Small Business Tax Records: What You Need to Keep

Taxes done? Ready for some spring cleaning of all that financial paperwork? So how long do you need to keep tax records for a small business?

Whether you keep physical or (more likely) digital tax records, it’s important to know what to save. So, in the spirit of spring cleaning, I dug into what business records you need to keep and for how long, and what you can send to your shredding pile.

According to the Internal Revenue Service (IRS), the length of time you should keep a document depends on the “action, expense, or event” the document records.

You must keep the business records supporting an item of income, deduction, or credit indicated on your tax return until the “period of limitations” for that tax return expires. The period of limitations refers to the time in which you can amend your tax return to claim a credit or refund (or the IRS can assess additional tax). 

Here’s what the IRS recommends:

Tax Records for Small Business

Tax Credits or Refunds: 3 years

If you are due a refund or credit, keep business records for three years from the date you filed your original return or two years from the date you paid the tax (whichever is later). Kyle Pearson, CPA and owner of Collective CPAs + Advisors, says this refers to items like your W-2s, 1099s, backup records for your deductions, etc.

Payroll Records: 4 years

Keep employment tax records for at least four years after the tax was due or paid, whichever is later.

Income Source: 7 years

Pearson says you should keep “any tax returns with single items that, if changed under audit, could create a change to reported income of 25% or more, for up to seven years.”

Losses and Bad Debt: 7 years

If you file a claim for a loss from worthless securities, bad debt, or a loss deduction, keep your records for seven years.

Property and Investments: Indefinitely 

Pearson adds that you should keep “records of property or investment purchases that you still hold. You’ll need that cost info when you eventually sell them.”

Pearson also recommends keeping a copy of “at least the most recent 10 years of tax returns as a best practice.”

Legal and Business Documents

Insurance and Legal Documents: 10 years

• Keep copies of insurance documents for 10 years after the policies expire. Any paperwork regarding insurance claims should be kept indefinitely. 
• Legal documents, such as canceled leases and notes receivable, should be kept for 10 years after cancellation. 
  

Other Insurance and Legal Documents

There are some documents you should keep indefinitely, such as:

• Financial documents (audit reports, annual financial statements, general ledgers, bank statements, journal entries, cash books, charts of accounts, check registers, subsidiary ledgers, and investment documentation)
• Corporate documents (articles of incorporation, charter, constitution, bylaws, minutes)
• Stock records (if your company is incorporated)
• Licenses, patents, trademarks, and registration applications
• Bills of sale, permits, licenses, contracts, deeds and titles, and mortgages

Don’t Toss It! Digitize it!

Pearson says one of the most common mistakes he sees small business owners make relates to business receipts. “Owners often believe that since they have bank statements, they don’t need to retain purchase receipts. But bank statements are secondary forms of substantiation and often won’t hold up as proof of business purpose when proving deductible expenses in the face of an audit. So keep receipts and notate the business purpose for anything above $75.”

And those receipts should be digitized. Pearson recommends using Dext, a receipt digitization tool for maintaining purchase receipts. He adds that you can also use Google Drive, Dropbox, Box, or other similar cloud services to retain these records digitally. Pearson says, “The key is proper organization when setting a file structure. Keep documents sorted by year and category to make searching and finding documents you need to reference easier.”

And, if your documents and records aren’t in the cloud, you should upload them there.

Recordkeeping requirements differ from state to state and can change yearly. So check with your accountant and attorney on what to keep. It could save you major headaches down the road.

Learn more tips for running and growing your small business at Index by Pinger.