Picture this: You own a small restaurant. One day, you receive an IRS notice—you’re being audited. Do you A) Panic or B) Calmly review your business records? If you know how long to keep business records (and which ones to keep), you’ll have the supporting documents needed to back up your tax return claims.
Keeping accurate and organized business records is key to managing your finances, complying with IRS requirements, and protecting your company.
So the question is … do you know how long to retain tax records?
Is keeping business records important?
Yes! Keeping business records isn’t just a best practice—it’s a requirement to back up your tax return claims.
Business records help you:
- Monitor your company’s financial health
- Prepare financial statements
- Track expenses and income
- Prepare tax returns
- Protect your business during audits, disputes, or lawsuits
What business records do I need to keep?
Keep the following business records for tax compliance, financial tracking, and more:
- Small business tax returns
- Financial statements
- General ledger
- Bank statements
- Credit card statements
- Check registers
- Receipts
- Contracts
- Business agreements
- Permits and licenses
- Insurance documents
- Payroll records (e.g., W-2s)
- New hire forms
For a full list of supporting business documents to keep, consult the IRS.
How long to keep business records
You know what records to keep. So how long do businesses need to keep records?
In most cases, keep business records related to your income tax returns for three years. But, how long to keep records depends on the type of record.
The IRS has a time frame for some records while the Department of Labor (DOL) sets the duration for others. Keep in mind that other entities (e.g., an insurance company) may vary on recordkeeping length.
| The Record | How Long to Keep | Says Who |
|---|---|---|
| Records on which wage calculations are based (e.g., time cards) | 2 years | DOL |
| Payroll records, collective bargaining agreements, and sales and purchase records | 3 years | DOL |
| Income tax returns and supporting documents** | 3 years | IRS |
| Employment tax records | 4 years | IRS |
**However, there are exceptions to this 3-year rule. According to the IRS, you may need to keep income tax return records for:
- 6 years: If you do not report income that you should report, and it is more than 25% of the gross income shown on your return
- 7 years: If you file a claim for a loss from worthless securities or bad debt deduction
- Indefinitely: If you do not file a return or if you file a fraudulent return
When in doubt, it’s better to be safe than sorry and hang onto records longer than you need to.
Check with your accountant, state, insurance company, or the IRS if you have questions about recordkeeping duration.
Best practices for recordkeeping
Strong recordkeeping skills? You’re in business. Poor recordkeeping skills? Time to step it up.
Keeping business records is an important part of operating a healthy business, making decisions, and being eligible for business tax credits and loans.
Use these tips for improved recordkeeping:
- Understand how long to keep business tax records: Don’t mess around with IRS deadlines! Clearly define how long you should keep each type of record.
- Keep digital records: Back up important documents on your computer or using accounting software.
- Separate personal and business funds: Open a business bank account that’s separate from your personal account for cleaner recordkeeping.
- Use accounting software: Keep your business records in the cloud rather than a pile on your desk. Plus, enjoy other features like automatic bank imports.
- Create a record retention policy: A record retention policy can help you organize records and dispose of outdated records properly. It may include types of records, length of time to hold onto records, organization and disposal methods, security protocol for sensitive documents, and access permissions.
How to keep records for taxes FAQs
Here are commonly asked questions about keeping business records.
How long to keep business tax records depends on the record. Typically, you must keep business records for three years and employment tax records for at least four years.
Keep records for seven years if your business files a claim for a loss from worthless securities or bad debt deduction.
The IRS typically can audit business tax returns up to three years from the date you filed your return or the due date (whichever is later).
However, the IRS can pull additional years (generally no more than the last six years) if they identify a substantial error.
Keeping digital business records is highly recommended. Backing up your physical documents protects your files against loss and damage, improves organization, and streamlines efficiency.
You can scan paper records onto your computer, download files that are already digital, or even take pictures and upload them to your computer or accounting software.
Better recordkeeping with Patriot Accounting™
Tired of drowning in paperwork? Use Patriot’s online accounting for stress-free tracking, secure storage, and more.
With Patriot’s accounting software, you can:
- Track expenses, income, and money
- Automatically import bank transactions
- View or download key financial reports
- Manage receipts and documents (with Accounting Premium)
Stay compliant and organized—without the hassle. Try Patriot’s Accounting Basic or Accounting Premium for free today!
This is not intended as legal advice; for more information, please click here.
