How Long Should You Keep Your Business Tax Returns?
There is a lot of paperwork involved in running a business, and when you're wanting to declutter, you might wonder how long to keep tax returns for business before sending them to the shredder. The good news is that the IRS doesn’t require you to keep business tax records indefinitely. However, understanding the period of limitations and other times when you might need past tax returns is important to make sure you're never found without the piece of paper you need.
The Statute of Limitations
The Internal Revenue Service sets a statute or period of limitations on keeping tax documents like receipts and bank statements. In most cases, observing these same periods for state-based taxes (or sales and use tax returns, in states like Florida that don’t charge income tax) is also a good idea.
The Three-Year Rule
If you file every year and declare all of your income and expenses, you generally only need to keep business tax records for three years after the date the return was filed, the tax filing date, or the date the return was amended (whichever is later).
For example:
If your tax return had a due date of April 15, 2022, and you filed on January 15, 2022, you should keep records connected to the return until April 15, 2025.
For the same return, if you filed one day late on April 16, 2022, you should keep these same records until April 16, 2025.
Let's say you discovered additional income after submitting your return and filed an amended tax return on December 12, 2023, for the 2021 tax year. In that case, you would need to keep records connected with the original and amended return until December 12, 2026.
Employee Records
The period of limitations for employee files is four years, rather than three. You should keep payroll tax records for a minimum of four years after the payroll tax was due or after the date it was paid, whichever is later.
Employee records include:
The personal details of each employee (name, address, social security number, occupation, dates of employment)
The dates and amounts of all wages, annuities, and pension payments made to each employee
Medicare, FICA, and taxes withheld
Any tips and fringe benefits paid
W2 and 1099 forms
Property Records
Documentation related to property may need to be kept for longer than three years. If you are simply claiming depreciation, keeping cost basis records for three years is usually sufficient. This applies to kinds of property like computers and business vehicles.
However, for deductions relating to real estate, you will need to keep records until three years after the filing date (or due date, whichever is later) of the return in which you declare the loss or gain from the sale of the property.
If you exchange one business property for another rather than selling and purchasing the real estate outright, you will need to keep the deeds and titles of the original property and the contract of the exchange until three years after the tax return in which you declare the sale and profit/loss from the property received.
Period of Limitations on Audits
If you are randomly selected for an IRS tax audit or any other type of government audit (for instance, a Florida sales tax audit), the government officials will audit your tax records for the past three years unless there were significant errors in a past return, such as unreported income that totaled more than 25% of your gross income or costs deducted for a bad debt or worthless securities. In those cases, they can go back as far as seven years.
To be prepared, it's best to keep records of undeclared income for six years and worthless securities and debts deducted for seven years. Ideally, you would submit an amended return to report income or a bad debt deduction that you discovered later. However, keeping this documentation on hand will become essential in the case of an audit so that you can reconcile income and expenditure that was not reported in the original return.
Delinquent Returns
Worst-case scenario, you didn't file a return at all or you filed a fraudulent return. In those cases, there is no period of limitations and the IRS can come after you at any time.
Contracting a small business bookkeeping service provider and/or using bookkeeping software like QuickBooks from the start can help you ensure that you never have a delinquent return.
Supporting Documents to Keep
Supporting documents for tax returns are many and wide-ranging. These examples are by no means exhaustive but should get you off to a good start:
Receipts
Invoices
Cash register tapes
Petty cash slips
Deposit records
Canceled checks
Electronic funds transfer records
Credit card receipts
Bank statements
Credit card statements
Accounts payable and receivable
Profit and loss statements
Lease documentation
Business loan documentation
Previous tax returns
Tax filing
Employment tax records to keep include:
W2 and 1099 forms
Payroll records
Basically, for any income, deduction, or credit you declare on your tax return, you should keep the piece of paper (or electronic invoice, etc.) that supports it. Expenses that can be deducted are explained in detail in the IRS guide to Travel, Gift, and Car Expenses.
Expenses Under $75
Many of the deductible expenses relating to transportation and meals may not come with a proper receipt, or perhaps the ink on that coffee cash slip has faded and can no longer be read. For these reasons, the IRS is more lenient on expenses under $75 that are claimed as tax deductions.
Instead of (or in addition to) keeping receipts for small cash payments, enter all of these expenses in a spreadsheet along with the details of the amount (when, where, and how much), what the payment was for, who was present, and the purpose of the expense.
It's also a good idea to make a note of what you talked about if the expense was for a meal or entertainment. Explaining that you struck a deal with a client over lunch is much more convincing than a Friday night "staff meeting" at a bar.
Other Records You Might Need
If you're thinking about how long to keep tax returns for business, it's also important to think about other records that are important to keep. While tax records can often be disposed of after three to seven years, you'll want to hang on to several business documents indefinitely:
Business formation documents, such as a deed of incorporation
Licenses and permits
OSHA and other regulatory documents
All contracts
Annual reports
Financial statements
Even if you don't need these documents for tax purposes, you might need to present key business documents to a potential investor, partner, bank, or insurance company. It's important to keep these kinds of business records indefinitely because you never know when they might be needed.
Paper or Electronic?
With many businesses moving away from paper transactions, a large percentage of the invoices and receipts that you keep will be electronic. However, scanning and saving your paper receipts is also a very good idea. Over time, the ink on receipts can fade, paper becomes discolored, and damage from pests, floods, and fires can render documentation inaccessible or unreadable.
As soon as each receipt or invoice is received, have your bookkeeper or QuickBooks accounting professional scan it and file it in an appropriate folder. You should then make a backup copy of these digital files to be kept in a cloud-based storage system and/or on a secure, password-encrypted pen drive.
Once this information is stored securely and a period of limitations expires, you can confidently shred those old coffee receipts knowing that you have a digital copy "just in case." Will the IRS accept it? As long as it's legible and exactly the same as the paper copy, you should be just fine.
The Golden Rule
After answering the question of how long to keep tax returns for business, the most important point to take away is to keep digital copies of everything because you never know when it might be needed.
As far as paper records, following the statute of limitations is usually sufficient. However, if you're ever in doubt about shredding a document, keep it!
