How Long Does a Business Need to Keep Invoices?

Maintaining accurate and accessible business records, including invoices, is a fundamental aspect of financial management and regulatory compliance. Proper record retention safeguards a business during audits, supports financial reporting, and provides a historical account of operations. Establishing clear policies for how long to keep various documents helps ensure compliance with legal obligations while also managing storage space efficiently. The specific duration for retaining records often depends on the type of document and the regulatory bodies involved, particularly federal tax authorities.

General Retention Guidelines

Businesses must adhere to specific timelines for retaining financial records, primarily guided by the Internal Revenue Service (IRS). Generally, the IRS recommends keeping tax returns and supporting documents for at least three years from the date you filed your return. This three-year period aligns with the standard statute of limitations, which is the timeframe the IRS typically has to audit a return and assess additional tax.

Certain situations, however, necessitate longer retention periods. For instance, if a business omits more than 25% of its gross income from a tax return, the IRS can extend the audit period to six years. Additionally, records supporting a claim for a loss from worthless securities or a bad debt deduction should be kept for seven years. In cases where a business does not file a return or files a fraudulent one, there is no statute of limitations, meaning records should be kept indefinitely.

Specific Record Types and Their Retention

Different types of business records have specific retention requirements based on federal regulations. Invoices, both sales and purchase, along with expense receipts, are generally considered supporting documentation for tax returns and should be kept for a minimum of three years. A six-year retention period is prudent if these documents relate to a substantial understatement of income.

Payroll records, which include employee information, hours worked, wages paid, and deductions, are subject to various federal laws. The Fair Labor Standards Act (FLSA) requires employers to retain payroll records for at least three years, with supporting documents like time cards kept for two years. The IRS mandates a four-year retention period for employment tax records, such as Forms W-4, W-2, and 941, starting from the later of the tax due date or the date the tax was paid.

Records related to business assets, such as equipment or property, should be retained until the statute of limitations expires for the tax year in which the asset is disposed of. For assets that are depreciated, records should be kept for three years after the asset is fully depreciated. Bank statements should be kept for three to seven years for tax purposes, or longer for the life of the business.

Corporate legal documents, including business formation papers, bylaws, permanent audit reports, annual financial statements, and the general ledger, should be retained permanently. Client contracts should be kept for at least six years, or longer if connected to potential legal disputes.

Methods for Record Keeping

Businesses have options for storing their records, including physical and digital methods. For physical records, proper organization is paramount, involving secure filing systems that protect documents from damage or loss. This includes using fireproof cabinets and maintaining a controlled environment to prevent deterioration over time.

Digital record-keeping offers significant advantages in terms of storage space and retrieval efficiency. Businesses can utilize reliable software systems, secure cloud storage solutions, and regular data backups to safeguard electronic files. It is crucial that digital records remain readable and readily accessible throughout their entire retention period, ensuring they can be reproduced accurately if required for verification.

Record Disposal

Once the required retention period for business records has passed, secure and compliant disposal becomes necessary to protect sensitive information. Simply discarding documents in regular trash receptacles is insufficient and can expose a business to risks like data breaches. Physical records, such as paper invoices, should be destroyed through methods that render them unreadable and unreconstructible. This includes shredding, burning, pulping, or pulverizing documents.

For digital records, secure disposal involves ensuring that data on electronic media cannot be recovered. Methods include secure wiping, which overwrites data multiple times, or degaussing, which uses a strong magnetic field to erase data from magnetic storage devices. Physical destruction of storage media, such as shredding hard drives, is also a highly secure method for ensuring data is irretrievable. Businesses should document the disposal process, including the date and method of destruction, to maintain a clear audit trail.