How Long Does a Business Need to Keep Tax Records?

Maintaining accurate and accessible tax records is a fundamental responsibility for businesses. Proper record-keeping ensures compliance with various tax laws and is essential for audits. Retaining financial documents protects a business from potential penalties and helps substantiate reported financial positions. This practice supports both the current operational health of a business and its long-term stability.

General Federal Tax Record Retention

The Internal Revenue Service (IRS) outlines general guidelines for how long businesses should keep tax records, primarily based on the period of limitations. This period defines the timeframe during which a business can amend a tax return or when the IRS can assess additional tax. Most records supporting income, deductions, and credits should be kept for at least three years from the date the original return was filed or its due date, whichever is later.

A longer retention period of seven years applies to records related to claims for a loss from worthless securities or bad debt deductions. If a business significantly underreports its gross income by more than 25%, the IRS may extend the assessment period to six years.

Certain records require indefinite or permanent retention, particularly those related to property or in cases of unfiled or fraudulent returns. Records that establish the basis of property, such as purchase records and depreciation schedules, should be kept as long as the property is owned and for three to seven years after its disposition. These documents are essential for calculating gain or loss upon sale. If a business fails to file a return or files a fraudulent one, there is no statute of limitations, meaning the IRS can assess tax at any time.

Key Federal Tax Record Types and Periods

Understanding the specific retention periods for different types of federal tax records is important for business compliance. Adhering to these guidelines helps businesses manage potential audits and avoid penalties.

Income records generally require retention for at least three years. These documents provide evidence of a business’s gross receipts and are fundamental for accurate income reporting. Supporting documentation also falls under this category. Examples include:
Invoices
Sales receipts
Bank statements
Deposit slips
General ledger entries
Cash register tapes
Forms 1099-MISC

Expense records should also be kept for at least three years. These records are necessary to substantiate all claimed deductions and credits, demonstrating that expenses were ordinary and necessary for business operations. Examples include:
Purchase receipts
Canceled checks
Credit card statements
Expense reports
Vendor invoices

Payroll records must be retained for at least four years after the tax becomes due or is paid, whichever is later. This four-year rule, mandated by IRS regulation 26 CFR 31.6001-1, applies to employment tax records and ensures that businesses can substantiate their payroll tax calculations and payments. Examples include:
Timecards
Payroll registers
Forms W-2
Forms W-3
Forms 940
Forms 941
Forms 944
Employee benefit records

Asset and property records require longer retention. These documents should be kept as long as the property is owned and for three to seven years after its disposition. These records determine the property’s basis for calculating depreciation, amortization, and any gain or loss upon sale. Examples include:
Purchase and sale agreements
Deeds
Depreciation schedules
Records of improvements
Form 4562 (Depreciation and Amortization)

Other key documents, including business formation documents, accounting ledgers, and financial statements like balance sheets and income statements, are recommended for permanent retention. While federal guidelines do not always mandate indefinite retention, these records are important for legal, financial, and historical purposes, extending beyond tax compliance alone. Copies of filed tax returns should also be kept indefinitely, as they serve as proof of filing and can be crucial if the IRS claims a return was never filed.

State and Local Tax Record Requirements

Beyond federal tax obligations, businesses must also navigate state and local tax record retention laws. These requirements can vary significantly from federal guidelines and among different jurisdictions. The retention periods for state and local taxes may be shorter, equal to, or longer than the federal periods, depending on the specific tax and the jurisdiction.

Common state and local taxes with specific record-keeping requirements include:
State income tax
Sales tax
Unemployment insurance tax
Property tax

For example, some states may require sales tax records to be kept for three to seven years. State income tax records may align with federal retention periods, but some states might impose longer requirements, such as four years or more. Unemployment tax records, similar to federal employment tax records, may be required for at least four years after the tax due date or payment.

The variance in retention periods stems from differing statutes of limitations for audits at the state level. If a state’s statute of limitations is longer than the federal period, it is prudent to retain records for the longer duration to ensure compliance. Businesses should be aware that, like the IRS, state tax authorities may also extend audit periods for significant underreporting of income or in cases of unfiled or fraudulent returns, potentially requiring indefinite record retention.

To ascertain precise record retention requirements for their location and business type, businesses are advised to consult their state’s department of revenue or a qualified tax professional. Relying solely on federal guidelines without checking state and local mandates can lead to non-compliance and penalties during state or local audits. Understanding and adhering to these non-federal requirements is an integral part of comprehensive tax compliance.