How Long to Keep Tax Records for a Business?

Businesses must maintain accurate tax records for compliance with tax authorities and financial management, which also prevents potential penalties and supports deductions during an audit. These records are invaluable for understanding cash flow, tracking performance, making strategic decisions, simplifying tax preparation, and maximizing deductions.

General Record Retention Periods

The Internal Revenue Service (IRS) advises businesses to retain tax records for a minimum of three years from the date the original return was filed, or the due date, whichever is later. This three-year period aligns with the general statute of limitations for IRS tax assessment. This timeframe allows the IRS to review tax filings and taxpayers to amend returns.

For claims involving a credit or refund, records should be kept for three years from the original return filing date, or two years from the tax payment date, whichever is later. Copies of filed tax returns should be kept indefinitely, as they assist in preparing future returns and making computations for amended returns.

Specific Record Categories

Different business records have specific retention considerations, often extending beyond the general three-year rule. Employment tax records, for instance, should be kept for at least four years after the date the tax becomes due or is paid, whichever is later. These include payroll records, Forms W-2, W-4, and I-9, plus documentation of wages, tax deposits, and employee identification.

For inventory, records like receipts, invoices, shipping logs, and reports are crucial for calculating cost of goods sold. The IRS suggests keeping inventory-related records for at least three years. Sales records, including invoices and receipts, should be maintained for at least three years to verify payments. Expense records, like receipts and invoices for deductible expenses, should also be kept for at least three years.

Bank and credit card statements are important for reconciliation and expense verification, aligning with the three-year retention period. Records for business assets, like machinery or furniture, should be maintained to verify acquisition, price, improvements, depreciation, and disposal details. Corporate records, like articles of incorporation, bylaws, and meeting minutes, are often retained permanently for legal and corporate governance, and tax implications.

Situational Record Retention

Certain circumstances extend record retention periods for businesses. If a business omits more than 25% of its gross income from a tax return, the statute of limitations for IRS assessment extends to six years. In cases where a fraudulent return is filed or no return is filed at all, there is no statute of limitations, meaning records should be kept indefinitely.

Records for property or assets should be retained until the period of limitations expires for the tax year of disposal. This ensures information for depreciation, amortization, or depletion, and calculation of gain or loss upon disposal, is available. For claims involving a loss from worthless securities or a bad debt deduction, records must be kept for seven years. This extended period allows for substantiation of the claim, which the IRS may scrutinize.

During an audit or dispute with a tax authority, relevant records should be retained until the matter is fully resolved. This retention is necessary even if it extends beyond typical periods.

Methods for Retaining Records

Businesses have options for storing and organizing tax records to ensure accessibility and compliance for required retention periods. Physical records should be stored securely and organized systematically, by year or record type, to protect them from damage. Environmental factors like humidity and temperature should be considered for long-term preservation.

Electronic record-keeping is accepted by the IRS, provided the records are accurate, complete, and accessible. Acceptable formats include PDFs and scanned documents, but businesses must ensure readability and accessibility throughout the entire retention period. Robust backup procedures and cybersecurity measures are important to protect electronic data from loss or unauthorized access.

Businesses can choose between cloud or on-premise storage for electronic records. Cloud storage offers scalability and accessibility; on-premise storage provides more direct control over data. Regardless of the method, records must be readily retrieved and reviewed by tax authorities upon request.