How Many Years of Business Records Should You Keep?

Business records, from financial transactions to legal agreements and employee details, are fundamental for any business. Maintaining accurate records supports financial management, operational efficiency, and compliance with various regulatory and legal obligations.

Understanding the Basis for Retention Periods

The duration for which businesses must retain records stems from various legal and regulatory requirements. A primary driver is the Internal Revenue Service (IRS) statutes of limitations. The IRS generally has three years from the date you file your original return, or the due date, whichever is later, to assess additional tax. This period extends to six years if you omit more than 25% of your gross income.

If a taxpayer files a fraudulent return or fails to file, there is no statute of limitations, meaning the IRS can assess tax at any time. State tax agencies often have their own distinct record retention rules, which may differ from federal requirements. Businesses must consider both federal and state regulations when determining retention schedules.

Beyond tax authorities, other legal and regulatory obligations impose specific retention periods. Certain industries, such as healthcare or finance, operate under strict federal and state regulations that mandate longer retention for specific types of records, like patient medical information or financial transaction data. Labor laws also dictate how long businesses must keep personnel and payroll records. Businesses should retain records for the longest applicable period among federal, state, and specific industry or legal requirements.

Common Business Records and Their Retention Guidelines

Different types of business records have varying retention requirements, primarily driven by the underlying legal and tax obligations.

Income Tax Records

Income tax returns and their supporting documentation, such as receipts, invoices, bank statements, and expense reports, should generally be kept for seven years from the date the tax was due or paid, whichever is later. Depreciation schedules for assets should be retained for the life of the asset plus seven years after its disposal.

Payroll Records

Payroll records require specific attention. Employee earnings records, payroll tax returns (Forms 940 and 941), and time cards should be kept for at least four years after the tax becomes due or is paid, whichever is later. This period aligns with IRS regulations for employment taxes. Copies of Forms W-2 and W-4 also fall under this four-year retention guideline.

Employment Records

Employment records are subject to specific retention rules. Personnel files, which include applications, résumés, performance reviews, and termination documents, should typically be kept for at least one year after an employee’s termination or the date of the personnel action, whichever is later. This period helps comply with anti-discrimination laws. Form I-9 must be retained for three years after the date of hire or one year after employment is terminated, whichever is later, to satisfy U.S. Citizenship and Immigration Services requirements.

Property Records

Property records, relating to the acquisition, improvement, and sale of business assets, demand long-term retention. Documents such as purchase agreements, deeds, improvement invoices, and depreciation schedules should be kept for the entire period the asset is owned. These records should also be retained for at least seven years after the asset is sold or disposed of, as they are crucial for calculating gain or loss for tax purposes.

General Financial Records

General financial records also have their own guidelines. Bank statements, canceled checks, general ledgers, and financial statements like balance sheets and income statements should be kept for seven years. This retention period supports thorough financial audits and reconciliation processes. Accounts receivable and payable records, including customer invoices and vendor bills, should also align with this seven-year timeframe to ensure proper tracking of money owed and owed by the business.

Legal Documents

Legal documents often necessitate indefinite retention due to their perpetual importance. Contracts, leases, corporate minutes, and intellectual property documents like patents and trademarks fall into this category. These documents establish the legal framework of the business, its operations, and its ownership, and their permanent retention protects the company’s long-term interests and legal standing.