What Are Business Tax Records?

Small Business tax records include anything that directly or indirectly supports amounts claimed on the business’s tax returns. Examples include:

• Invoices
• Cash register tapes
• Canceled checks
• Bank statements
• Receipts
• Credit card statements
• Real estate closing statements
• Bills of sale
• Tax forms
• Tax returns

Transactions normally generate these documents automatically. Small Businesses or their accountants then record the accounting effects of transactions and file the supporting records based on the type of transaction and when it occurred.

Digital file management systems offer many advantages, though companies must keep paper originals of some documents. Electronic files take up much less space, they allow for easier access and enable quick backup. As a result, many businesses manage their records almost completely electronically.

These records allow companies to prepare for their tax returns and prove the return’s accuracy during tax audits. The IRS and other tax authorities can deny deductions for unsubstantiated expenses, potentially leading to interest and penalties.

How Long Should I Keep Tax Returns and Other Small Business Tax Records?

The IRS cannot assess additional tax once a certain period—called the statute of limitations—has passed. The federal income tax statute of limitations equals:

• Three years from the filing date—or the due date, if later—for most tax returns
• Four years after the tax becomes due—or gets paid, if later—for employment tax returns
• Six years from the filing date—or the due date, if later—for tax returns that underreported gross income by more than 25%
• Seven years from the filing date—or the due date, if later—of the related tax returns for losses from worthless securities or bad debt
• Forever for unfiled or fraudulent tax returns

Some state taxing authorities follow IRS rules, while others use different periods. Creditors and investors may have their own requirements.

Creating different retention policies for each possible scenario may prove impractical. Retaining tax returns and other records for seven years—starting from the later of the filing date and due date of the related tax return—offers a convenient rule of thumb. This covers almost all documents for businesses that file all required tax returns without fraud.

Many CPA firms and other tax practitioners retain tax records for seven years, though some keep them indefinitely in digital storage. Even small businesses that entrust their records to a certified tax professional need to keep copies. The IRS and other taxing authorities can deny deductions that a company can’t support, even if an outside professional lost the documentation. However, CPAs cannot deliberately withhold records, even for unpaid fees.

Small Business Tax Records to Keep Forever

Companies must keep certain tax records indefinitely. Assets usually have tax consequences upon sale, so the statute of limitations will apply to the future tax return that includes the asset sale.

Small Businesses also need to retain specific key documents forever. These include company information documents and ownership records such as stock ledgers, titles, deeds, property records, and contracts.

Corporations must also keep shareholder meeting minutes. Failure to maintain corporate records could cause the corporation’s owners to lose liability protection.

Missing documentation can cause substantial liability and missed opportunities. Keeping tax returns and other records for the appropriate period allows your business to respond to information requests, including tax audits.