Good business recordkeeping lets you prepare financial statements, helps you keep tabs on your expenses, and comes in handy if you ever get sued or audited.
But did you know that the IRS also requires you to keep financial records for your business?
In this guide, we’ll walk you through which records you’re legally required to keep, how long you should keep them, and how to make sure you don’t lose them.
The eight small business record keeping rules
Always keep receipts, bank statements, invoices, payroll records, and any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return.
Expenses that are less than $75 or that have to do with transportation, lodging or meal expenses might not require a receipt. But you still need to tell the IRS where and when the expense occurred, and what it was for.
Most supporting documents need to be kept for at least three years.
Employment tax records must be kept for at least four years.
If you omitted income from your return, keep records for six years.
If you deducted the cost of bad debt or worthless securities, keep records for seven years.
Go paperless, store everything electronically, and always make backups.
Even if you don’t need a document to do your taxes, you might need it for something else. When it doubt, keep it.
What receipts to keep for taxes
As much as they’d love to take your word for it, the IRS requires that you keep documentation that backs up the income, deductions, and credits you report on your tax return.
Here are the main types of records you should hang on to:
- Cash register tapes
- Deposit information (cash and credit sales)
- Canceled checks or other proof of payment/electronic funds transferred
- Credit card receipts
- Bank statements
- Petty cash slips for small cash payments
- Accounts payable and receivable
- Payroll records
- Tax filings
- Previous tax returns
- W2 and 1099 forms
- Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return
Although you might not always need them to do your taxes, you should also keep the following business documents on hand:
- Any contracts you’ve signed (with clients, vendors, contractors, employees, etc.)
- Articles of incorporation
- Business permits
- Company health, safety, and any other regulatory documents
- Annual reports
Because the burden of proof is on you to back up every item on your tax return with documentation, the best approach to recordkeeping for small businesses is to try to keep as many records as you can.
Are there any documents I don’t need to keep?
it’s impossible to keep everything. Receipts sometimes get lost, especially for small expenses. Can you still claim those receipt-less expenses as tax deductions?
Maybe, if the expense is less than $75
Generally speaking, you can get away with not keeping a document for three reasons:
- The expense is less than $75. (Note: this doesn’t apply to lodging expenses.)
- The expense is for transportation, and it’s not easy to get a proper receipt.
- You’re reporting lodging or meal expenses under an accountable plan with a per diem allowance.
But wait, don’t throw away that Chipotle receipt yet!
Even then, you’re not completely off the hook. Any business deduction on your tax return can be questioned during an audit—even expenses under $75.
In order for the IRS to uphold a deduction under $75 without a receipt, you’ll need to present them with the following information:
- The expense amount
- Where and when it was made
- The essential character or purpose of the expense
If you’re deducting meals and entertainment, it’s even more complicated. You might have to submit a list all of the people who were there with you when the expense occurred, and what you talked about (really—the IRS wants to know if you talked shop).
If you deduct many expenses below $75 (and especially if you deduct lots of meals and entertainment) a spreadsheet or mobile app like Expensify is usually the best way to keep track of everything without drowning in a sea of small receipts.
If you’re still not sure about which small receipts to keep, you can review the IRS guidelines on proving expenses under $75 here.
How long do you need to keep financial records for businesses?
Generally speaking, for three years
The IRS says you need to keep your records “as long as needed to prove the income or deductions on a tax return.” In general, this means you need to keep your tax records for three years from the date the return was filed, or from the due date of the tax return (whichever is later).
Let’s say you filed your 2017 tax return two months ahead of the deadline, on February 10, 2018. That means you’d need to keep the receipts, tax records, and any other documentation related to the return until April 15, 2021—three years after the 2017 deadline.
Why three years?
This is mainly due to the Period of Limitations, which is the time during which you can amend your tax return, or during which the IRS can perform an audit on your return.
When the period of limitations on your tax return expires, you’re no longer required to keep the tax return or its supporting documentation.
Exceptions to the three-year rule
In certain instances, you’ll need to hold on to tax records for longer than three years. For example:
If you have employee records
You should keep employment tax records for at least four years after the date that payroll taxes become due, or are paid (whichever is later).
If you omitted income from your return
If you don’t report income that you should have reported and it’s more than 25% of the gross income stated on your return, keep records for six years after the date that you filed, or the due date of the tax return (whichever is later).
If you deducted the cost of bad debt or worthless securities
In that case, keep the records for seven years.
If you file a fraudulent return, or no return at all
Hoping to get away with tax fraud? There’s no statute of limitations on fraudulent or unfiled returns—so the IRS can come after you forever. Just something to keep in mind!
If you have records connected to property
The standard three year period of limitations applies to any deductions you make related to your property (depreciation, loss from a sale, etc.) But sometimes the length of time between when you dispose or sell your property and when you no longer need to keep those documents can be longer than 3 years.
Say you dispose of a property by selling it during the 2015 tax year, report the financial gain on your 2017 tax return, and file your tax return right on the tax deadline of April 17, 2018. That means you’d need to keep records connected to the property until April 17, 2021 (i.e. three years after the filing date of April 17, 2018).
These records usually include deeds, titles, and cost basis records (for instance, receipts for equipment such as computers or vehicles).
Do I need to hang on to paper bank statements?
If you have online banking, no. The digital copy will be just fine. If your bank doesn’t have online banking, it’s best to hang on to bank records for three years.
The easiest way to keep records
The IRS says you can use any recordkeeping system as long as it “clearly shows your income and expenses”. But unless you’re auditioning to appear on an episode of Hoarders, you should probably go paperless and store everything electronically.
The IRS accepts digital copies of documents as long as they’re identical to the original copies. (This means you must be able to produce a printed, legible copy of the document for them upon request.)
Digitizing your records is also a great way to avoid accidentally tossing them in a move or an overzealous fit of spring cleaning. Plus, let’s not forget that paper records can fade, and are susceptible to damage. Telling the IRS that “the dog ate my tax records” simply won’t fly.
We recommend scanning every record and receipt in your business, tagging it with a descriptive name, and archiving it forever.
Here are some tools that can make digital recordkeeping easier:
Bench—you can upload all your receipts and store them in the Bench app, with no storage limits.
A dedicated business document scanner, like the Kodak Alaris (these machines can process large numbers of documents at once and take care of the filing process for you, saving you hours of work).
A dedicated receipt app such as Receipt Bank.
If you do end up going the paperless route, remember to keep a backup copy of your documents in a secure second location, like a password-protected hard drive, or a secondary cloud storage service.
Tax filing done for you. From start-to-finish.
BenchTax connects you to a tax expert, trained by Bench. It’s tax filing, every deduction you deserve, and your smoothest tax season yet—done for you.
I’ve waited the appropriate length of time, and now I’m on the way to the landfill to dump all of these old tax documents. This is fine, right?
Hold up. Tax time might be the most important time for business recordkeeping, but taxes aren’t the only reason you should be keeping all of those documents.
Before you toss them, double check to see whether anyone else you do business with might need them. Creditors, business lawyers, and insurance companies all sometimes require you to keep records longer than the IRS does.
This is really just another benefit to keeping digital records. Instead of worrying whether you should be keeping or getting rid of them, you can archive them permanently.
When in doubt, keep it
If there’s one thing you take away from this guide, make it this rule.
If there’s ever any doubt about whether you should keep a document, keep it. Or even better, digitize it. You’ll thank yourself the next time you do your taxes or get audited.