Small Business Recordkeeping: Tax Records You Need to Keep
Heads up: this article is only relevant for U.S. businesses.
For small business owners, keeping records isn’t just helpful for filing your taxes and monitoring your finances—it’s a legal requirement imposed by the IRS. But which records does your small business need to keep? And which ones should you send to the shredder?
In this guide, you’ll find an overview of which records you should be storing, instructions on how long you need to keep them, and methods for filing digital copies of your records online.
Receipts and tax records: what you need to keep
As a small business or self-employed worker, the IRS requires you to keep documentation that supports an item of income, deduction, or credit shown on your tax return. As much as the IRS would love to take your word for it, this documentation proves that you earned what you said you earned, and purchased the things you said you purchased.
Tax records and supporting documentation that you’ll want to keep include
- Bank and credit card statements
- Canceled checks
- Proof of payments
- Financial statements from Bench or your bookkeeper
- 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
It’s important to note that this is not a comprehensive list, as the nature of your business will affect the type of records you need to keep for federal tax purposes.
Because the burden of proof is on you, the taxpayer, to back up every item on your tax return with supporting documentation, our advice is very simple: the best approach to recordkeeping is to keep everything. Basically, become an organized records hoarder.
The $75 rule: when you don’t need to keep receipts
Generally, you are required to keep documentary evidence, such as receipts, canceled checks, or bills, to track your business expenses. There are exceptions, however.
Documentary evidence is not needed if any of the following apply.
- The expense is less than $75 (Note: this rule does not apply to lodging expenses.)
- The expense is for transportation, and a receipt is not readily available
- You are reporting lodging or meal expenses while traveling for business, which you account to an employer under an accountable plan, and for which you receive a per diem allowance
Keep in mind that any business deduction on your tax return can be called into question during an audit—even expenses under $75.
Just because you’re not required to maintain a paper trail for these smaller expenses, doesn’t mean you’re off the hook for tracking them. If your business is audited, in order for the IRS to uphold a deduction under $75 in one of the above categories where you haven’t kept the receipt, you’ll need to present certain information upon request.
This is the expense information you need in case of an audit:
- The amount of the expense
- The date the expense was made
- The place the expense was made
- The essential character or purpose of the expense
For meals and entertainment expenses, you also need to list the people involved.
At the moment, record these details on the back of the receipt or whatever note-taking solution you have handy. But in the long-term, it’s best to transfer this information into a spreadsheet, or use a mobile app like Expensify to store these details each time you make a business purchase under $75.
You can review the IRS guidelines on proving expenses under $75 here.
How long should you keep tax records?
The three year rule
In general, you should plan 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). If you filed your return early, it’s treated as being filed on the due date.
An example of the three year rule
Let’s say you filed your 2017 tax return early—on February 10, 2018—two months ahead of the deadline. You would need to keep the receipts, tax records, and any other supporting documentation related to your 2017 tax return, until April 15, 2021—three years after your 2017 tax return deadline.
This three year rule is in place thanks to the Period of Limitations, which is the period of time during which you—the taxpayer—can amend your tax return, or when 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.
As is often the case with IRS regulation, there are exceptions to this rule.
Exceptions to the three year rule
In certain instances, you’ll need to hold on to tax records for longer than three years.
Here’s a rundown of these exceptions, with an explanation of how long you should keep the records in each case:
Do you have employees? Keep the employment tax records for at least four years after the date that payroll taxes become due, or is paid (whichever is later).
If you do not report income that you should report, and it is 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).
Bad debt and worthless securities
If you deduct the cost of bad debt or worthless securities on your tax return, keep the records for seven years.
Fraudulent return or no return
Hoping to get away with tax fraud? There is no statute of limitations on fraudulent or unfiled returns—so the IRS can come after you forever. Just something to keep in mind.
Records connected to property
In general, you should keep records relating to property until the period of limitations (the period in which you can amend your tax return, or be audited by the IRS—generally three years) expires for the year in which you dispose of the property.
You need to keep records connected to property so that you can calculate any depreciation, amortization, or depletion deduction, and to factor the gain or loss when you sell or dispose of the property.
Let’s clarify this with an example. Say you dispose of a property by selling it during the 2015 tax year. You report the financial gain on your 2017 tax return, and you file your tax return right on the tax deadline of April 17, 2018. You would need to keep records connected to the property until April 17, 2021 (i.e. three years after the filing date of April 17, 2018).
Important property documents include deeds, titles, and cost basis records—for instance, receipts for equipment such as computers or vehicles.
How to store receipts and tax records
Now that you know how long you should hold onto your records, you’ll need to set up a safe and organized system for storing them. You could go the old fashioned route and pick up a fireproof safe to store your records. But if you’d prefer to avoid filling your office with paperwork, a better suggestion is to go paperless and store your documents electronically.
The IRS accepts digital copies of documents as long as they are identical to, and contain all of the accurate information from, the original copies. You need to be able to produce a printed, legible copy of the document upon request.
Storing all of your receipts and tax records digitally is the easiest way to avoid losing them, and ensures that you’ll have everything on hand should your business ever be scrutinized by the IRS—as a bonus, they’ll also help you to make the most of your deductions. Finally, digitizing your records is 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—and we’re pretty sure that telling the IRS that “the dog ate my tax records” won’t fly.
Store copies of your receipts and tax records online using a secure cloud storage service like Dropbox, Evernote, or Google Drive. If you have plenty of records to upload, consider investing in a business scanner that automatically files documents in the right location at the push of a button.
As with any system, it’s important to keep a backup copy of your documents in a second location, likes a password-protected hard drive, or a secondary, secure cloud storage service.
Keeping records for non-tax purposes
Beyond your taxes, there are other reasons to keep records after the three-year mark. Creditors, business lawyers, or insurance companies may need you to keep records longer than the IRS does. Once your records are no longer required for tax purposes, double check that they’re no longer required for other purposes before you shred them.
An added benefit of keeping digital records—in case we haven’t already sold you on the idea— is that you can simply archive them permanently in online storage rather than delete them.
Do I need to send receipts to my bench bookkeeper?
Unlike the IRS, Bench doesn’t need to see receipts to verify each of your business transactions.
Your Bench bookkeeping team can balance your books using the information on your business’s bank and credit card statements, provided that you sync your business’s bank and credit card accounts with Bench. Obviously, cash transactions will need to be sent separately. Most major financial institutions can connect directly with Bench. For those that cannot—and for services such as payroll—your bookkeeper is able to work with you on a case-by-case basis to make sure Bench receives your statements every month.
Once you have set up a means of transmitting information from your business accounts to Bench, it is important that you run all business transactions through those accounts, so they can be tracked in your books.
The only times you’ll need to upload a receipt to Bench are:
- When you perform a business transaction that is not recorded on your business’s monthly bank statements.
- When you spend over $2500 on a business transaction. Such a purchase may indicate capital expense, such as equipment, whose value can be expensed over the useful lifetime of the item.
If for some reason, you’re in a spot where you must use cash, or a personal debit or credit card, for a business purchase (it happens), the receipt for this item will need to be uploaded separately to your Bench account, so that we’ll know to add it to your business records. Your Bench team may be good, but we can’t read minds (yet).
So to review, you’ll need to upload a receipt to Bench:
- When you pay for a business expense with cash (cash expenses)
- When you pay for a business expense using your personal debit or personal credit card (personal contributions)
- When your employee pays for an expense using their own money, and you need to reimburse them (employee reimbursements)
Don’t worry too much about remembering when to upload a receipt to Bench. If a receipt or further information about a business transaction is required, your bookkeeping team will get in touch to sort it out.
When in doubt, keep it
While it’s important to understand what tax records you need to keep, and how long you need to keep them, remember: the best approach to small business recordkeeping is to keep everything.
When you’re not scrambling to locate missing receipts and records next time the tax deadline rolls around, or in the event that your business is audited, you’ll be glad you did.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.