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As a small business owner, you likely keep records for everything – from what you’ve earned to what you’ve spent each month and year. As a result, you may have collected quite a bit of paperwork. Can you dump it all once you’ve filed your tax return?Not so fast. According to the IRS, you need to keep a copy of your tax return, and its supporting documents, for at least three years. In some cases, you need to hold onto your returns for seven years. Read on to learn which records you’re legally required to keep, how long you should keep them, and how to keep them organized.
Why Should You Keep Your Tax Returns?
It may seem like holding on to many years’ worth of financial records is a waste of space, but there are several reasons why you’ll want to – and it’s not just for the IRS. Here’s a look at a few of them.
Documentation for Loans
If you plan on applying for a small business loan at some point, you’ll likely be required to submit tax returns going back at least three years, as well as bank statements, income statements, balance sheets, and other documents that show proof of your sales, profits, and losses.
In Case of an Audit
Getting audited isn’t at the top of anyone’s fun list, but if you are chosen for an audit by the IRS, having the last three to seven years’ worth of tax returns and supporting documents can help turn what can be a giant headache into…a slightly smaller headache.
If You Want to Sell Your Business
If you decide to sell your business, any interested buyer will likely want to look at your tax returns going back several years to see how profitable your business has been.
How Long Is It Recommended That You Keep Business Tax Returns?
At a minimum, you should keep business tax returns for three years from the date the return was filed or the due date of tax return, which is later. However, there are some exceptions to this rule. So one small business tax tip is to keep your returns for seven years to play it perfectly safe. Here’s why: The IRS stipulates that you should keep your records for as long as needed to prove the income or deductions on a tax return. Three years is the period during which you can amend your tax return and the IRS can perform an audit on your return. In certain instances, however, you’ll need to hold on to tax records for longer than three years. For example:
If you deduct the cost of worthless securities or bad debt, you need to keep your records for seven years.
If there’s any chance you didn’t report all income that should have been reported (and it’s more than 25% of the gross income stated on your return), you need to keep your return for six years.
If you don’t file a return (or file a fraudulent return), you need to keep your records forever – there’s no statute of limitations on fraudulent or unfiled returns, which means the IRS can come after you at any time.
In addition to your tax returns, you’ll want to hold on to these other important business records – for tax as well as other reasons.
Business Formation Documents
If your business is operating as a corporation or LLC, you’ll want to hang onto your articles of incorporation, or articles of organization, as long as you are in business. You will likely need these documents when applying for any type of debt instrument, should you ever sell your business, or if you decide to buy out a partner.
Employment Records
If you have employees, you need to keep all employment tax records for four years. That includes:
Employees' names, addresses, social security numbers, dates of employment, and occupation
Wages, annuities, and pensions paid to employees with dates of payment
Taxes withheld including FICA and Medicare
Records of tips and fringe benefits paid if applicable to your business, and
1099 documents for independent contractors
Sales Receipts
When your company makes a sale or you purchase something for your business, you either give or take a receipt. Sales receipts play an important role in your business – they reinforce your transaction history in your accounting books and also support the information you list on your small business tax return. As a general rule of thumb, you’ll want to keep business receipts for as long as the IRS can audit your records, which is a minimum of three years.
Business Asset Records
If you have purchased high-value equipment or property for your business, and you claim deductions for depreciation of those assets, you’ll need to keep asset records for at least three years after the year you disposed of the asset. You’ll also want to have these records if/when it comes to time to sell the asset.Business asset records should include the receipt for the purchase of the asset, the date when you started using the asset, and the date you disposed of it (and if you sold it, record of the sale and sale price).
Others
Other business records and documents you’ll want to carefully file away include:
Ledgers and registers
Leases documents
Loan documents
Bank and credit card statements
Insurance policies and records
Which Records Should You Keep Permanently?
Documents that support your tax return generally only need to be kept as long as you keep those tax returns, which can be anywhere from three to seven years, depending on your tax situation. There are some documents, however, that you’ll want to keep indefinitely, as they might be of interest to you, a lender, or someone looking to invest in or buy your business. These include:
Business formation documents
Business licenses and permits
Annual reports
Shareholder meeting minutes
Employer identification number
Pension and retirement plan documents
Tips on Small Business Record Keeping
To save space – make sure important papers don’t get lost or damaged in a flood or fire – it can be a good idea to digitize all of your important business documents. The process entails scanning every record and receipt, tagging it with a descriptive name, and putting it in an electronic file. This not only keeps documents safe, but also makes it easy to retrieve records when you need them. Some tools that can help you do this include:
A business document scanner
A cloud-based storage service
A receipt app on your phone
If you decide to go paperless, it’s also a good idea to have backup – this could be keeping a copy of everything on a harddrive or using a second cloud storage service.
The Takeaway
You need to keep business tax returns and supporting documents for at least three years, but there are some exceptions. The window for IRS audits is six years should you fail to report income, and seven years if you deduct the cost of worthless securities or bad debt. Your accountant can advise you on whether you need to abide by the three-, six-, or seven-year rule.Certain documents, such as your business formation documents, business licenses and permits, and annual reports, should be held on to indefinitely.Keeping your business tax returns and other records in an organized fashion can help in the event of an IRS audit, and also come in handy should you decide to apply for any type of small business loan or sell your business.
3 Small Business Loan Tips
Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders
Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.
SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.
Frequently Asked Questions
How many years of business records should you keep?
How many years can the IRS go back and audit?
Why should a business keep old tax returns?
Photo credit: iStock/andresr
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About the Author
Susan Guillory
Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
