Handbook / Bookkeeping and cash

How long to keep business records: IRS periods and a practical policy

Every self-employed person eventually faces boxes of receipts and folders of statements and wonders what can go. The answer depends on what the record supports and which rules apply. This guide summarises the IRS guidance and turns it into a practical policy.

The general rule

The IRS says the length of time you should keep a document depends on the action, expense or event it records. Generally, that means keeping records that support an item of income, deduction or credit shown on your return until the period of limitations for that return runs out. The period of limitations is the time during which you can amend your return to claim a credit or refund, or the IRS can assess additional tax.

The IRS periods

According to the IRS, unless otherwise stated these periods run from when the return was filed, and returns filed before the due date are treated as filed on the due date:

• 3 years: the general period, if none of the situations below apply.
• 3 years from filing or 2 years from paying the tax, whichever is later: if you file a claim for credit or refund after you file your return.
• 7 years: if you file a claim for a loss from worthless securities or a bad debt deduction.
• 6 years: if you do not report income you should have reported, and it is more than 25% of the gross income shown on your return.
• Indefinitely: if you do not file a return, or if you file a fraudulent return.
• At least 4 years for employment tax records, after the date the tax becomes due or is paid, whichever is later.

Property and asset records

The IRS says records relating to property should generally be kept until the period of limitations expires for the year in which you dispose of the property. You need them to figure depreciation, amortization or depletion, and the gain or loss when you sell.

For a computer, vehicle or equipment you use for several years, that means keeping the purchase records for the whole time you own it, plus the period after you sell or dispose of it.

If you received property in a nontaxable exchange, the IRS notes you must also keep records on the old property, because your basis carries over.

Non-tax reasons to keep records

The IRS points out that records you no longer need for tax purposes may still be needed for other reasons. Check:

• insurance policies and claim requirements
• lenders, who may ask for several years of records
• contracts with clients or suppliers
• state rules, including state tax agencies
• legal disputes, where you should keep everything relevant

What to keep

• income records: invoices, payment reports, 1099 forms, deposit records
• expense records: receipts, invoices, bank and card statements
• mileage logs and vehicle records
• asset purchase and sale records
• copies of filed tax returns
• payroll and contractor records, if you have them
• contracts and important correspondence

The IRS recordkeeping page explains what supporting documents show. See also receipt tracking.

A simple retention policy

Write a short policy that works for your business:

1. Tax year folders: keep each year's records together, digital or paper.
2. Default retention: many small businesses keep tax records longer than the general period, as a buffer, unless a longer rule applies.
3. Asset folder: separate folder for property records, kept until the period ends after disposal.
4. Employment folder: if you have employees, keep employment tax records for at least the IRS minimum.
5. Permanent folder: filed returns, formation documents and major contracts.
6. Annual review: each year after filing, check which folders have passed their retention date.

Digital storage

Scanned and digital records are fine if they are accurate, complete and readable. Store them in at least two places, protect them with strong passwords and multifactor authentication, and test that backups restore. See data backup.

Destroying records safely

Records contain personal and financial information. Shred paper and securely delete digital files when your policy allows. Do not destroy records connected to an open audit, dispute or claim.

Paper or digital

Decide on one main format and stick to it. If you scan paper receipts, check that scans are legible and complete before shredding originals, and keep them in the same tax-year folders as your digital records.

Keep records until the IRS period of limitations runs out: generally 3 years, longer in specific cases, at least 4 years for employment taxes, and property records until after disposal; then check non-tax needs before destroying anything.