Business Tax Records—What Records to Keep and When to Shred

Are you never quite sure what original information to save after you file your annual tax return? In this article, we discuss what business tax documents you must keep and how long to keep them.

Good bookkeeping is difficult to manage for many businesses. Let’s face it—your priority is to keep the business running from day to day. It might not seem like it but now, as you prepare to file your business taxes for 2011, is actually the perfect time to develop good record keeping habits.

Keeping organized records throughout the year is vital to making sure you have all the information you need during tax season. Proper record keeping practices instilled now will also ensure that filing your 2012 tax return goes as smoothly as possible. Finally and perhaps most importantly, organized records will also help if the IRS audits your tax return or sends your business an IRS notice of additional taxes due.

If this is all simply overwhelming, business accounting and bookkeeping is actually something you can outsource. The peace of mind and organization that having an external bookkeeping service may be well worth the investment for your business.

So what to keep and what to shred?

Many CPAs advise clients to keep any and all documentation that might affect a federal tax return for 6 years or more. While this is a good rule of thumb, some documents are more critical than others.

Employment tax records—Businesses must keep these records for at least four years. This four year time period begins when the tax becomes due or is paid, whichever occurs later.

Gross receipts—Records from your sales like invoices, credit card charge forms, cash register tape, slips from bank deposits, receipt books, and tax forms from miscellaneous work should be kept for a minimum of four – six years. Keeping them organized by month and type will also help tremendously.

Proofs of purchase and expenses—Purchase records and expense documents can be invoices, credit card charge forms, cash register receipts, canceled checks, account statements, and petty cash slips if small cash payments were made. Storing these for the last four years should suffice, but hang onto them for six if you are self employed.

Asset documentation—Real estate closing statements, invoices of purchase and sales, and canceled checks are records you should definitely keep on file. Although it depends upon the type of business you have, real estate investment information should be kept until 3 years after the sale of the asset is completed since you will need the original documentation to calculate gains or losses on the asset.

Why these time periods? While the IRS doesn’t have standards by which they recommend how long you should keep records, they do have a chart that reviews the statute of limitations. These statutes indicate for how long your tax return could be selected for an audit review and thus require the subsequent documentation be referenced. The IRS Statute of Limitations chart is listed below.

If you:

(1) Owe additional tax and (2), (3) and (4) do not apply: 3 years

(2) Did not report income that you should and it is 25% of your gross income: 6 years

(3) File a Fraudulent Return: No Limit

(4) Do not File your Return: No Limit

(5) File a claim for credit or refund AFTER you filed your return: the later of 3 yrs or 2 yrs after the tax was paid

(6) File a claim for loss from worthless securities: 7 years

Please note that these guidelines begin from the time when the return was filed. If you filed your return before the April deadline, the statute begins on the April tax filing deadline date for the year filed. If for any reason you delayed filing your tax return, the statute of limitations would begin on the date you actually filed the delinquent return.

Business tax preparation can be simplified at year end with proper tax planning. If you are a business owner looking for business tax services or business accounting solutions, the tax professionals at have the expertise to help. Call (866) 676-9417 or email today for a free, no obligation consultation with a CPA.