What are general record retention guidelines for business taxpayers?
While a business’s recordkeeping system will be unique to its situation, below are some general guidelines regarding tax-related records.
- Canceled checks for tax payments – Permanent
- Correspondence from IRS/taxing authorities – Permanent
- Depreciation schedules – Permanent
- FUTA/FICA/SUTA/income tax withholding – 4 years
- Income tax returns – Permanent
- Inventory reports – Permanent
- Payroll tax returns (includes Forms W-2) – Permanent
- Sales tax returns – Permanent
Support for gross income, deductions, credits or other matters required to be reported on a tax return – At a minimum, the books and records should be maintained until the expiration of the statute of limitations, including extensions, for each tax year. It’s often advisable to keep tax return support for at least six years (see How long should I keep records? On irs.gov).
Period of Limitations that apply to income tax returns
- Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
If the business taxpayer has carryforward items from prior year income tax returns, the internal record retention policy may need to be modified. In these situations, certain original records of transactions to support any tax benefit item or position should be retained through the conclusion of the statute period of the year in which the benefit was claimed (rather than the period where the benefit/position arose).
Early on it may be tempting to keep everything. But over time the cost and liability of storing old documents — either in paper copies or electronically — can become significant. Rather than waiting until you run out of room or are frustrated by storage bills, you should implement a document retention policy. Your CPA can offer his her own experience as well, based on knowledge of your industry and/or state, and can advise you with specific recommendations for records retention.
While your recordkeeping system will be unique to your business, certain subjects are universal. For most small businesses, the categories that follow make up much of their financial paperwork. Since incomplete or sloppy records in these areas can cause you major trouble and expense, getting them under control is a good place to begin.