Keeping tax records and other important business documents isn’t just helpful for getting your taxes filed: Recordkeeping is a legal obligation imposed by the IRS. But when you’re staring down piles of receipts and other business records, it can be hard to know which records you need to keep, and which records you can send to the shredder. In this guide, we’ll cover the items you need to store and keep when it comes to small business recordkeeping. We’ll also explain how long you need to keep them, and efficient methods for filing records (to save you from the overstuffed filing cabinet).
Tax Records & Receipts You Need to Keep
Every small business owner or self-employed person is required by the IRS to keep documentation that supports items of income, deductions, or credits appearing on their tax return. This documentation is how you prove that you earned what you said you earned and purchased what you said you purchased.
The tax records and supporting documentation you need to hold on to include:
- Bank and credit card statements
- Canceled checks
- Proof of payments, like transaction records from PayPal
- 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
Keep in mind that this list is not one hundred percent comprehensive. The types of records you need to keep for tax purposes will vary according to the nature of your business.
The burden of proof to prove your business transactions is on you, the taxpayer. Since it’s up to you to back up every item on your tax return with supporting documentation, our advice is simple: Keep everything.
During a tax audit, your first line of defense is your tax records. Your best bet is to store everything digitally, so it’s easily on-hand in case of scrutiny from the IRS. This will also help you avoid losing receipts so you can support every possible tax deduction that applies to your business.
Since it’s up to you to back up every item on your tax return with supporting documentation, our advice is simple: Keep everything.
The $75 Rule: Receipts You Could Toss (But Shouldn’t)
In general, you’re expected to hold on to documentary evidence — receipts, canceled checks, bills — to track your expenses.
We’re going to stick to our “keep everything” advice here and say you should get into the habit of filing receipts for all of your business expenses. But it will help you to understand the exceptions to the recordkeeping rules.
You don’t need to keep documentary evidence for expenditure if any of the following apply:
- The expense comes to less than $75 (Note: this rule does not apply to lodging expenses.)
- It’s a transportation expense and a receipt is not readily available
- You’re reporting expenses while traveling for business, which you account to an employer under an accountable plan, and for which you receive a per diem allowance
Remember, however, that any expense — even one under $75 — can be challenged during an IRS audit. If you lack a receipt for any expenses under $75, the IRS will only uphold the deduction if you present certain information upon request.
Here’s the expense information you’ll need to document and present during an audit:
- The amount of the expense
- The date the transaction took place
- The place the transaction took place
- The essential character or purpose of the expense
For meals and entertainment deductions, you also need to specify who was involved with the expense — for example, the name of the client you took out for lunch. Write these details down on the backs of paper receipts, or in a diary or calendar. You can also use a mobile app like Expensify to keep digital records.
You can learn more about IRS guidelines for expenses under $75 on the IRS website.
When Can You Shred Tax Records?
The Three Year Limit
Generally, you need to keep tax records for the three years following the date the expense was filed, or from the due date of your tax return — whichever comes later. Even if you file your tax return early, it’s treated as though it was filed on the due date.
An Example of the Three Year Limit
Let’s say that a few years ago, you were well-organized and you filed your tax return for the 2013 financial year on April 10, 2014. However, the deadline that year was April 15, 2014.
This means you would have to keep the tax records, receipts, and other supporting documentation connected to your 2013 tax return until April 15, 2017 — three years after the date your return was due.
You can thank the period of limitations for this rule. The period of limitations is the period during which a taxpayer — that’s you — can amend their tax return. It’s also the period during which 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 a copy of the tax return or any of its supporting documentation.
However, this is tax law we’re discussing — which means that there are exceptions to every rule.
Exceptions to the Three Year Rule
There are certain instances that demand you hold onto a tax return for longer than three years after filing. Here’s a summary of exceptions to the three-year rule, and a basic explanation for how long you should keep the records in each category:
Bad Debts & Worthless Securities
You’re able to deduct the value of bad debt or worthless securities on your tax return. But if you do, you have to keep records of these debts and securities for seven years.
If you failed to report income that you should have reported, and it was more than 25% of the gross income listed on your return, keep records for six years after the date you filed, or the deadline for filing — whichever came later.
If you have employees, you must keep employment records at least four years after the date that payroll taxes were due or were paid — whichever is later.
Fraudulent Return or No Return
Just in case you were planning to commit tax fraud, or skip filing a return: There is no statute of limitations on breaking the law. The IRS can come after you forever.
Generally, you should keep records of property for at least three years — the period of time in which you may be audited, or in which you can amend your return.
You need to keep those records so that you can calculate any depreciation, amortization, or depletion deduction, and to factor in gain or loss if you eventually sell the property.
Here’s an example: Say you got rid of a piece of property during the 2015 tax year. On your tax return for 2015, you report the money you made. You file right on the deadline — April 18, 2016. You would need to keep records related to this piece of property for three years, until April 18, 2016.
The type of property records you should hold on to include deeds, titles, and cost basis records — for instance, receipts for computers or vehicles.
How to Store Receipts and Tax Records
Now you know how long to keep your tax records, the next step is to develop an efficient and secure method for storing them.
Chances are, your order history and transaction records already live in the cloud. But in the case of hard copies of receipts — for example, from one of your many trips to mail goods at the post office — it’s better that you go completely paperless.
The IRS will accept digital copies of documents so long as they’re identical to and contain the same accurate information as the original copies. You need to be able to produce a legible printed copy of the document upon request.
Use cloud storage services like Sync, Dropbox, Evernote, or Google Drive to keep copies of your paper documents online. If you have a large number of documents to upload, consider investing in a high-speed scanner. It’s also wise to keep a backup of every document in a separate location, such as an encrypted solid state drive, or a different cloud storage service.
Keeping Records for Non-Tax Purposes
Your creditors, business lawyer, or insurance company may also want to see copies of your tax records, and they may need you to hold on to them longer than the IRS does. Once you’re past the period of limitations on your records, double-check that you won’t need them for another purpose before you shred them.
If you’re using digital storage, you can simply archive records you no longer need — rather than permanently deleting them.
It can be tough to keep up with all the rules small businesses are expected to follow. Although it’s important to make sure which records you need to keep and the period of limitations for each, remember: The best approach to small business recordkeeping is to hold onto everything. Life is easier when you’re not scrambling for missing receipts and records during tax season. And, so long as you keep everything, you’ll know you always have what you need in case of an IRS audit.