how long should you keep business tax records

How Long Should You Keep Business Tax Records?

An important part of any business is record keeping. You should keep records about payrolls, invoices, and taxes. Not only will these records keep you in compliance with the law, but will also help you understand your business’ financial health.

A large amount of paperwork is accumulated each year, and it can be difficult to determine how long you should keep this information. When determining how long you should keep records, you first should consider the type of information you’re looking at. The IRS has given businesses specific guidelines for particular pieces of information, such as how long you should keep business tax records. You want to make sure the relevant information is available if your business is audited.

For laws that apply to your specific business, you need to consultant an accountant, but here are some general guidelines:

Tax returns

Businesses file quarterly taxes with the federal and state government. You also file a tax return each year. The IRS recommends that you keep tax records for three years from the date you file. If you file a claim for credit or refund after you file your return, you should keep the returns for two years from the date you paid the tax. Always file for your tax return. If you never file, or if you commit an act of deliberate fraud, there is no statute of limitations.

State Rules

Each state has specific rules about keeping tax returns. In Virginia, for example, the law says you need to keep tax returns for at least three years from the date of the return or the date the return was filed. The same law applies in Maryland. It’s best to check with your accountant on the rules that apply in your state.

Employment Tax Records

If you have employees, you have to keep track of records pertaining to them. These records include things like:

  • Employer identification number
  • Wages, annuities, and pension payments
  • Amounts of tips reported
  • Names, addresses, and social security numbers
  • Copies of Form W-2 that were returned to you as undeliverable
  • Copies of employees’ and recipients’ income tax withholding allowance certificates
  • Copies of returns filed

The IRS recommends keeping employment tax records for at least four years after the date that the tax becomes due or is paid. However, the IRS can go after payroll taxes indefinitely. In Beeler v. Commissioner, the IRS was able to receive payment for outstanding payroll taxes after 24 years.

Personnel Files

Along with tax information, you must also keep an I-9 and other personnel records. The I-9 form verifies that a person is legally allowed to work in the United States. Records must be kept for a year after an employee leaves or three years from the start of employment, whichever is greater. Many attorneys and human resource professionals recommend keeping personnel files for seven years.

Supporting Evidence

While the three-year rule generally applies, the IRS can seek to recover unpaid taxes for up to six years if you failed to pay an amount greater than 25% of your business’s gross income. It’s wise to keep receipts, bank statements, invoices, and other supporting documents for seven years.

Healthcare Information

The Affordable Care Act brought new tax implications to many businesses. Businesses with more than 100 employees are required to show proof of insurance with their tax returns or pay a penalty. The IRS recommends keeping these records for three years from the time of filing.

Records Connected to Property

The IRS guidelines for property states “keep records relating to property until the period of limitations expires for the year in which you dispose of the property.” You need property records for depreciation, amortization or depletion deduction. You will also need to calculate gains or loss when you sell the property.

Insurance Records

Businesses can have various types of insurance — property, workman’s comp, product liability and others. It’s best to keep these records for four years. If you manufacture a product, it’s best to hang on to these records indefinitely, as you never know when a lawsuit will be filed. Four years is a good guideline for other insurance records.

Capital Assets

If you have capital assets – stocks and bonds, real estate, etc. – and you sell them some day, you should retain proof of how much you paid for it to establish your cost basis.

When it comes to record keeping, the philosophy is definitely “better safe than sorry.” If you’re not sure how long to keep a business tax record, it’s better to file it away in a secure place than destroy it, only to find out that you need it later.

For more on record keeping or if you have any questions, feel free to contact us.

KDuncan & Company is dedicated to providing knowledge and support for small government contractors about concerns regarding government contracting. For questions on areas such as as cost proposals, accounting systems, DCAA compliance, and incurred cost audits, reach out to KDuncan & Company. 

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