Once you start keeping good records, the next question is how long to hold on to them. Shredding too early can leave you unable to support a return. Keeping everything forever creates clutter and, for documents with personal data, unnecessary risk. The IRS publishes clear guidance on this, and this article summarizes it in plain English.

The starting point: the period of limitations

The IRS page How long should I keep records? explains that the length of time you should keep a document depends on the action, expense or event the document records. Generally, you must keep records that support an item of income, deduction or credit 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 a return to claim a credit or refund, or the IRS can assess additional tax.

The retention periods the IRS describes

The IRS lists several periods. In summary:

  • Three years is the general rule, covering most situations where none of the longer periods apply.
  • Three years from filing, or two years from when you paid the tax, whichever is later, if you file a claim for credit or refund after filing your return.
  • Seven years if you file a claim for a loss from worthless securities or a bad debt deduction.
  • Six years if you do not report income that you should have reported and it is more than 25% of the gross income shown on your return.
  • Keep records indefinitely if you do not file a return, or if you file a fraudulent return.
  • At least four years for employment tax records, after the date the tax becomes due or is paid, whichever is later.

Always read the IRS page itself for the exact wording, because the details matter in edge cases.

Records connected to property

Records relating to property are a special case. The IRS advises keeping them 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 deductions, and to figure the gain or loss when you sell or otherwise dispose of the property.

For a business, this often means keeping the purchase documents for equipment, vehicles and improvements for as long as you own them, plus the retention period after the sale. A laptop bought several years ago may still need its invoice.

Records that other parties may need

The IRS also notes that some records should be kept longer for non-tax reasons. Insurance companies, lenders and creditors may require you to keep records longer than the IRS does. Before you discard anything, consider whether a loan agreement, lease or insurance policy asks for longer retention.

Employment tax records

If you have employees, employment tax records need at least four years of retention under the IRS guidance above. That includes records supporting wages paid, taxes withheld and deposits made. Information about independent contractors matters too. The IRS page on forms and associated taxes for independent contractors advises keeping each contractor's Form W-9 on file for four years for future reference in case of questions. Our payroll services can help keep these records complete.

A simple retention policy for a small business

You do not need a complicated system. Many small businesses adopt a policy like this and then ask their tax professional to confirm it fits:

  1. Keep each tax year's return and its supporting records together, in one folder per year.
  2. Keep each year's folder for at least the general period, and longer if any of the longer IRS periods might apply.
  3. Keep payroll records for at least four years after the tax is due or paid.
  4. Keep asset purchase and improvement records for as long as you own the asset, then for the retention period after disposal.
  5. Check loan, lease and insurance agreements for longer requirements.
  6. When records do reach the end of their retention period, dispose of them securely, especially anything with Social Security numbers or bank details.

Electronic records and backups

Electronic records are only useful if you can find and open them later. Use consistent file names, store records in more than one place and make sure someone besides you knows where they are. Our guide to what business records to keep covers how to organize records day to day.

Need help getting organized?

If your records are scattered across inboxes, shoeboxes and old software, our bookkeeping services can bring them together. Book a free consultation to talk about where you are starting from.