How long to keep business tax records and receipts

Business records are documents like tax returns, receipts, payroll files, bank statements, and other records showing your income, expenses, and overall financial activity. Essentially, they're the proof of your business's financial operations.

You should retain most of your records for at least three years, but some situations require holding on to them much longer. These rules vary based on the document type, and mistakes in record-keeping can lead to hefty penalties.

General rule for keeping tax records

Tax records include your filed business tax returns, receipts, invoices, financial statements, and payroll documents. These documents substantiate your gross income, tax deductions, or credits. These records are essential not just for compliance but also for protecting your small business. They serve as proof in case of an IRS inquiry or legal dispute and help you claim deductions accurately.

Standard 3-year record retention rule

The Internal Revenue Service advises you to keep your tax records for at least three years from the date you file your return. This three-year period matches the statute of limitations. During this time, the IRS can audit your return or adjust your reported income. If you file early, the clock starts from the official tax deadline, not your filing date.

They have implemented the 3-year rule as it gives the IRS enough time to review your filing. It also allows you to make changes or amend your return if needed. Keeping your records ensures you have proof of your reported income, deductible expenses, or credits if questions come up.

Exceptions to the standard retention period

There are a few exceptions where you'll have to hold only your records a little longer.

1. Unreported income exceeding 25%
   If you under-report your income by more than 25% of what's shown on your return, the IRS extends the statute of limitations to six years. For example, if your income is $100,000, but you fail to report $26,000 or more, this rule applies. You should keep all the relevant tax documents for at least six years in such cases.
2. Claiming worthless securities
   If you claim a deduction for worthless securities or bad debts, you'll need to keep records for seven years. These deductions often require extra documentation to substantiate the claim, and the IRS might need more time to review them.
3. Fraudulent or unfiled returns
   There is no statute of limitations if you don't file a tax return or file a fraudulent return. The IRS can investigate these issues indefinitely. In such cases, you must retain your records forever to ensure you have proof of your financial activity if questioned.
4. Employment tax records
   For employment taxes, the IRS requires you to keep records for at least four years. This includes payroll tax filings, employee wage documentation, and proof of tax payments. These records are essential for both compliance and potential audits related to payroll.
5. Property and asset records
   If you own property or long-term assets, keep records until the period of limitations expires for the tax year when you sell or dispose of the asset. This can extend beyond three years. These documents help establish your basis, calculate depreciation, and determine capital gains or losses.

Industry-specific record retention guidelines

The record retention guidelines vary based on your industry, as each sector has unique requirements based on regulations, operations, and tax obligations. For example, healthcare providers must follow HIPAA rules, while manufacturers often need to keep inventory and production records for longer periods to meet compliance standards.

Retail and inventory-based businesses

As a retailer or inventory-based business, you should keep supporting documents that track inventory purchases, sales, and adjustments. This includes receipts, invoices, shipping logs, and inventory reports. These financial records are essential for calculating your cost of goods sold (COGS), directly affecting your taxable income.

The IRS generally advises keeping inventory-related records for at least 3 years, matching the standard statute of limitations for tax returns. However, if you sell inventory or property that affects future deductions or tax filings, retain these records until the statute of limitations expires for the year you sell the asset. This could extend the retention period to 6 or 7 years.

Service-based businesses

Service-based business owners need to focus on keeping records that track income, client agreements, and expenses. You should keep these invoices for at least 3 years to verify payments received and services provided.

Client contracts tied to ongoing or long-term projects should also be retained for at least 6 years or longer if they relate to disputes or legal obligations. Receipts and bills for business expenses, such as travel, software subscriptions, or office supplies, should be kept for at least 3 years, aligning with the IRS's standard retention period.

If you have employees, payroll records, including wage, tax, and benefits information, must be kept for at least 4 years. Records for assets, such as office equipment, need to be held until they are fully depreciated, plus 3 years after that tax year ends.

If you are a healthcare provider, you must follow HIPAA regulations and keep patient billing records for at least 6 years. Freelancers or consultants working on intellectual property projects should retain all related documents indefinitely to protect their rights.

Business records to retain beyond taxes

Records like contracts, payroll documents, and asset records can impact your IRS audits and legal disputes. This is why it is quite essential to retain them. Beyond compliance, retaining these records also enhances your operational efficiency. Organized documentation streamlines audits, accelerates financing processes, and ensures you can respond quickly to inquiries from regulators, lenders, or partners.

Payroll documentation

Payroll records include all documents related to employee compensation and taxes. This includes pay stubs, records of wages, hours worked, tax withholdings, overtime pay, bonuses, and benefits. These records help you stay compliant with federal and state labor laws.

These records are important when resolving disputes or handling audits. If an employee raises a wage dispute, your payroll documentation serves as evidence to settle the matter. During an IRS or labor audit, detailed payroll records prove your tax filings are accurate and complete.

Employment tax record

Employment tax records include documents that show wages paid to employees and taxes withheld. These records cover payroll tax returns, like Forms 941 and 940, W-2s, and details of withheld income tax returns, Social Security, and Medicare contributions. You also need to keep proof of tax deposits, unemployment tax filings, and any communication with the IRS or state tax agencies.

Accurate employment tax records protect your business from penalties and help resolve issues, such as employee disputes over tax withholdings or earnings. They also ensure you can provide the necessary documents during an IRS or labor audit.

Asset depreciation and property records

Asset depreciation and property records include purchase invoices, receipts, contracts, and titles or deeds. You should also keep documents related to maintenance, upgrades, and repairs that increase the asset's value. Depreciation schedules are particularly important, as they show how much of the asset's value has been deducted each year for tax purposes.

Detailed asset records protect your business while preparing for IRS audits and help you plan for the future. They show the value of your assets, support loan applications, and attract investors by demonstrating your business's worth. Without these records, you risk reporting errors and being unprepared for inquiries.

Why are digital records better than physical records?

Digital records are much easier to access. Unlike physical files that require storage space and manual retrieval, digital records can be accessed instantly from anywhere. This is especially useful for remote work or businesses with multiple locations. Employees spend up to 25% of their time searching for documents. Digitization significantly reduces this wasted time.

These records also offer better security. Physical documents are at risk of being lost to fire, theft, or natural disasters. In contrast, digital records can be encrypted, backed up, and stored securely in the cloud.

Compliance is also easier with digital systems. Many platforms automate record retention schedules, ensuring you keep records for the required time and dispose of them securely when no longer needed. This helps you avoid fines or penalties for non-compliance.

You can keep your records digital with Ramp. It automates expense management, bill payments, and accounting. This simplifies your financial processes and maintains healthier business operations.

How to safely dispose of records

When records are no longer needed, you must destroy them securely to protect sensitive information and comply with data privacy laws. Improper disposal can lead to data breaches, fines, or legal problems.

For physical records, shredding is the safest option. Use a cross-cut shredder that cuts documents into tiny, unreadable pieces. This is crucial for records with financial, employee, or client information.

You should use data-wiping software to permanently erase files and make them unrecoverable for digital records. If you store records in the cloud, follow your provider's deletion steps to fully remove files from their servers. For old hard drives or devices, use a professional data destruction service to ensure all data is completely erased.

You should also record when and how the documents were destroyed, especially if they contained sensitive or regulated information. This documentation protects your business in case compliance questions come up later.

Stay compliant and confident with smart record-keeping

You stay compliant, organized, and prepared when you organize and keep your records. It effectively protects your business from audits, legal problems, and unnecessary stress.

With proper record keeping, you can back up tax filings, resolve disputes, and meet due dates without scrambling. The IRS can impose penalties of up to $330 per missing document, making accurate records essential to avoid fines.

Good record-keeping through digital tools gives you more than compliance—it provides real-time visibility into your finances. By automating the documentation process with Ramp, you free up time to focus on scaling your business while maintaining the accurate records stakeholders expect.

The information provided in this article does not constitute accounting, legal, or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.