The end of the year is when a lot of owners finally clear out the filing cabinet, or the box of receipts riding around in the truck. Before anything goes in the shredder, it helps to know how long the IRS expects you to hold onto it. Toss something too early and you may not be able to prove a deduction you already took. Keep everything forever and the box just keeps growing.
I’m a bookkeeper, so I’m covering the records side here. These are the IRS’s own periods for federal income tax returns. Whether a different one applies to you is a question for your preparer.
The usual answer: 3 years.
The IRS ties it to how long your return can still be changed. For most returns that is 3 years after you file. Any record that backs up income, a deduction or a credit on that return stays until then. If you filed early, the IRS counts from the due date instead.
Payroll records: 4 years.
If you have employees, keep your employment tax records for at least 4 years after the tax was due or paid, whichever is later.
Equipment and property: longer.
The receipt for a truck or a piece of equipment you bought years ago still matters. The IRS says to keep property records until the period runs out for the year you sell it or get rid of it. Those records are what your depreciation is figured from each year, and what your gain or loss is figured from when it sells. So the paperwork on something you’ve owned for eight years stays in the file a while yet.
A few cases run longer.
It’s 6 years if income was left off a return and it’s more than 25% of the gross income shown on the return. It’s 7 years if you claim a bad debt deduction or a loss on worthless securities. If one of those might fit your year, bring it up with your preparer.
What to keep
The IRS lists sales slips, paid bills, invoices, receipts, deposit slips and canceled checks. For an expense, the record should show who you paid, how much, proof that you paid it, the date, and what it was for. Keep a copy of every tax return you file too. They help with next year’s return, and with fixing an old one if it comes to that.
Paper or digital
Digital counts. The IRS says the rules for paper records apply to electronic ones too, so a receipt photo in QuickBooks needs to show the same details a paper copy would. If the photo is blurry or cut off, take another. (Here’s how receipts get to me week to week.)
Before you shred
Taxes aren’t the only reason to keep something. Your insurance company or a lender may want records kept longer than the IRS does, so it’s worth asking them first. Whatever you keep, sort it by year and by type, the way the IRS suggests, so you can find it when someone asks.
If your books themselves are behind, a box of receipts doesn’t do much until each one is matched to what happened in the business. For a quick read on where your file stands, there’s the free Books Health Quiz.
Take the free Books Health QuizKeep reading: 5 Things to Get Ready Before Your Tax Preparer Asks for Your Books