How long a small business should keep its records

“Keep everything for seven years” is the version most business owners have heard. The real answer is more specific, and in a couple of situations it is far longer.

The idea behind the rule: the period of limitations

The IRS does not set retention periods by document type. It ties them to the period of limitations: the window in which you can amend a return to claim a credit or refund, and in which the IRS can assess additional tax.

Keep the records that support an item of income, deduction or credit until that window closes for that return. Returns filed before the due date are treated as filed on the due date.

The periods

The IRS lists these periods for income tax returns. Unless stated otherwise, the years run from the date the return was filed.

Situation	Keep records for
The ordinary case, where none of the situations below apply	3 years
You file a claim for credit or refund after filing your return	3 years from filing, or 2 years from the date you paid the tax, whichever is later
You file a claim for a loss from worthless securities or a bad debt deduction	7 years
You do not report income you should have reported, and it is more than 25% of the gross income shown on the return	6 years
You do not file a return	Indefinitely
You file a fraudulent return	Indefinitely
Employment tax records	At least 4 years after the date the tax becomes due or is paid, whichever is later

Two of those rows are the reason “three years” is unsafe as a blanket rule: the six-year row and the two rows with no end date at all.

Records tied to property are different

Records relating to property are kept until the period of limitations expires for the year in which you dispose of the property, not the year you bought it.

Those records are what let you work out depreciation, amortisation or depletion, and the gain or loss when you sell. A machine bought in 2019 and sold in 2031 has purchase records that stay relevant into the 2030s.

There is a further wrinkle: if you received property in a nontaxable exchange, your basis in the new property comes from the old one. In that case you keep the records for both the old and the new property until the period expires for the year you dispose of the new one.

What counts as a record

Your books are the summary. The supporting documents are the proof behind them. The IRS lists the kinds that typically matter:

• Gross receipts: cash register tapes, deposit information, receipt books, invoices, Forms 1099-MISC.
• Purchases: cancelled cheques or other proof of payment, receipts, credit card receipts and statements, invoices.
• Expenses: the same, showing who was paid, how much, proof of payment, the date and what it was for.
• Assets: when and how you acquired it, purchase price, cost of improvements, deductions taken, how it was used, and the details of how you disposed of it.
• Travel, gift and transportation expenses: these carry their own substantiation requirements.

Electronic records are fine. The IRS is explicit that every requirement applying to paper books and records applies equally to electronic ones, so “it is in the accounting software” does not lower the bar.

Before you throw anything away

Two cautions.

Keep copies of the returns themselves. The IRS suggests this separately from the supporting records, because past returns help in preparing future ones and in making the calculations an amended return needs.

Tax is not the only reason to keep something. The IRS says plainly: when records are no longer needed for tax purposes, check whether you have to keep them longer for another reason. Insurers and lenders often require longer retention than the IRS does, and contracts, leases and employment records have their own reasons for existing.

A practical way to handle it

The periods above are minimums tied to situations you may not know you are in yet. Whether unreported income exceeded 25% of gross income, for example, is not something you set out to know.

In practice most small businesses find it simpler to keep complete records for seven years, keep anything connected to property until well after the property is gone, and keep copies of the filed returns permanently. That covers every row in the table without having to work out which row applies.

Storage is cheap. Reconstructing a year you no longer have records for is not.