How Long Should I Keep Tax and Business Records?

“How long do I keep all this?” is one of the most common questions people bring to a CPA, usually while standing next to boxes of old receipts. The answer depends on what the record supports. The IRS publishes a short guide to retention periods, and the Franchise Tax Board can review California returns on its own timeline, so most CPAs recommend erring on the long side. Here is the IRS framework and how to apply it.

What are the IRS retention periods?

Situation	Keep records for
General rule for income tax records	3 years
You file a claim for a credit or refund after filing	3 years from filing or 2 years from payment, whichever is later
You claim a loss from worthless securities or a bad debt deduction	7 years
You leave out income that is more than 25% of the gross income shown on your 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 tax is due or paid, whichever is later
Records about property	Until the period of limitations ends for the year you sell or dispose of it

What does “records about property” mean in practice?

Anything that establishes what you paid for an asset and what you added to it: closing statements for land and buildings, invoices for improvements, purchase records for equipment and breeding livestock, depreciation schedules. You need them to figure gain or loss when you sell, which may be decades later. For a farm or rental, these are often the most valuable papers you own.

What about California?

The Franchise Tax Board reviews state returns and may ask for records behind them. Because state and federal returns are built from the same records, the simplest approach is to keep everything for at least as long as the longest period that could apply to either return. Ask your CPA what period they recommend for your situation.

What should a small business keep?

• a summary of income and expenses for each year, such as bookkeeping files or a ledger;
• sales records: invoices, deposit records, sales tax returns if you hold a seller’s permit;
• expense records: receipts, invoices, canceled checks, card and bank statements;
• payroll: time records, wage payments, withholding, returns and deposits;
• asset records: purchases, improvements, depreciation, sales;
• copies of every filed return and every letter from a tax agency.

Are scanned copies acceptable?

The IRS says electronic records must meet the same requirements as paper ones and must be reproducible in legible form, with the system kept as long as the records matter. A scanner and a consistent folder structure by year and category work for most small businesses. Keep a backup somewhere other than the office.

A simple yearly routine

• After your CPA files, save a final copy of both returns with the year in the file name.
• Put that year’s supporting documents in one labeled box or folder.
• Move property records to a separate permanent file.
• Each spring, review the oldest boxes against the table above before shredding anything.
• Never discard payroll records until at least four years have passed.

Common mistakes

• Shredding asset purchase records because they are old, when the asset is still owned.
• Keeping the return but not the receipts behind it.
• Throwing out payroll files after three years instead of four.
• Storing scans only on one computer or phone.
• Mixing personal and business papers so neither can be found.

If a record is lost, tell your CPA early. Banks, suppliers and agencies can often supply copies of statements, invoices or prior returns, but it takes time. The IRS and the Franchise Tax Board both provide copies or transcripts of prior returns on request, which is useful when an old return cannot be found.

What about records for a farm or rental you inherited?

Inherited property brings its own paperwork. What matters for a later sale is usually the value on the date of death rather than what the previous owner paid, so keep the estate documents, any appraisal and the records of improvements you make afterward. Ask your CPA which papers from the estate they need before anything is discarded, since those records can be hard to rebuild years later.

Why your CPA cares

If the IRS or the Franchise Tax Board asks about a return, your CPA can only answer with the records you kept. The engagement letter usually states that you are responsible for keeping your own records; see What Should a CPA’s Engagement Letter Say, and What Should I Bring?. For farm-specific records, see What Farm Records Should I Keep for My CPA?.