How Long Should I Keep My Tax Records?

cyron CPA taxes

Another year’s taxes have been filed and the CPA just handed over a folder with a hard copy of all tax documents, plus the copies of anything provided for filing purposes. This envelope contains basically every pertinent piece of information about the business. Initially, business owners are glad to have a copy and know that all the copies of information provided are securely back in your hands, but now, what should be done with them? how long should I keep my tax records?

How Long Do Business Owners Have to Keep Tax Records?

As a business owner, there is probably a file cabinet full of various records, most definitely including tax records for multiple years. At some point, all business owners look at this cabinet and want nothing more than to clean it out, shred unnecessary files, and reorganize for more current information. The question remains – how long should I keep my tax records? When it comes to destroying tax records, it really depends on what happened the year those taxes were filed. In most cases, if the owner properly reported income, paid anything owed at the time of filing, it is safe to shred any tax records older than three years.

However, there are a few caveats to the three-year rule. First, if the business owner owed anything in that particular year, and paid any time after filing, the IRS states that those records should be kept for two years from the final date of payment, or three years, whichever is later. Also, if the income reported in any given year turns out to be underreported by 25% or more, those records will need to be kept for six years. These are the latest dates that the IRS’ statute of limitations will allow for an audit.

What About Related Records?

Bad stock picks? Make a loan that the recipient can’t pay back? Keep all the original records for stock purchases and loan information for seven years. If a business owner finds themselves in a loss situation on either of these financial moves, the IRS allows for a well-documented, bad debt or worthless securities deduction up to seven years after the initial engagement.

If a business owner also owns property, the purchase, renovation, and other associated documents should be kept until the statute of limitations for the tax year the business owner sells the property runs out. Once the business owner no longer owns the property, these records will be used to calculate any “depreciation, amortization, or depletion deductions and to figure the gain or loss” to file in the year of the sale.[1]

Do Files Have to be Kept in Hard Copy?

Technically, no. If that filing cabinet is just an eyesore, business owners are allowed to keep all these records digitally. The IRS even keeps digital records of returns, which business owners can request copies of if they need to. The biggest thing to consider when answering  “how long should I keep my tax records”, is if the cloud storage that the business uses is encrypted. While there are many cloud services that business owners can use to maintain these records, the most important thing is that this sensitive information is kept safe. If the information is encrypted, easily accessible, and available for at least the appropriate number of years, digital files are a great way to keep offices from feeling cluttered.

Contact Cyron CPA for additional assistance – we can help with your specific business questions.

[1] Department of Internal Revenue Service. “How long should I keep records?.” IRS. 2022. Pg. 2