The state filing that created the company is one document. The file that protects the company starts the day money moves.
Business recordkeeping requirements are that file. IRS Publication 583 says everyone in business must keep records. You can choose a system that fits the work. The system has to show income and expenses clearly enough to support the return.
Key Takeaways
- The IRS does not require one kind of ledger. Publication 583 says you may use any system that clearly shows income and expenses. The books have to show gross income and deductions and credits. Supporting documents have to sit behind the entries.
- A payment record is not a deduction. The publication says proof of payment by itself does not show you are entitled to the deduction. Keep the invoice or the receipt too.
- The usual tax clock is three years. Publication 583 counts from the date the return is filed. A return filed before the due date counts as filed on the due date. Six years and seven years and no time limit are the exceptions in the same table.
- An LLC's tax file follows how the LLC is taxed. The SBA adds company papers on top of that. An operating agreement and membership transfers and meeting notes are records you may need if you sell or if someone sues.
- A scan replaces paper only after you test it. Publication 583 says the electronic system has to index and store and preserve and retrieve a legible copy. Destroy the paper after that test works.
Table of Contents
What the records do for you
Publication 583 lists the jobs a good file does.
- You can see whether the business is improving and which items are selling.
- You can prepare an income statement for a period and a balance sheet on a date. Those statements help with a bank or a creditor.
- You can tell business receipts from nonbusiness receipts and taxable income from nontaxable income.
- You can catch expenses while you remember them. The publication says you may forget them at tax time if you did not record them when they occurred.
- You can explain the return if the IRS examines it. The records have to be available for inspection. A complete set speeds the exam.
IRS recordkeeping rules leave the format open. The publication says the law does not require a specific kind of record except in a few cases. The kind of business changes what you need. If you run more than one business, keep a complete and separate set of records for each one.
Set the system on an accounting method that shows income for the tax year. The SBA describes the two methods owners use most. Accrual records the sale when you complete it. Cash records it when you are paid. The SBA’s example is a two-hundred-dollar sale in January that the customer pays in February. Accrual puts it on January’s books. Cash puts it on February’s books. Publication 583 says you must use the same accounting method to figure taxable income and to keep the books. You choose that method when you file the first income tax return.
What records to keep
What records to keep for a business starts with a summary and the papers under it. Publication 583 says the summary is ordinarily the books. Journals and ledgers are the examples. For most small businesses the checkbook is the main source of those entries.
Supporting documents include sales slips and paid bills and invoices and receipts and deposit slips and canceled checks. Organize them by year and by type of income or expense. Keep them in a safe place.
| What the record supports | What Publication 583 says to keep |
|---|---|
| Gross receipts | Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips, Forms 1099-MISC, Forms 1099-NEC |
| Inventory you buy to resell | Canceled checks, cash register tape receipts, credit card sales slips, invoices. A manufacturer includes raw materials and parts. |
| Expenses other than inventory | Canceled checks, cash register tapes, account statements, credit card sales slips, invoices, petty cash slips |
| Assets such as machinery and furniture | When and how you acquired it, purchase price, improvements, the section 179 deduction, depreciation, casualty losses, how you used it, when and how you disposed of it, selling price, expenses of sale |
Purchase invoices and sales invoices and real estate closing statements and canceled checks can hold the asset facts. You need those facts for depreciation and for gain or loss when you sell.
Travel and transportation and gifts have their own rules. Publication 583 sends you to Publication 463. Employment tax records have their own list in Publication 15.
Bench’s recordkeeping guide adds contracts and articles of incorporation and permits and regulatory papers and annual reports. Bench says you may not need every one of those to prepare the return. Keep them because a sale or a dispute can ask for them. That matches a warning in Publication 583. When the tax clock ends, check whether an insurer or a creditor wants the file for longer.
Tax recordkeeping fails when the only paper is a bank line. Publication 583 has a table for a statement that stands in for a missing canceled check. The statement has to be highly legible.
- A check payment needs the check number and the amount and the payee’s name and the date the bank posted it.
- An electronic transfer needs the amount and the payee’s name and the date the bank posted it.
- A card charge needs the amount and the payee’s name and the transaction date.
The publication then draws the line. Proof of payment does not establish the deduction. Keep the slip or the invoice that shows you incurred the cost.
Bench says a receipt may not be required in three cases. The cost is under seventy-five dollars and it is not lodging. Or it is transportation and a receipt is hard to get. Or you report lodging or meals under an accountable plan with a per diem. Bench says the IRS can question the deduction. You then need the amount and where and when it happened and the purpose. Meals can require who was there and what you discussed. Keep the small slips if you can. The note is the backup when the slip is gone.
The account you open first
Publication 583 says one of the first steps is a business checking account kept apart from your personal account. Deposit all daily receipts there. Note the source of each deposit as business income or personal funds or loans. Keep copies of the deposit slips.
Pay business costs by check so the expense has a document. Write a check to yourself only when you withdraw money for personal use. Skip checks payable to cash. If you must pay cash, keep the receipt. If there is no receipt, write an explanation in the records at the time you pay.
The publication’s sample is Henry Brown, a sole proprietor of a small auto body shop. He has part-time help and no inventory held for sale and he uses the cash method. He enters checks in a disbursements journal each day. The checks are prenumbered and every number is accounted for. He does not pay personal bills from the business account. If he did, he would record them and he could not deduct them. He pulls sales tax out of monthly receipts before he calls the rest income. He collected that tax for the state. It is not a deduction and it is not his income.
His petty cash illustration uses a fixed fund of fifty dollars. Each payment gets a slip attached to the receipt. Unspent cash plus the slips should equal the fund. When the slips use up the fund, he writes a check to petty cash and refills it. Fifty dollars is his example. It is not a required fund size.
Reconcile the account each month. Publication 583 says the statement and the checkbook and the books should agree. The statement may include bank charges you have not entered. It may omit a deposit or a check that has not cleared. Reconciliation shows the cash you have and puts the charges in the books and catches errors.
Record expenses when they occur. Identify the source of receipts. The publication says it is generally best to record transactions daily.
Bench’s mistakes guide describes what happens when the stack waits. You forget what a receipt was for. Reconciliation becomes a pile. Deductible costs never get written down. Decisions use old numbers. Bench says do the books monthly at a minimum and weekly if you can. Daily recording is for volume high enough that a bookkeeper makes sense.
How long to keep business records
Keep business records until the tax law no longer needs them. Publication 583 says that generally means you keep support for an item of income or a deduction until the period of limitations for that return runs out. That period is the time you have to amend for a credit or a refund and the time the IRS has to assess more tax.
Publication 583’s table for income tax returns works like this. Years start after the return is filed unless the table says otherwise.
| If this is true | Keep the records |
|---|---|
| You may owe more tax and the rows below do not apply | 3 years |
| You left out income you should have reported and it is more than 25 percent of the gross income on the return | 6 years |
| You filed a fraudulent return | No time limit |
| You did not file a return | No time limit |
| You claim a credit or a refund after you filed | 3 years or 2 years after the tax was paid. Use the date that falls second. |
| You claim a loss from worthless securities or a bad debt | 7 years |
Keep copies of filed returns. The publication says they help you prepare the next return and an amended return.
Employment tax records are separate. If you have employees, keep all of those records for at least four years after the tax is due or is paid. Use the date that falls second. The list of what to keep is in Publication 15. The SBA’s compliance example says the same four-year employment-tax rule. In that example the owners complete Form I-9 and keep it on file. They do not send that form to the federal government.
Assets last longer than a normal expense. Publication 583 says keep property records until the limitation period expires for the year you dispose of the property in a taxable sale or other taxable disposition. You need them for depreciation and amortization and depletion and for basis when you figure gain or loss. If you received the property in a nontaxable exchange, keep the records of the old property and the new property until you dispose of the new property in a taxable disposition.
Bench’s recordkeeping guide walks through an early-filed return so the due-date rule is concrete. The illustration files a 2020 return on February 10 of 2021. The receipts stay until April 15 of 2024 because an early return counts as filed on the due date. That is Bench’s example. Use the due date on the return you filed.
SCORE’s storage article tells owners to hang on to tax returns and supporting documents for at least seven years and then read the IRS page for the full breakdown. Bench’s mistakes article says keep receipts for seven years to be safe. Bench’s recordkeeping guide follows the IRS periods and adds a plain rule. If you are unsure, keep the document. The SBA’s closing checklist says common guidelines run from three years to seven years and that you may be legally required to keep tax and employment records after you shut down.
Use the IRS table for the tax file. Use the longer habit when the paper is an asset or a formation document or something a creditor might ask for. Shredding at three years can be right for an ordinary expense. It is the wrong move for a truck you have not sold.
Compliance recordkeeping after you form
Post-formation recordkeeping is wider than the tax return. The SBA splits the work into external filings and internal company records. External work is paperwork and tax you send to a state or to the federal government. Internal records document decisions you may need if you sell or if a legal action starts.
Business documentation requirements differ by entity. The SBA says corporations have the strictest internal list.
- Hold an initial meeting and annual meetings of directors and of shareholders.
- Record the minutes.
- Adopt bylaws and keep them current.
- Issue stock and record every transfer.
Publication 583 says a corporation should keep minutes of board of directors’ meetings. The two pages point the same direction. The minutes are part of the company file, not a substitute for the tax file.
LLC recordkeeping is lighter on the SBA’s page and it is not empty. The SBA says LLCs are generally advised to keep an updated operating agreement and to issue membership shares and to record transfers of membership interests and to hold annual meetings. Publication 583 describes an LLC as an entity formed under state law by filing articles of organization. Members are not personally liable for its debts. For federal income tax the LLC may be a partnership or a corporation or an entity disregarded as separate from its owner. The tax records follow that classification. The operating agreement is the company record the SBA wants on file either way. Confirm the classification on Form 8832’s instructions if you are unsure. This article does not pick it for you.
SCORE says keep a partnership agreement or an LLC partnership agreement and any amendments for the life of the partnership. SCORE says keep S corporation acceptance letters and Form 2552 indefinitely. IRS Publication 583 names Form 2553 as the election by a small business corporation. Keep the acceptance letter and the election form you filed. If your IRS letter shows a different form number, keep that form.
SCORE says keep hard copies of state and local licenses you need in order to operate. The SBA says renewal rules vary by place and by industry. A restaurant may renew health and safety certificates. A seller of tobacco or alcohol or tires may renew a sales permit. A plumber or a nurse may need a board certificate. Federal permits stay current with the agency that issued them. The SBA says fees that come with an annual report or a biennial statement can exceed three hundred dollars. Keep the filed report and the proof you paid. The dollar figure is the SBA’s ceiling example. Your state sets the real fee.
Other structures have few internal requirements on the SBA’s page. The SBA says it is rarely a bad idea to write down important decisions.
If you close, the SBA says a sole proprietor can decide alone. A partnership needs the owners to agree and a written record that follows the articles of organization. File dissolution papers in every state where you are registered. The SBA says skipping that filing leaves taxes and filing duties in place. Cancel permits and licenses and business names you no longer need. Then keep the tax and employment file for the period the law requires. The three-to-seven-year line on the SBA’s checklist is a common guideline. The IRS table is the tax rule.
Paper, scans, and software
Publication 583 applies the same rules to electronic storage that it applies to paper. The system has to index and store and preserve and retrieve and reproduce the records in a legible format. The IRS has to be able to reach a complete and accurate copy. You may destroy the paper after you test that the system reproduces the records the way the IRS requires and you have procedures that keep it that way. You keep any other records the law requires.
The IRS may test the equipment and the index and the software and the retrieval. The publication says that test is not an examination and the IRS shares the result with you. If the system fails, you can face penalties unless you kept the paper and it shows the correct tax. The detail is in Revenue Procedure 97-22.
A computerized book has a second duty. You have to produce legible records that support the return and show the correct tax. The machine-readable records have to reconcile with the books and the return. They have to identify the source documents. You keep a description of the system that covers the flow of data and the controls that protect accuracy and the controls that block unauthorized changes and the chart of accounts with account descriptions. That standard is Revenue Procedure 98-25.
Bench says a digital bank statement is enough if you can get it from the bank. Bench says paper fades and a move can swallow a box. Scan and name the file and keep a second copy in another secure place. A password-protected drive or a second cloud service is Bench’s example. Publication 583’s test comes first. A folder of photos you cannot reprint in a legible form is not a finished system.
Small business records requirements for the summary can live in software. QuickBooks Online is one place to keep the checkbook activity and the receipt image in the same record. It does not decide that a cost is deductible. It does not start or stop the IRS clock. You do, with the publication’s table.
The SBA says someone has to cover accounts receivable and accounts payable and available cash and bank reconciliation and payroll. A bookkeeper can handle day-to-day work at a lower cost than a CPA. A CPA costs more and can tailor the work. An online service is the third option the SBA names. Pick the help for the job. The retention duty stays with you.
A file you can keep up
- Open the business account if it is not open. Label every deposit as business income or personal funds or a loan.
- Record the week’s income and costs. Attach the invoice or the receipt to the payment. Pull sales tax you collected out of income.
- Reconcile the bank statement every month. Enter charges the statement shows and the books missed.
- File asset purchases in their own folder with the date and the cost and the improvements. Leave that folder alone until you dispose of the asset and the limitation period for that year ends.
- Put the formation papers and the operating agreement or the bylaws and the minutes and the licenses in a company folder that is separate from the year’s receipts.
- Before you shred a year, check Publication 583’s table. Then check whether the paper is an asset or an employment record or a contract a creditor might want.
If the month’s totals come from QuickBooks Online, reconcile before you treat them as the books. Compliance recordkeeping and the tax file are the same habit. Write it down while you remember it. The exam and the buyer and the insurer all ask for the same pile.
