How Long Should A Small Business Keep Tax Records?

Basic tax record retention rules for freelancers

While the magic number for how long you should hang on to your records is generally three years, there are some exceptions to consider.

Here’s how long you should keep various types of tax records, organized by time frame.

Why three years?

The three-year period, or the "statute of limitations," refers to the amount of time after filing in which the Internal Revenue Service (IRS) can “review, analyze, or solve” your tax-related issues. If you were to get audited, the IRS would conduct an audit within this time frame.

The IRS can inquire about unfiled returns at any time — there’s no three-year period of limitations if you haven’t filed at all.

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Are there any exceptions?

Yes, especially for contractors. Under certain circumstances, the duration of keeping tax records for a business may extend beyond the standard three years. Here are some circumstances where you might want to hang on to your records for longer. 

• If you’re a 1099 contractor handling write-offs. 1099 contractors should hold their 1099 tax write-offs and records for as long as possible to help prove their income and deductions when filing.

• If you’re selling a business asset to a third party. When selling a business asset (property or equipment, for example) to a third party, keep records of all previous tax returns. If the person you sold the asset to doesn’t honor the sales contract or breaks the deal in any way, the IRS will want you to prove that you’ve been on top of your taxes to show who’s wrong regarding a failed sale.

Not filing can have serious consequences. Evading taxes and getting caught can lead to ongoing IRS pursuit, so even if you've had a slow year, file no matter what!

To avoid receiving a negligence penalty, which happens when you can’t prove you qualified for the credits or deductions you received, it’s also smart to keep copies of your receipts for purchases over $75. If you’ve made a big purchase and can’t find the receipt, contact the vendor and ask for a copy for your records.  

What if you lose your tax return records?

It’s important to keep a record of all your tax returns as part of your tax records, which is pretty easy these days — most digital filing tools, including Keeper, keep a record for you. Keeping returns is important in case you need to: 

• File an amended tax return
• Prepare your future tax returns
• Support proof of income deductions 

If you can't find your most current tax return, though, don't stress. The IRS also hangs on to them, and you can request a copy.

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Is there a required system for keeping tax records?

Nope! There is no required system. However, it probably helps to have some method to the madness so you can find anything you need regarding income and expenses should the IRS come around. Common methods of record-keeping include: 

• Paperless apps (like Keeper)
• Digital copies, like photos and scans of receipts
• Cloud-based storage systems like Dropbox and Google Drive
• Paper receipts

When are receipts required?

You’ve probably had that moment when you reach into your wallet to pay for something and instead of finding cash, you end up with a fistful of old receipts. Of course, there are times when receipts come in handy (purchases made for a meeting or reimbursable travel expenses, for example), but most of the time, you can account for your business expenses in other ways.

Are there exceptions to the under-$75 rule?

As mentioned above, cash purchases under $75 are typically not worth saving receipts for, but there are some nuances and exceptions to this rule. 

While the IRS doesn’t expressly require receipts for small purchases during business travel, you should hang on to your receipts for lodging, even if the cost was under $75. It’s likely that you booked a hotel online, so the record is digital anyway, but if you happened to pay in cash, make sure to hang on to the document.

What’s the best way to track expenses?

The IRS has a list of acceptable documents for tracking expenses during tax season, and you'll probably be happy to see that "paper receipts" isn’t at the top of the list! 

The following are accepted by the IRS: 

• Bank statements
• Credit card statements
• Invoices
• Canceled checks or other documents reflecting proof of payment / electronic funds transferred

It's safe to say that most freelancers rely on digital records when it comes time to file. Keeper will automatically log write-offs, then take those deductions into account when you file your taxes.

Are there any other documents you should save? 

In general, keeping all business records showing income or proof of business is a smart move. Examples of business records you’ll want to hang on to include:

• Receipts for large purchases, like a laptop, car (if you use a vehicle for work), or anything that can get you a significant write-off and is necessary for you to do your job 
• Bank statements
• Payroll records, if you have employees at your company
• Client invoices
• W-2 and 1099 forms
• Business permits or insurance, which are typically needed for construction jobs

Digitizing your information is recommended, especially after the three-year mark has passed. Consider using a service like Dropbox or a physical hard drive, especially if you’ve failed to file a return in the past. 

An Upwork study from 2023 found that 38% of the US workforce does freelance work, a number that is expected only to increase in the coming years. With greater numbers comes more opportunities and resources, making filing taxes when you’re self-employed much easier than it used to be!

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FAQ

What if I can’t find last year's return?

Don’t panic! Losing a return is pretty common (well, at least common enough that the IRS allows you to request a new one). You will need to fill out Form 4506 to request your return, however, which can take up to 75 days to process. Your filing service may also be able to provide a copy of your return. 

Are just digital copies of my records going to be enough?

Most of the time, yes! The IRS is often happy with bank statements. But remember, there are exceptions to the rule. Keep receipts for cash purchases exceeding $75, such as a laptop or home office equipment. Additionally, if you are on a work trip, you must retain lodging payment receipts, regardless of the amount.

Jesus Morales-Grace, EA contributed to this article.