IRS Record-Keeping Requirements for Small Business Owners

Record retention periods:

General rules:

Situation	Retention Period
Standard business records	3 years from filing date
Underreported income by 25%+	6 years
Fraudulent return	No limit
Unfiled return	No limit
Employment tax records	4 years after tax becomes due
Asset/property records	Until statute of limitations expires for the year you dispose of the asset
Business entity records (formation, operating agreement)	Permanent

Practical recommendation: Keep all records for at least 7 years. Storage is cheap (digital or physical); reconstructing lost records is expensive or impossible.

What records to keep:

Income:

• Bank statements (all business accounts)
• 1099 forms received
• Sales receipts or invoices issued
• Cash register tapes or POS reports
• Payment processor statements (Square, Stripe, PayPal)
• Deposit records

Expenses:

• Receipts for all purchases (digital photos of paper receipts are acceptable)
• Credit card and bank statements
• Canceled checks
• Invoices from vendors
• Mileage log (for vehicle deduction)
• Meal receipts with business purpose and attendees noted
• Utility bills (for home office)

Assets:

• Purchase receipts or invoices for all business assets
• Improvement records (additions, renovations)
• Depreciation schedules
• Sales records when you dispose of an asset
• Keep asset records BEYOND the normal 3-6 years (until the asset is disposed of, then add the retention period)

Employment:

• Payroll records (4 years)
• W-4 forms (4 years after tax is due)
• I-9 forms (3 years after hire or 1 year after termination, whichever is later)
• Workers’ compensation records (per state requirements)

Specific substantiation rules:

Vehicle mileage (Reg. 1.274-5T):

• Must maintain a contemporaneous log
• Required for each trip: date, destination, business purpose, miles
• Must record total annual miles (to calculate business percentage)
• A mileage tracking app satisfies the contemporaneous requirement
• Without a log: the ENTIRE vehicle deduction is disallowed

Meals (IRC 274(d)):

• Five elements required for each meal:
  1. Amount
  2. Date
  3. Place (name of restaurant)
  4. Business purpose
  5. Name and business relationship of person(s) entertained
• Must be recorded at or near the time of the expense
• Credit card statements alone are NOT sufficient (they prove payment, not business purpose)

Home office:

• Measurements of the dedicated space
• Total square footage of the home
• Photos showing exclusive business use
• Mortgage/rent records, utility bills, insurance
• Records of any improvements to the office space

Travel:

• Receipts for lodging, transportation, and incidental expenses
• Business purpose of the trip
• Dates of departure and return
• Destinations
• For trips combining business and personal: records showing which days were business vs. personal