Did you know the average American spends 13 hours every year preparing federal tax returns? For small business owners, that figure almost doubles to 24 hours!
According to the IRS, the period of limitations is the “period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.”
How Long to Keep Tax Returns (according to the IRS)
For the actual tax return itself, the IRS advises keeping them forever. I would 100% agree with that. Especially in the digital age, where everything can be saved on a hard drive or backed up in the cloud, there’s no reason to toss your actual tax returns.
Period of Limitations That Apply to Income Tax Returns
1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later if you file a claim for credit or refund after filing your return.3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
According to the IRS, you should keep records relating to property “until the period of limitations expires for the year in which you dispose of the property.”
How Long Should I Keep Tax Returns as a Small Business Owner?
According to the IRS guidelines above, they have up to six years to audit you if you forgot or neglected to report at least 25% of your income.For that reason, a business owner probably should plan to keep at least six years worth of 1099s and other records of business income and expenses to be safe.
What if I Have Claimed Investment Losses or Bad Debt Write-Offs?
The silver lining is you get to claim this loss to offset your income (in most cases) on your tax return. However, per the IRS, filing a claim of loss for bad debt or a worthless investment triggers a seven-year period of limitations.