Small business books and records: what you must keep

The rule

Federal law (Internal Revenue Code section 6001) requires you to keep books and records that are sufficient to show your income, deductions and credits. States have similar rules for income, sales and payroll taxes. You must be able to show how you arrived at every number on a return.

What to keep

Books of account

A business should keep permanent books: a general ledger with supporting journals, reconciled bank and credit card accounts, and a separate business bank account. Good bookkeeping is also the best defense in an audit.

How long to keep records

• Generally at least three years after you file the return.
• Six years if you may have under-reported more than 25% of gross income.
• Seven years for bad debt or worthless securities claims.
• Four years for employment tax records.
• Keep records about property for as long as you own it, plus the period that applies to the year you sell it.
• Keep returns and records indefinitely if you never filed or if fraud is involved.

What the IRS can do if records are missing or unreliable

• Reconstruct your income using indirect methods, such as bank deposits, net worth or percentage mark-ups, which often produce a higher number than your actual income.
• Disallow deductions you cannot substantiate. For travel, vehicles, gifts and certain other items the law requires adequate records, and estimates are not accepted.
• Impose penalties. The accuracy-related penalty is 20% of the underpayment and can apply when a taxpayer fails to keep adequate books and records. A civil fraud penalty of 75% can apply in serious cases.
• Change your accounting method if your records do not clearly reflect income.
• Assess tax for years you did not file using whatever information the IRS has, without your deductions.
• Extend the audit period. The three-year limit becomes six years if more than 25% of income is left off.
• Hold responsible individuals personally liable for unpaid payroll taxes (the trust fund recovery penalty).
• In cases of willful failure to keep records or to file, criminal penalties are possible.

What state revenue departments can do

Rules vary by state, but common powers include:

• Estimating tax from test periods or sampling when sales records are incomplete (sales tax audits often project an error rate from a sample to the whole period).
• Best-judgment or estimated assessments when returns or records are missing.
• Denying exemptions (such as resale or exemption claims) when certificates are missing.
• Penalties and interest, including penalties for failing to keep records and for late or missing returns.
• Personal liability of owners and officers for unpaid sales and payroll trust taxes.
• Liens, levies, license suspension or closure for unpaid taxes in some states, and reclassification of workers in payroll and unemployment audits.

If your records are incomplete

Do not guess and do not wait. It is often possible to reconstruct records from bank and card statements, vendor statements, third-party reports (such as 1099s and processor reports) and transcripts. A documented, reasonable reconstruction is far better than silence. We can help rebuild books and prepare for an audit.

A simple habit list

• Use a separate business bank account and card.
• Reconcile accounts every month.
• Keep a mileage log and a short note on every business meal and trip.
• Store digital copies of receipts in an organized place.
• Keep a calendar for tax deposits and filings.

Common questions

General information for 2026, not advice for your situation. Rules change and have exceptions. Talk to us before you act.