How long to keep business records
How long to keep business records in California
- A California business keeps income and expense records four years, the usual Franchise Tax Board (FTB) window, against the IRS's three.
- A business keeps records for an asset until the IRS and FTB can no longer examine the return for the year it sells the asset.
- Employers keep payroll and employment tax records at least four years, under both IRS and Employment Development Department (EDD) rules.
The IRS, the FTB, the EDD and, inside City limits, the City of San Diego each set record periods for a business. For each record type, the business keeps the file for the longest period any of them sets.
Retention periods by record type
| Record | Keep for | Who sets it |
|---|---|---|
| Income and expense records behind a return | 4 years from the due date or filing date | FTB (IRS: 3 years) |
| Returns with income under-reported by more than 25 percent | 6 years | IRS |
| Bad debt or worthless securities deductions | 7 years | IRS |
| Years with no return, or a fraudulent return | Indefinitely | IRS |
| Employment tax records | 4 years after the tax is due or paid, whichever is later | IRS |
| Payroll records | At least 4 years | EDD |
| Payroll hours and wage records | At least 3 years, kept in California | Labor Code 1174 |
| Earned sick leave accrual and use records | At least 3 years | City of San Diego, inside City limits |
| Form I-9 | 3 years after hire or 1 year after the job ends, whichever is later | USCIS |
| Asset purchase, improvement and sale records | Through the limitations period for the year of sale | IRS and FTB |
The IRS and the Franchise Tax Board both start the clock at the later of the return's due date and its filing date.
FTB statute of limitations on older returns
The FTB issues a Notice of Proposed Assessment within four years in the ordinary case, and keeps a 12-year window for abusive tax avoidance transactions. The FTB can assess later when the IRS changes a federal return in an audit, or when the business omits more than 25 percent of income. Keep the records for that year until the IRS and FTB settle any federal change.
The FTB asks businesses to keep:
- A copy of each return
- Records that back up income, deductions, adjustments and credits
- Receipts, cancelled checks and bills
- Extra proof for travel, entertainment, gift and auto deductions
How long to keep payroll records
- Location: employers keep payroll records at a central California location or at each work site (Labor Code section 1174).
- Sick leave: employers inside City of San Diego limits give employees their sick leave accrual records regularly.
- Missing records: if an employer can't produce its wage and sick leave records, the City presumes a sick leave or minimum wage violation and can rely on the employee's estimate.
When a North Park cafe can shred its 2022 files
A North Park cafe that filed its 2022 returns on April 18, 2023, has three employees and still uses an espresso machine bought in 2022 keeps:
| Record | Keep until | Rule |
|---|---|---|
| Sales and expense receipts | April 18, 2027 | FTB, 4 years from filing |
| 2022 payroll records, Forms 941 and DE 9 | At least January 31, 2027 | IRS and EDD, 4 years after the fourth-quarter returns were due |
| Espresso machine invoice | Through the limitations period for the year the cafe sells the machine | IRS and FTB |
The cafe can shred the 2022 income and payroll files from April 19, 2027, and keeps the espresso machine invoice.
When to hire a CPA for missing records
An owner missing files for a year under FTB examination, or improvement receipts for a building just sold, can have a CPA rebuild the records. Start with how to choose a CPA.