I don't want to throw away important tax records just in case IRS decides to audit my business. For how many years do I need to keep records for federal business income tax?
IRS records supporting tax filings should be kept for the length of time the statute of limitations run. Furthermore, you should keep records for any assets you are depreciating or amortizing. These records should be kept for the period of years the statute of limitations applies to your situation.
From the IRS website:
The length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.
The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
1) You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2) You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
3) You file a fraudulent return; keep records indefinitely.
4) You do not file a return; keep records indefinitely.
5) You file a claim for credit or refund* after you file your return; 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.
6) You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7) Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
First, you should keep all records relating to income and expenses for 6 years, to be safe, since there is a potential 6 year statute of limitations. Second, you need to keep all records relating to the acquisition or improvement of property for as long as you keep either (i) the property itself or (ii) any property you exchange for that property in a tax-deferred exchange.
Third, now that data storage is essentially free, there is no excuse not to keep all records forever since you can PDF them so that they occupy no physical space and store them on electronic media. A thumb drive can store all of your records for your entire life.