2. What types of records should a business owner keep for tax purposes? How long should the records be kept?

Answer 1

You should keep records of everything that has to do with completion of your tax return.

As far as how long to keep the records, it varies depending on the particular information. Here is what IRS suggests:

How long to keep records. You must keep your records for as long as they are important for the federal tax law.

Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. (A period of limitations is the period of time after which no legal action can be brought.) For assessment of tax you owe, this generally is 3 years from the date you filed the return. For filing a claim for credit or refund, this generally is 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.

If you did not report income that you should have reported on your return, and it is more than 25% of the income shown on the return, the period of limitations does not run out until 6 years after you filed the return. If a return is false or fraudulent with intent to evade tax, or if no return is filed, an action can generally be brought at any time.

You may need to keep records relating to the basis of property longer than the period of limitations. Keep those records as long as they are important in figuring the basis of the original or replacement property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. See chapter 13 for information on basis.

Note.
If you receive a Form W-2, keep Copy C until you begin receiving social security benefits. This will help protect your benefits in case there is a question about your work record or earnings in a particular year. Review the information shown on your annual (for workers over age 25) Social Security Statement.

Copies of returns. You should keep copies of tax returns you have filed and the tax forms package as part of your records. They may be helpful in amending filed returns or preparing future ones.

http://www.irs.gov/publications/p17/ch01.html#d0e6968

Best wishes.

Answer 2

You need to keep your tax returns for up to 7 years. This includes the actual return and any attachments/deductions you had with this. Receipts for materials, gas, office supplies...etc. Also you need to keep a file on your employees, hire/fire, W4 and IR forms.