The importance of record keeping at the farm cannot be overstated. Not only are proper records important for the individual producer to measure their success or failure at the farm, they are also required by the IRS, says David Doshier, of David Doshier and Associates, CPA, in Yellville, Ark.
The most common method Doshier said he sees for record keeping among farmers is a checkbook, receipts and a yellow pad. However, there are many effective ways to ensure the appropriate and correct type of records are kept. He explained, “It has been my experience that farmers don’t usually like computers. They would rather keep paper records, unless they can convince their spouse to do it on a computer. QuickBooks is a relatively simple (computer records program) and is certainly adequate for farm records. Most small farmers in the Ozarks are better off with paper records because they don’t have the volume of a large farm and don’t benefit from a computer.”
Software programs, ledger books, shoe boxes of receipts, the bottom line is the income and expenses need to be able to be tracked, and you need to keep proof of the expenses, and of the profit. All of these records then translate into an accurate tax return at tax time.
“Farmers can use cancelled checks for their records, if they have a dedicated checking account,” he added.
The most common error Doshier said he sees farmers make in their record keeping, and therefore, in their ability to receive their full return due, is a “Failure to deduct small items that are purchased throughout the year, such as hand tools.”
Doshier said it has been his experience that while for the purpose of IRS reporting requirements, farmers keep good enough records, when it comes to them fully understanding their cost of doing business, their records have room for improvement.
Good records and accurately prepared tax documents should not lead to an audit. However, Doshier noted that if a farmer is indeed audited, the IRS will ask to see bank statements from all a producer’s accounts, proof of major expenses, receipts and written records, such as a daily log. He noted one thing that can be done to make a producer less likely to be audited is to have a CPA prepare your taxes. The IRS is aware that a CPA is trained in tax preparation and has ethics and a code that they must work by. Producers can take in their actual expenses and deductions and let their tax-preparer ask the pertinent questions. Often this will end the farmer up paying less taxes, and operating totally legally, rather than trying to exaggerate expenses on major purchases, or being “creative” in other ways, which puts up red flags for the IRS.
“Truthful and accurate tax returns typically produce less tax and grief than one “creatively” prepared,” Doshier said.
Staying within the confines of the legal system, while ensuring tax code works for a producer’s individual farm or ranch, is vital to the success of the agriculture industry. “I believe that small farmers are what is keeping this country together,” Doshier concluded.
