Feb. 25, 2010 - Tax season is in full swing throughout the country and most taxpayers, including farmers and ranchers, are looking for the same thing-the maximum refund.
According to tax experts, the best way to insure getting the maximum return is through good recordkeeping.
"A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount of tax," said Jose Pena, professor and economist for the Texas AgriLife Extension Service.
Except in a few cases, the law does not require any specific kind of records to be kept.
"You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses," Pena said.
Pena advised that those running more than one business should keep a complete and separate set of records for each business.
Ronald Flecker, a Certified Public Accountant in Hopkins County, said the key is keeping accurate records.
"Use spreadsheets or some type of accounting software to maintain accurate data throughout the year," Flecker said. "Keeping up with income and expenses on a daily, weekly basis insures you don't forget anything."
Pena suggested that no matter how records are kept, handwritten or on computer software, they should include a summary of all business transactions.
"For example, they must show your gross income, as well as your deductions and credits," Pena said. "In addition, you must keep supporting documents. Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. These documents contain the information you need to record in your journals and ledgers.
"It is important to keep these documents because they support the entries in your bookkeeping/accounting system and on your tax return," he said. "Keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense."
Flecker concurred the most important thing about the records is detail and accuracy.
"Entering income and expenses into a journal, spreadsheet or accounting program keeps a total balance of all your receipts and makes it easier at year end," Flecker said. "This also helps maintain a budget and track cash flow."
As a CPA, Flecker finds honesty and accuracy to be of the utmost importance in recordkeeping.
"This will help your (tax preparer) make decisions on this year's tax while also planning for future plans," Flecker said.
When it comes to getting taxes done as a farmer or rancher, it is important to have a tax preparer who is familiar with the agriculture industry.
"Use a qualified and experienced tax professional with experience in farming or whatever your business is," Pena said. "Farming is sufficiently different that one should use a tax preparer who has experience in doing farm tax preparation and ideally, has an understanding of farming."
"Anyone may be able to compile a schedule F, but there is more to farming than just filling out a tax return," Flecker said. "Farming is a business and I expect you would ask someone knowledgeable about your business for credible answers."
Pena and Flecker both suggested that asking around in the community might be the best way to find a farming- or ranching-knowledgeable accountant.
Utilizing a preparer familiar with the business can ensure deductions aren't missed.
"A good rule of thumb would be, anything you spend money on for your farm (can be deducted)," Flecker said. "The tax code is specific on how to account for these expenses, but in general, they are all deductible."
To find specific deductions, Pena referenced to examples found on the Schedule F that include deductible expenses.
"The ordinary and necessary costs of operating a farm for profit are deductible business expenses," Pena said. "Part II of Schedule F lists some common farm expenses that are typically deductible."
The list includes deductions such as accounting fees, advertising, business travel and meals, commissions, consultant fees, crop scouting, educational expenses and more.
To find out more about preparing taxes for farmers and ranchers, or to see if a farm or ranch qualifies for deductions, visit http://www.irs.gov/publications/p225/ch04.html#en_US_publink1000217873, for the Farmer's Tax Guide, Publication 225.
