A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount
of tax. This chapter explains the benefits of keeping records, what kinds of records you must keep, and how long you must
keep them for federal tax purposes.
Tax records are not the only type of records you need to keep for your farming business. You should also keep records that
measure your farm's financial performance. This publication only discusses tax records.
The Farm Financial Standards Council has produced a publication that provides a detailed explanation of the recommendations
of the Council for financial reporting and analysis. For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www.ffsc.org. For more information, contact Countryside Marketing, Inc. in the following manner.
Send a fax to 262-253-6903.
Farm Financial Standards Council
N78 W14573 Appleton Ave., #287
Menomonee Falls, WI 53051.
Benefits of Recordkeeping
Everyone in business, including farmers, must keep appropriate records. Recordkeeping will help you do the following.
Monitor the progress of your farming business.
You need records to monitor the progress of your farming business. Records can show whether your business is improving,
which items are selling, or what changes you need to make. Records can help you make better decisions that may increase the
likelihood of business success.
Prepare your financial statements.
You need records to prepare accurate financial statements. These include income (profit and loss) statements and balance
sheets. These statements can help you in dealing with your bank or creditors and help you to manage your farm business.
Identify source of receipts.
You will receive money or property from many sources. Your records can identify the source of your receipts. You need
this information to separate farm from nonfarm receipts and taxable from nontaxable income.
Keep track of deductible expenses.
You may forget expenses when you prepare your tax return unless you record them when they occur.
Prepare your tax returns.
You need records to prepare your tax return. For example, your records must support the income, expenses, and credits
you report. Generally, these are the same records you use to monitor your farming business and prepare your financial statements.
Support items reported on tax returns.
You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your
tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.
Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited
to your farming business that clearly shows, for example, your income and expenses.
You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. See
chapter 2. If you are in more than one business, you should keep a complete and separate set of records for each business. A corporation
should keep minutes of board of directors' meetings.
Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily made in accounting
journals and ledgers. For example, they must show your gross income, as well as your deductions and credits. 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 journals and ledgers and on your tax return.
Keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.
All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain
tax books and records. When you replace hard copy books and records, you must maintain the electronic storage systems for
as long as they are material to the administration of tax law. An electronic storage system is any system for preparing or
keeping your records either by electronic imaging or by transfer to an electronic storage media. The electronic storage system
must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. All electronic
storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Electronic storage
systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and
records. The original hard copy books and records may be destroyed provided that the electronic storage system has been tested
to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic
storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. You
still have the responsibility of retaining any other books and records that are required to be retained. The IRS may test
your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. This
test is not considered an examination and the results must be shared with you. If your electronic storage system meets the
requirements mentioned earlier, you will be in compliance. If not, you may be subject to penalties for non-compliance, unless
you continue to maintain your original hard copybooks and records in a manner that allows you and the IRS to determine your
correct tax. For details on electronic storage system requirements, see Rev. Proc. 97-22. You can find Rev. Proc. 97-22 on
page 9 of Internal Revenue Bulletin 1997-13 at www.irs.gov/pub/irs-irbs/irb97-13.pdf
Travel, transportation, entertainment, and gift expenses.
Specific recordkeeping rules apply to these expenses. For more information, see Publication 463.
There are specific employment tax records you must keep. For a list, see Publication 51 (Circular A).
Assets are the property, such as machinery and equipment, you own and use in your business. You must keep records
to verify certain information about your business assets. You need records to figure your annual depreciation deduction and
the gain or (loss) when you sell the assets. Your records should show all the following.
When and how you acquired the asset.
Cost of any improvements.
Section 179 deduction taken.
Deductions taken for depreciation.
Deductions taken for casualty losses, such as losses resulting from fires or storms.
How you used the asset.
When and how you disposed of the asset.
Expenses of sale.
The following are examples of records that may show this information.
Financial account statements as proof of payment.
If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared
by financial institutions. These include account statements prepared for the financial institution by a third party. These
account statements must be legible. The following table lists acceptable account statements.
|IF payment is by...
||THEN the statement must show the...
Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. You should also keep other
documents, such as credit card sales slips and invoices, to show that you also incurred the cost.
Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file
an amended return. Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2.
You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code.
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. Generally, that means
you must keep your records for at least 3 years from when your tax return was due or filed or within 2 years of the date the
tax was paid, whichever is later. However, certain records must be kept for a longer period of time, as discussed below.
If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes
due or is paid, whichever is later.
Keep records relating to property until the period of limitations expires for the year in which you dispose of the
property in a taxable disposition. You must keep these records to figure any depreciation, amortization, or depletion deduction
and to figure your basis for computing gain or (loss) when you sell or otherwise dispose of the property.
You may need to keep records relating to the basis of property longer than the period of limitation. Keep those records
as long as they are important in figuring the basis of the original or replacement property. Generally, this means as long
as you own the property and, after you dispose of it, for the period of limitations that applies to you. For example, if you
received property in a nontaxable exchange, you must keep the records for the old property, as well as for the new property,
until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. For
more information on basis, see chapter 6
Records for nontax purposes.
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to
keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer
than the IRS does.