Tax Tips for The Farmer and Rancher – Get Organized and Stay Compliant

tfrnetwork October 27, 2019 No Comments

Tax Tips for The Farmer and Rancher – Get Organized and Stay Compliant

 

Some of the most common questions we have from clients meeting with us for the first time involve how to organize their financial information.  When working with business owners we focus on two things, the first being keeping accurate records for tax planning and preparation.  This is the main concern we see from our clients.  Our second focus is helping business owners understand their financial information so they can run their business from a financially informed perspective.  When it comes to the equine and agriculture industries we often see the second focus being a brand new one for most people.  Using financial information to run a business is often the last thing on the mind of a farmer.  And I get it, your animals can’t wait for vet care because the budget doesn’t allow it.  You can’t just decide to postpone planting because it’s financially not the best time.  But there is useful information that can be gained from your financials to help you run your business.  And it can be adapted to the equine and ag industries (we do it everyday).  For now let’s cover the basics, the things to help you get organized and stay compliant.

Getting Set Up

The first thing you need is a way to actually track your financial information.  There are a few different programs that we recommend to make this easier.  The first is Quickbooks which most people have heard of.  They have an online version which is a monthly pay as you go program.  It’s not quite as robust as the desktop version, but should be sufficient.  AccountingSuite is one that most people have not heard of.  It’s personally my favorite and is a more affordable cloud based program that is in line with the features of Quickbooks Desktop.

Once you get your accounting program the rest is all dependent on what programs you want to use to track the information you need to run your business.  That may be Cattle Max, Excel, etc.  Really it’s up to you.  If you plan on selling directly to consumers such as at a farmer’s market you’ll want to also get a payment processor.  Square, Stripe, and Paypal are fairly common ones and have reasonable fees.   From a business perspective you should absolutely have a separate bank account for your business.  All business transactions should run through that account and personal should not be combined with business.  Business credit cards should also be business only, no personal transactions.  One of the main concerns with agriculture businesses when it comes to an IRS audit is the tendency to mix personal with business.

One of the main concerns with agriculture businesses when it comes to an IRS audit is the tendency to mix personal with business.

When it comes to categorizing and tracking your income and expenses use Schedule F (for IRS Form 1040) as a guide on how to categorize your transactions.  Schedule F is designed specifically for farming businesses and breaks the expenses down into practical categories for a farmer (such as veterinary and breeding, seeds, fertilizer, and feed).  It’s fine if you don’t have a good category for a business expense that matches with Schedule F, you can create your own and list it separately.  The category should be something that helps you manage your business and that cannot be reasonably fit into one of the other categories.  If you want to separate out expenses from within a category make a subaccount which can easily be combined back in for reporting purposes.

Tip:

Tip: These categories should go into your chart of accounts in your accounting program.  Setting up or modifying your chart of accounts is a great way to get actual insight into your business.  For example, creating sub-accounts based on different activities on your farm can help you see where you are most profitable.  You can also accomplish this with “classes” in your accounting program.  Ex: If you raise hogs and cattle using one class for hogs and one class for cattle will help you see where your income and expenses are coming from/going to.  This also allows you to run reports for the whole business for tax purposes.  If you plan on separating all transactions into different operation segments on the farm use classes, if you only want to separate certain categories of expenses use sub accounts.

What Receipts, etc Should You Keep?

This is probably our most common question.  You should keep receipts for everything for at least three years after filing a tax return or three years after the tax return is due.  So if you bought feed in 2018 you should keep that receipt through April 15, 2022 assuming you filed your tax return on time.  However, if you purchased a tractor in 2018 you would want to keep the documentation on that tractor for three years after you are done depreciating it on your tax returns or for three years after you sell the tractor and reflect that on your tax return.  The statute of limitations for the IRS to come back and examine a tax return can go back further than three years if they suspect you have omitted a large amount of income or filed a fraudulent return.

The best part of having an accounting system, especially one that is cloud based, is you can upload all of your receipts, bills, invoices, etc to the system.  These are all stored virtually and in the event of an audit they’re easy to access.  As a back up I recommend storing the receipts virtually.  At my firm we have a Dropbox account where we store the information and upload everything to folders organized by month and year.  For large accounts we may also include folders for weeks, activities, customers, or vendors.  Taking a picture of the item or scanning it is a quick way to get it into the storage system.  Google Drive is also a great alternative (and it’s free).  Electronic records/pictures of the document are considered acceptable for the IRS as long as all of the information is visible.  If you want to keep the paper copies I suggest organizing by month and year.  If you pay for something in cash you MUST get a receipt to substantiate the deduction on your tax return.

Tip:

Tip: If you go out to eat with a client, vendor, etc and pay for the meal keep the receipt and document on the receipt the following: who you went to eat with and what was discussed.  This helps document your business meal expenses.  Mileage can be supported with information on where you were driving, on what date, and why.  I recommend keeping a mileage log in Google Drive if you are using a vehicle for both personal and business use.  Receipts for maintenance for the vehicle should also be kept.

How Do 1099s Work?

Many people do not realize that they need to be tracking who they are paying for services.  If you pay someone over $600 for services you may need to issue them a 1099 at the end of the year.  These are due by January 15th.  If the vendor has a specific tax organization (such as being taxed as a corporation) you don’t need to issue them a 1099.  But there are exceptions including for attorneys and medical professionals (this includes vets!).  To request information for a vendor send them Form W-9.  Method of payment also matters, credit card processors typically take care of this for you.  If you pay someone via check, cash, or another means that does not report the income for you they need a 1099.  1099s are not issued to employees, only independent contractors.  The main vendor that farmers miss is their vet, if you pay your vet more than $600 with cash or check they need to be issued a 1099 regardless of if they are a corporation.

Let’s Talk About Independent Contractors

This tends to be a legal matter in terms of classification, but has huge tax implications.  The IRS is a stickler for misclassification of employees as independent contractors.  Because independent contractors are paid without employment taxes if the IRS determines that someone you have been paying as a contractor is actually an employee they will hold you responsible for employment taxes and penalties.

For more information click to check out this IRS resource about self-employed, small business, or independent contractors.

Hobby Versus Business

If you are considered a business you can deduct allowed business expenses, however if you are a hobby you can only deduct a very small group of expenses called Cost of Goods Sold.  There are nine things that the IRS looks for to determine if you are running a business or a hobby.  They are not black and white.  The general profitability guideline is an activity is considered a business for tax purposes if it is profitable at least three out of the last five years (two out of seven for some equine activities).  Even if the activity meets the profitability guideline the IRS may decide that the activity is a hobby.  The burden of proof falls on the IRS in this case.  If the activity does not meet the profitability guidelines the activity can still be considered a business and not a hobby if the taxpayer can show that it should be treated as such.  The burden of proof in this case falls on the taxpayer.  The first item listed on the IRS website for business versus hobby determination is if the activity is run like a business and complete and accurate records and books are maintained it is likely to be a business not a hobby.  Another important reason to always keep accurate and complete financials.

Check out this IRS resource for more information on how to decide on business vs hobby.

Estimated Tax Payments

Farmers and fishermen are subject to special federal regulations for estimated tax payments.  If at least 2/3 of your income comes from Schedule F activity you only have to make one estimated tax payment by January 15th as opposed to the four estimated tax payments required for other taxpayers.  If you file your tax return by March 1st and pay any taxes owed you do not need to make any estimated tax payments.  Estimated tax payments are required when the withholding from the taxpayer’s income will not be sufficient to cover the taxpayer’s tax liability.  If the withholding is at least 2/3 of the tax liability or 100% of last year’s tax liability estimated taxes are not required for farmers and fishermen.

Other Resources

The IRS provides a large amount of resources regarding the taxation of farmers.  If you are interested in reading more information on how the IRS taxes farmers and certain things that the IRS focuses on during the audit of farmers I recommend you take a look at the following publications:

The Farmer’s Tax Guide is publication 225 and can be found here.

Publication 51 is designed for Agriculture Employer’s and can be found here.

Finally a resource that many people do not know about is the IRS Audit Technique Guides (ATG).  These are designed to help auditors of the IRS learn about various industries, they also are provided to the public to help taxpayers and tax professionals understand IRS treatment for specific industries.  The Audit Technique Guide for farmers is not readily available on the landing page for the IRS ATGs, however if you Google IRS Farmers ATG each chapter will come up in the results as a separate PDF.

About The Author

Whitney Marietti owns and runs Marietti Accounting Services, LLC which focuses on providing accounting and tax services to clients in the equine and agriculture industries.  Located in Central Ohio the firm works remotely with clients across the U.S.  Prior to starting her business Whitney worked in the industries training horses and working for veterinary clinics.  Her passion lies in helping farmers navigate the specialized tax laws for agriculture businesses. You can reach Whitney directly at

Whitney@Mariettiaccountingservices.com or 614-526-9354.