Recordkeeping and the Basics of Tax Forms

Peyton Fair – Farm Credit Mid-AmericaLes Humpal – UT Extension

Danny Morris – UT Extension

Recordkeeping: Why is it important?

• Good records assist good managers in making more informed business decisions. – Records can be used in creating budgets.– Aid in creating accurate financial statements.– They allow you to see where you money is going.– Help managers answer important questions like:

• What is our total income?• Where does all of money go?• Can we be more efficient in our business?

How much detail should go into recordkeeping?

• All records should be accurate and reliable.

• Accuracy and attention to detail will ensure the records are reflective of what the business is actually doing.

• If records are not accurate, your records are essentially worthless.

What type of records should I keep?

• Typically, two types of records should be kept: – Production records

• Example: Birthweights of cattle, crop yields, etc.– Financial records

• Example: Livestock (or crop) sales, fertilizer expense, etc.

Production Records

• Production records will differ between different enterprises.

• Recommendations for livestock and crop producers will be discussed.

• Key things to note:– These lists will not be all inclusive.– Use them as a guide in keeping your own

production records.

Recordkeeping: Livestock• Identify each animal individually

– Ear tags, branding, etc.– Allows you to track each animal’s performance

• Birth weights and date of births• Pregnancy percentages• Calving rates• Death loss rates• Average weaning weights• Average daily gains

Recordkeeping: Crops (Row Crops and Fruit & Vegetable)

• Crop yields• Fertilizer rates• Seeding rates• Production area (i.e. linear feet, acres, etc.)• Application rates of pesticides• Irrigation records• Planting dates• Harvesting dates

Financial Records• Basic items to keep track of:

– Receipts– Invoices– Checks– Bank statements

• These will be used to complete tax returns. • There are limitations to this level of recordkeeping.

– Limited information is available to make management decisions and planning.

– You will be unable to accurately complete financial statements.

Financial RecordsA complete set of financial records allow managers to:

– Know the true cost of production– Calculate break even prices– Plan for expansion (or reduction) of the business– Discern the amount of cash needed to make loan

payments along with possibly covering some costs of living

– Determine the profitability of each enterprise– Better work with lenders to secure financing– Create marketing plans

Financial Records

• Financial statements can only be completed with reliable records.

• With accurate records you can create:– Balance Sheet– Income Statement– Cash Flow Statement– Enterprise Budgets

Financial Records

• Enterprise Budgeting: – Requires income and expense records– Requires production records

• Useful for determining:– Strengths and weaknesses of the farm– Production costs for each crop– Break even prices for each crop– Evaluate different alternatives

• Should I stop producing a certain crop or raising particular sort of livestock?

• Should I raise more of a specific product?

Methods of Recordkeeping• Many different forms available.• Method should be practical, useful, and affordable. • Examples of different methods:

– “Shoebox” Method – keeping paper records loosely to be used only in tax preparation

– Pen and paper method– hand calculations require more time, but beneficial to those not familiar with computers; preprinted forms are available from various sources

– Electronic recordkeeping – typically requires less time and are easy to keep up once created; popular software examples include Excel and Quicken

• Benefits: Electronic records are easily shared with business partners (i.e. lenders, accountants, etc.)

• Requires knowledge of computers and must be purchased

Excel Example of Income Statement

Note: This particular example is free by default in Microsoft Excel 2013. It can easily be customized to fit your operation.

UT Extension Sample Tomato Enterprise Budget

Note: This budget is Excel based. UT Extension also has crop budgets for all principal row crops and forages.

Those budgets can be accessed at: http://economics.ag.utk.edu/budgets.html

UT Extension Cow-calf Budget

Note: This budget is Excel based. UT Extension also has other cattle budgets.

Those budgets can be accessed at: http://economics.ag.utk.edu/budgets.html

Quicken: Tracking Income & Spending

Budgeting with Quicken

• Within Quicken, you can create “tags” to track expenses that fit your operation. For example, if you need to track feed expense, create a tag for “Feed” to track expenses in that category.

• You can then use Quicken to track your spending on “Feed” and even create a budget. You can use it to track loan payments, bills, etc.

• Quicken is also very user friendly and easy to customize to fit your farm.

Sales Tax Exemption Qualification and Warning

Tax Form Resources• 2015 Schedule 1040: https://www.irs.gov/pub/irs-pdf/f1040.pdf• 2015 Schedule C: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf• 2015 Instruction for Schedule C: https://www.irs.gov/pub/irs-

pdf/i1040sc.pdf• 2015 Schedule E, Part I: https://www.irs.gov/pub/irs-

pdf/f1040se.pdf• 2015 Instruction for Schedule E: https://www.irs.gov/pub/irs-

pdf/i1040se.pdf• 2015 Schedule F: https://www.irs.gov/pub/irs-pdf/f1040sf.pdf• 2015 Instructions for Schedule F: https://www.irs.gov/pub/irs-

pdf/i1040sf.pdf• 2015 Schedule 4835: https://www.irs.gov/pub/irs-pdf/f4835.pdf

Conclusion- Recordkeeping is essential to running a

profitable business.- The method of recordkeeping can either make

the task burdensome or convenient. - Various ways to keep records

- Covered the basis of tax forms used in farming operations

- For additional tax advise, seek assistance from a certified tax professional (i.e. CPA).

Questions/Comments?

• Note: If you need assistance with recordkeeping or structuring your business, contact your local Area Farm Management Specialist.