If this year's taxes were a nightmare due to poor record keeping, make sure that it doesn't happen again. Beyond tax problems, poor record keeping makes organic farming much more difficult. In fact, as an organic farmer, records should be a major concern as they're a required component of your organic system plan.
Why keep records?
As noted above NOP policy requires you to keep sound records in order to become certified organic and to maintain certification. For tax purposes, good record-keeping allows you to monitor farm progress including income and losses, can help you identify the source of your receipts, helps you track deductible expenses and helps you to get your taxes filed correctly and quickly. Perhaps most importantly, well-kept tax records may help you survive an IRS audit.
What records do you need to track for tax purposes
Most of the records you need to track for taxes, you'll already be tracking for certification purposes. However, in general, to help you maintain organic certification, but also specifically for tax purposes you need to be keeping track of the following farm records:
- Keep records of all proof of income and losses. This means holding onto your basic business financial records and statement - i.e. your monthly income and expense ledger.
- If you have more than one checking account, be sure to keep records from each.
- Travel expenses including entertainment and gifts.
- Evidence of non-cash transactions, such as crop shares.
- Employee taxes. For advice about this read Publication 51, (Circular A), Agricultural Employer's Tax Guide.
- Fuel used on a farm if the fuel was used for farming purposes. Track your mileage rates and fuel costs for operating a car, van, pickup, or panel truck.
- All business assets - such as machines, equipment, computers and so on. Be sure to keep receipts for all purchases and also track costs of asset improvements and losses of assets (for example in a fire). When and if you sell an asset record the price and date of said sale.
- A depreciation schedule for any purchased equipment that is eligible for depreciation.
- Employee tax records must be kept for at least 4 years.
- Basic financials such as bank records, check stubs and canceled checks.
- All documents related to estate purchases or sales.
- Previous year tax returns.
How long should you keep tax-minded records?
The IRS recommends you keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, the IRS recommends keeping all tax records for at least three years, although some records, such as asset records and employee wage records must be kept longer.
Resources for Tax Record-keeping
Legally, the IRS doesn't demand that any specific sort of record-keeping system be used, except for in a few cases. That said, choose a system that allows you to most efficiently track income and expenses. Also use a system that clearly shows your income for each distinctive tax year. Below are some record-keeping resources that may work for you.
- The Farm Financial Standards Council offers a low-cost publication that provides detailed recommendations for record keeping and financials called Financial Guidelines for Agricultural Producers.
- FINPACK is a comprehensive software system for farmers, ranchers and other agricultural producers, covering all aspects of running a successful farm operation, including record-keeping.
- The Projected Cash Flow Statement
- Various Farm Business Downloads
- A Virtual Small Business Tax Workshop CD - free