Tax Guide for Farmers – Recordkeeping and Accounting

Farming is defined by the IRS as the operation or management of a farm for profit, whether you are the owner or tenant of the farm. Farming can include the raising of dairy, fish, fruit, livestock, or poultry.

There are special tax considerations that those in the business of farming must take into account. This publication focuses on recordkeeping and accounting.

Recordkeeping for Farmers

Farmers like those who run other businesses need to keep adequate financial records. Recordkeeping provides several business-related benefits, including but not limited to the following:

  • Monitoring the progress of your farming business
  • Providing details to prepare financial statements
  • Identifying specific sources of property

Recordkeeping also provides specific benefits for income tax purposes:

  • Keeping track of deductible expenses, so you do not forget any deductions due to you
  • Preparing your tax returns, so you have details behind reported income, expenses, and credits
  • Supporting your tax returns, so you can support your tax returns when inspected by the IRS

To be beneficial for tax purposes, recordkeeping should include support for your income, expenses, and deductions.

You should maintain your records for the specific length defined by the Internal Revenue Code. Typically, this means maintaining your records for at least three years after the related tax return was due or filed or for at least two years after the related tax was paid.

There are exceptions to the above retention rules as follows:

  • Records to support taxes related to employees must be kept for at least four years after the related tax is due or paid, whichever occurs later
  • Records related to property must be kept until the limitation expires after the year in which you dispose of the property. Records that support the basis of the property must be kept beyond the defined limitation period

Accounting for Farmers

You can use any accounting method for your farming business that shows the income and expenses used to calculate your taxable income. These methods include the cash method, the accrual method, or a hybrid of the two methods.

Cash Method

The cash method is the most common method used in farming business, because it is the easiest method for keeping records. In general, income is recorded in the tax year during which you constructively or actually receive it, and expenses are deducted in the tax year in which you pay them.

The cash method does not allow you to deduct the prepayment of expenses.

Accrual Method

Under the accrual method, you report income in the year in which it is earned and deduct or capitalize expenses in the year in which they are incurred. The accrual method provides for a better matching of income and expenses than does the cash method.

Under the accrual method, you should not recognize income until all events have occurred that give you the right to receive the income and you can determine the amount of the income. You should not record expenses until the events have occurred that mean you have a liability, the amount of the liability is known, and the property or service related to the transactions have been provided.

Combination Method

You can generally use a combination of the cash and accrual methods so long as you use it consistently and the approach shows your income and expenses. However, you must abide by the following requirements:

  • If you calculate your income using the cash method, you must report your expenses using the cash method.
  • If you report your expenses using the accrual method, you must calculate your income using the accrual method.

Once you establish a method of accounting, you can only change methods once you receive approval from the IRS.

Where can I get more help with by tax return or questions related to tax for a farming business?

If you have further questions about how to prepare your tax return when you have a farming business, you can speak with a tax attorney to get more help. There are tax attorneys who special in answering questions and preparing tax returns for farmers. These tax attorneys have the background and experience to address questions unique to a farming business.

You can take the first step to getting the help you need by completing the form below or calling the telephone number located at the top of this web site. Please take that step today.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.