Every business that we know of thrives on good record keeping. Without it you cannot expect to survive in today’s world. Farming like any other business has to maintain good records for review over time especially when you are filing your taxes. You need to have good records of expenses, receipts of payments, financial statements from banks, and etc. These records will help you prepare your taxes accurately and avoid raising any red flags over at the IRS office. If for any reason the question arises over your tax return as to how authentic they are or if your business is chosen randomly to be audited, your records are the only things between you and a large tax penalty.
Secondly, it’s very important to have a system set up. This system should be rigorously followed every time a record is to be entered into a computer or a ledger. The system concerns the organization of your records and the order that they should be in. The records should be in an order where you are easily able to reference them or use them to review. The payroll needs to be in a specific order, such an order that will make it easier for you to review it if an employee of yours comes up to you asking for a raise or maybe a copy of his/her W-2. You should not only be concerned with your taxes but also theirs.
You should always have a record of all the assets you have purchased in this tax year and over the years for your business, which in this case happens to be farming. These assets are usually machinery and equipment. The one thing certain about them is that they will depreciate over the years and you might be able to claim a deduction on them. For you to be able to claim deduction on them and then later if you have to prove the value that it has depreciated it to, you would have to produce records, things like bill of sale and repair receipts. Cancelled checks are also very important records. Because if you do get audited, the auditor will go through all your records. The more comprehensive and simple to follow the records are, the more chances of you walking out of their with the least liability owed to IRS.
These records of your transactions with others to gain a property or to sell it off or to claim a credit or a refund on it should be kept as long as the period of limitations for the return on which they were claimed doesn’t run out. For example if you buy a new tractor and you owe additional taxes on your return for the tax year, then you should keep the records of buying this tractor for the next three year starting from the day you filed the return. If you filed a fraudulent return or didn’t file a return for that year then there’s no period of limitations meaning you should keep your records for a while maybe even pass it on to your kids. If the income you didn’t report on your tax return goes over 25% of the gross income reported, you should keep the record of buying that tractor for at least six years.
You should also keep all records of the employment taxes that you have paid for at least the last four years after the tax became due and you paid it, which ever comes first.
