Short answer
Keep a running summary of farm income and expenses plus the documents behind it: sales slips, invoices, receipts, payroll and records of equipment, livestock and land. Farm profit or loss goes on Schedule F, and good records also let your CPA consider options such as farm income averaging.
Farm returns are only as good as the records behind them. A CPA can do a lot with a well-kept ledger and very little with a year of loose receipts. This answer explains what the IRS expects farm records to show, what to keep for each part of the operation and how those records turn into a Schedule F and other forms.
Why do farm records matter so much?
IRS Publication 225, the Farmer’s Tax Guide, lists the reasons in its chapter on records: to monitor the progress of the farm, prepare financial statements, identify sources of income, keep track of deductible expenses, prepare tax returns and support what is reported on them. A lender reviewing an operating loan uses the same records.
The publication describes the core of a good system: a summary of your business transactions showing gross income, expenses, deductions and credits, plus supporting documents such as invoices and receipts for purchases, sales, payroll and other transactions, kept in an orderly way, for example by year and type of income or expense.
What goes into the records?
| Area | Keep | Why your CPA needs it |
|---|---|---|
| Sales | Packer and processor statements, cooperative notices, sales slips, auction settlements | Gross farm income on Schedule F and the two-thirds estimated tax test |
| Program payments and insurance | Agricultural program payment notices, crop insurance and disaster payments | Each is reported differently |
| Operating expenses | Invoices and receipts for feed, seed, fertilizer, chemicals, fuel, repairs, custom hire, utilities | Deductions on Schedule F |
| Labor | Payroll records, crew leader details, Form 943 | Payroll taxes and wage deductions |
| Equipment and buildings | Purchase contracts, trade-ins, sale records | Depreciation and gain or loss on sale |
| Livestock | Purchase and sale records, raised versus purchased animals | Different treatment for sales of breeding and dairy animals |
| Land | Closing statements and improvements | Basis for any future sale |
What is Schedule F?
Schedule F of Form 1040 is where an individual farmer reports farm income and expenses to arrive at farm profit or loss. Sales of farm products, rents, agricultural program payments, income from cooperatives and other farm income go on it. Some items, such as sales of certain livestock or equipment, are reported on other forms, which is one reason purchase and sale records need to be kept separately from operating receipts.
Which accounting method will my CPA use?
Most small farms use the cash method, reporting income when received and expenses when paid; others use an accrual method, and Publication 225 describes special methods for farm inventories. You can even use different methods for business and personal items. The method affects how you should keep records, so ask your CPA which one your farm uses and why.
Can records lower my tax?
Sometimes. The IRS allows people in a farming business to average some or all of their farm income using tax rates from the three prior years, on Schedule J. Publication 225 says this may lower tax in a year when farm income is higher than in one or more of the prior years. Your CPA can only test it with prior years’ returns and a clear record of this year’s farm income.
Paper or electronic?
Either works. The IRS applies the same requirements to electronic records as to paper ones, and electronic systems must be able to reproduce the records in legible form. If you scan receipts and discard paper, the system must be reliable enough to meet IRS standards. A simple routine that works for many farms:
- one bank account and card used only for the farm;
- receipts photographed or filed weekly, by category;
- a monthly total of income and expenses, even in a spreadsheet;
- a separate folder for anything bought or sold that lasts more than a year.
Separate the farm from the household
The biggest single improvement most small farms can make is separating farm money from family money. When the same account pays the feed bill and the grocery bill, every statement has to be picked apart at year end, and deductions get missed or questioned. A separate account and card for the farm, with transfers to the household account as owner draws, leaves a clean trail your CPA can follow.
How long should I keep them?
Generally at least three years after filing, longer for payroll and for property you still own. The details are in How Long Should I Keep Tax and Business Records?. The same records also decide whether you qualify for the farmer estimated tax rule in When Do Farmers Pay Estimated Tax?.
Tip: At the end of each month, write one line on anything unusual: a hail claim, a new tractor, a crop sold to a new buyer. Those notes save your CPA hours in January.