05 December 2023, US: As the holidays wind down and the new year approaches, it’s a time for hopeful plans. But in the midst of all the cheer you face a looming responsibility—tax season.
It’s a time of year most of us don’t look forward to—gathering receipts, remembering what expenses we had (but may have forgotten to write down!), preparing financial information for banks and lenders, budgeting for the coming year and making that appointment to meet with your CPA. This can all feel quite overwhelming!
How to Prepare Yourself for the Tax Deadline
Every farming operation is different when it comes time to tax planning. Farmers should work with their accountant or advisor on determining the next best steps to take and what makes sense for their operation.
“There are a lot of strategies farmers have for tax planning. Being very forward thinking and not thinking one year at a time is a good strategy. Commodity prices have been very good this year and it looks like they’re going to continue to be good for the near term which will allow some profitability to hopefully continue over the next year or two. Farmers really need to be thinking about how this looks long-term for them. Making the right decisions right now will both protect their working capital and put their operation in the best position forward from a tax standpoint,” says TJ Wilson, Director of Sales for FBN® Finance.
Here are the top five ways to prepare for tax time:
1. Identify Sources of Receipts
During the year you receive money, property and/or services from many sources. Your records can identify the source of your receipts. You need this information to separate farm from non-farm receipts and taxable from nontaxable income. This helps your accountant properly report this information to the IRS. Gather your revenue receipts, invoices, checkbook and bank statements. You can use a simple code to delineate these items—such as “B” for business, “P” for personal and “?” for things you might be unsure about. This simple process will help your accountant quickly summarize information and figure out those with a “?”.
2. Flag Business and Personal Expenses
You want to get the greatest tax deduction possible, so you also need to identify all business expenses. You can use the same process as above—gather any expense receipts, credit card statements and your checkbook, and then take a few minutes to categorize expenses. This will make the process go much more quickly with your accountant—and may jog your memory as to anything you might have otherwise been overlooked.
3. Prepare Financial Statements
Typically, financial statements have at least two components: a profit and loss (or income) statement and a balance sheet. If you’ve completed the above two steps, you’ll already have most of the information for the income statement. However, it’s also helpful to collect income information reported to you by other people – such as an employer (on Form W-2), a bank (typically on Form 1099-INT), the government (on Form 1099-G), or a cooperative (on a Form 1099-PATR). Typically these come in around the end of January.
Additionally, you should set aside the following: bank statements as of December 31; purchase documents for equipment, trucks, livestock, etc.; and closing documents for any assets you purchased with a loan. This information, along with the income and expenses you identified in steps one and two, will aid in preparing complete and accurate financial statements.
4. Complete Other Tax Information
In addition to completing your tax returns, almost everyone who receives income from you also must prepare their own tax return. If you had people working for you during the year, you need to report to those people the amounts you paid to them for their services. For example, if someone worked for you as an employee, you’ll need to report the wages you paid to them on a W-2 and if you paid a contractor or service provider, you may need to send a Form 1099 to them. Again, your accountant can help you with filing the forms.
5. Keep Supporting Items for Your Tax Return
For this last step, the good news is you really don’t have to do much of anything! This is what the IRS would tell us: “You must keep your business records available at all times for inspection…If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will assist in the examination.” File paper items in a place for safekeeping and organize corresponding digital files as well. This way, you’ll have the information if you need to access it in the future.
(For Latest Agriculture News & Updates, follow Krishak Jagat on Google News)