Publication 225 |
2003 Tax Year |
Importance of Good Records
This is archived information that pertains only to the 2003 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Introduction
A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount
of tax. This chapter
explains why you must keep records, what kinds of records you must keep, and how long you must keep them for federal tax purposes.
Tax records are not the only type of records you need to keep for your farming business. You should also keep records that
measure your farm's
financial performance. This publication only discusses tax records.
The Farm Financial Standards Council has produced a publication that provides a detailed explanation of the recommendations
of the Council for
financial reporting and analysis. For information on recordkeeping, you may want to get a copy of Financial Guidelines for Agricultural
Producers. You can order it from Countryside Marketing, Inc., by calling 1–630–637–0199 or you can write to:
Farm Financial Standards Council
1212 S. Naper Blvd., Suite 119
Naperville, IL 60540
The document is 218 pages. If you order the document, you will be mailed an invoice for $25.00 plus postage.
You can also download the publication at www.ffsc.org.
Topics - This chapter discusses:
-
Why you should keep records
-
What records to keep
-
How long to keep records
Useful Items - You may want to see:
Publication
-
51
Circular A, Agricultural Employer's Tax Guide
-
463
Travel, Entertainment, Gift, and Car Expenses
See chapter 21 for information about getting publications.
Why Keep Records?
Everyone in business, including farmers, must keep records. Good records will help you do the following.
Monitor the progress of your farming business.
You need good records to monitor the progress of your farming business. Records can show whether your business is
improving, which items are
selling, or what changes you need to make. Good records can increase the likelihood of business success.
Prepare your financial statements.
You need good records to prepare accurate financial statements. These include income (profit and loss) statements
and balance sheets. These
statements can help you in dealing with your bank or creditors and help you to manage your farm business.
Identify source of receipts.
You will receive money or property from many sources. Your records can identify the source of your receipts. You need
this information to separate
farm from nonfarm receipts and taxable from nontaxable income.
Keep track of deductible expenses.
You may forget expenses when you prepare your tax return unless you record them when they occur.
Prepare your tax returns.
You need good records to prepare your tax return. For example, your records must support the income, expenses, and
credits you report. Generally,
these are the same records you use to monitor your farming business and prepare your financial statements.
Support items reported on tax returns.
You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your
tax returns, you may be asked
to explain the items reported. A complete set of records will speed up the examination.
Kinds of Records
To Keep
Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited
to your farming
business that clearly shows, for example, your income and expenses.
You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. See
chapter 3. If you are
in more than one business, you should keep a complete and separate set of records for each business. A corporation should
keep minutes of board of
directors' meetings.
Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily made in accounting
journals and
ledgers. For example, they must show your gross income, as well as your deductions and credits. In addition, you must keep
supporting documents.
Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices
and receipts. These
documents contain the information you need to record in your journals and ledgers.
It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return.
Keep them in an
orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.
Travel, transportation, entertainment, and gift expenses.
Specific recordkeeping rules apply to these expenses. For more information, see Publication 463.
Employment taxes.
There are specific employment tax records you must keep. For a list, see Publication 51 (Circular A).
Excise taxes.
See How To Claim a Credit or Refund in chapter 18 for the specific records you must keep to verify your claim for credit or refund of
excise taxes on certain fuels.
Assets.
Assets are the property, such as machinery and equipment, you own and use in your business. You must keep records
to verify certain information
about your business assets. You need records to figure your annual depreciation deduction and the gain or loss when you sell
the assets. Your records
should show all the following.
-
When and how you acquired the asset.
-
Purchase price.
-
Cost of any improvements.
-
Section 179 deduction taken.
-
Deductions taken for depreciation.
-
Deductions taken for casualty losses, such as losses resulting from fires or storms.
-
How you used the asset.
-
When and how you disposed of the asset.
-
Selling price.
-
Expenses of sale.
The following are examples of records that may show this information.
-
Purchase and sales invoices.
-
Real estate closing statements.
-
Canceled checks.
Financial account statements as proof of payment.
If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared
by financial institutions.
These include account statements prepared for the financial institution by a third party. These account statements must be
highly legible. The
following table lists acceptable account statements.
Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. You should also
keep other documents, such as
credit card sales slips and invoices, to show that you also incurred the cost.
How Long To Keep Records
You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code.
Generally, this
means you must keep records that support an item of income or deduction on a return until the period of limitations for that
return runs out.
The period of limitations is the period of time in which you can amend your return to claim a credit or refund or the IRS
can assess additional
tax. The following table contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the
years refer to the period
after the return was filed. Returns filed before the due date are treated as filed on the due date.
Table 1. Period of Limitations
IF you... |
THEN the
period is... |
1. |
Owe additional tax
and situations
(2), (3), and (4), below,
do not apply to you
|
3 years |
2. |
Do not report income
that you should report
and it is more than 25%
of the gross income
shown on your return
|
6 years |
3. |
File a fraudulent return |
Not limited |
4. |
Do not file a return |
Not limited |
5. |
File a claim for credit
or refund after you filed
your return
|
Later of: 3 years or 2 years after tax was paid |
6. |
File a claim for a loss
from worthless securities
or a bad debt deduction
|
7 years |
Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you later file
an amended return.
Employment taxes.
If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes
due or is paid, whichever is
later.
Assets.
Keep records relating to property until the period of limitations expires for the year in which you dispose of the
property in a taxable
disposition. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure your
basis for computing gain
or loss when you sell or otherwise dispose of the property.
Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis
of the property you gave up,
increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the
period of limitations
expires for the year in which you dispose of the new property in a taxable disposition.
Records for nontax purposes.
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to
keep them longer for other
purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.
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