Running a Small Agricultural Business : Recordkeeping and Managing an Account Book

Record Keeping and Managing an Account Book

By: Sandy Buxton, Cornell Cooperative Extension, Washington County

Everyone who is running a business, either full or part time, needs to have a good handle on their numbers. Tracking income and expenses is an important issue with the federal government as a sign of a business not just a hobby, but it is also important for general information - should you be in or continue this business?

Why Keep Records?

• Records help you monitor the progress of your farm business. Knowing what has been happening in the farm business puts it in the position of being able to be more successful.
• Records help you to prepare financial statements needed for taxes, the bank and to prove information for ag assessment.
  • taxes
  • income statements (profit and loss statements)
  • balance sheet
• For identification of income sources, important when money comes in from several enterprises. Everything needs to be separated farm : non-farm; tax deductible : non-tax deductible.
• When preparing your tax returns, records must document income, expenses and any credits that you report for programs. This will help support your side in any disagreements with the IRS.

What kinds of records need to be kept?

If you are in more than one business venture, you need to keep a complete set of books for each enterprise. Ideally, each would include the amount of overhead expenses used by the business (percent of taxes, electricity, labor, etc.).

You must show:

• Gross Income - all of the money that came into the business. For your own use and information, keep track by smaller categories so that you can do some analysis with the numbers.
• Expenses that can be taken as a deduction. They need to have supporting documentation.
• Credits, or any money that comes to the business in credit form.
• Purchases or sales of capital items also need to be tracked and documented for depreciation and capital gains purposes (buildings, equipment, major repairs etc.).

What qualifies as a farm expense?

• Labor - wages paid, insurance and benefits, money paid to an independent contractor for work performed ( farrier, sheep shearer, pasture mowing, etc).
• Feed - grain, concentrates, roughage (hay, silage, etc.), and other feed items (molasses, beet pulp, vitamins, etc.).
• Machinery hire - any type of machinery rental expense, or hiring a person to perform some type of machinery work for you (bull dozing, plowing, trucking animals, etc.).
• Truck, tractor and repair expenses - supplies such as anti-freeze, fan belts, small engine parts, hoses, small tools, truck registration and insurance.
• Fuel, oil, gas and lubricants - any purchases of these products and grease.
• Breeding fees - expenses incurred in the process of reproducing your animals; stud fees, artificial inseminator fees.
• Veterinary and medicine expenses - payment for the vet who keeps your animals healthy or repairs their problems, for the purchase of medicine and supplies used to cure and prevent problems.
• Other supplies and expenses related to the business: accountant, office supplies, subscriptions, advertising, consultants, etc.
• Lime and fertilizer for maintaining land fertility.
• Seeds and plants - the cost of what you actually grow.
• Spray and other crop expense - pesticides, herbicides, potting soil, pots, and many other things used to grow crops.
• Land, building, and fence repair - repairs related to the business, designed for keeping animals contained, improving building safety and appearances.
• Electricity and telephone - expenses related to the business. Sometimes it is done as an assignment of the bill.
• Taxes and insurance - if some facilities are used and there is documentation to support, then some of these expenses can be assigned to the farm business.

Record all payments made on farm related liabilities and capital purchases. Anything to a bank, large animal purchases, equipment or structure purchases, etc.

Non-deductible Expenses - do not qualify for consideration as deductions

• Certain family living expenses are not deductible through the business since they are used for personal expenses.
• Loss of growing crops.
• Repayment of loans, only the interest on the loan is deductible.
• Estate, inheritance and gift taxes.
• Loss of livestock. You can not deduct the value of raised livestock that die because you deducted the cost of raising them.
• Losses from sales or exchanges between related people.
• Cost of raising unharvested crops.
• Costs of unharvested crops bought with land.
• Dues and Subscriptions. Except boards of trade, business leagues, chambers of commerce, public service organizations, professional associations and trade associations.
• Fines and penalties.

Cornell Account Book

One easy method for organizing and coordinating all of this information is a Cornell Account Book. This publication has been refined over many years of public use by many dairy farmers and tax professionals. Set up with the Schedule F and other forms (schedules) in mind, the account book provides a framework that organizes records for tax preparation. Based on a simple double-entry system, the farm enters all of their information in one column and then enters the info on the appropriate category column so that they can be added and recorded each month.

A disadvantage of the account book is that it is designed for dairy farmers or livestock producers. Many of the categories relate to feed purchased and milk or animals sold. However, the number of categories is quite large and some headings are easy to change.

Other areas in the book record the income categories. Special attention has to be taken with items that are bought and sold. Tax implications can be a problem if records are not kept. The length of time items are held after purchase before resale is important in some cases.

Debt payments have their own special section in the book allowing for end of year adjustments for interest and principal expenses. Tracking the different payments made helps to keep your tax professional apprised of any capital purchases that you might forget to put in their proper place.
Many small businesses need to acquire equipment, buildings or have to grow a product. Each of these are situations where the farm cannot "write-off" the full amount in one year, the year of the purchase. Instead, the amount is deducted over several years.

Depreciation usually is the approximate rate at which a capital item is "consumed" by the farm. Sometimes the rate is determined by the government, other times it is related to the use of the item in question.

Example 1 : A farm purchases an adult cow for $1500.
A. If her useful life is calculated to be 5 years, her rate of depreciation would be $300/year. ($1500/5 years = $300/year)

B. If her useful life is calculated to be 3 years, her rate of depreciation would be $500/year. ($1500/3 years = $500/year)

Using scenario A. After 2 years of ownership, you decide to sell the cow for $1200. The farm would be subject to depreciation recapture of $300 because the farm has already received the tax benefit ($1500-600 = $900, $900< $1200 sale price).

However, if you sold the cow for $800, which is an amount less than the cow's current value of $900, there would be no depreciation recapture and no capital gain on the sale.

When installing fencing, irrigation material, trees and other items the same types of rules can come into play. It is important to know the many ramifications that come into play when making decisions. Records and information insure that the farm has the best possible options available.

Maintaining records allows a farm to have information to use in making decisions. Knowledge can be very powerful, and sometimes it can mean profit! If you would like a Cornell Account Book (hardcopy) from Cornell Media Services or the Excel spreadsheet version, please call Cornell Cooperative Extension Washington County at 1-800-548-0881.