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Www. Www.freestatetaxsites.com freestatetaxsites. Www.freestatetaxsites.com com 1. Www.freestatetaxsites.com   Importance of Records Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Benefits of Recordkeeping Kinds of Records To Keep How Long To Keep Records Introduction A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount of tax. Www.freestatetaxsites.com This chapter explains the benefits of keeping records, what kinds of records you must keep, and how long you must keep them for federal tax purposes. Www.freestatetaxsites.com Tax records are not the only type of records you need to keep for your farming business. Www.freestatetaxsites.com You should also keep records that measure your farm's financial performance. Www.freestatetaxsites.com This publication only discusses tax records. Www.freestatetaxsites.com 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. Www.freestatetaxsites.com For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www. Www.freestatetaxsites.com ffsc. Www.freestatetaxsites.com org. Www.freestatetaxsites.com For more information, contact Countryside Marketing, Inc. Www.freestatetaxsites.com in the following manner. Www.freestatetaxsites.com Call 262-253-6902. Www.freestatetaxsites.com Send a fax to 262-253-6903. Www.freestatetaxsites.com Write to: Farm Financial Standards Council N78 W14573 Appleton Ave. Www.freestatetaxsites.com , #287 Menomonee Falls, WI 53051. Www.freestatetaxsites.com Topics - This chapter discusses: Benefits of recordkeeping Kinds of 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 16 for information about getting publications. Www.freestatetaxsites.com Benefits of Recordkeeping Everyone in business, including farmers, must keep appropriate records. Www.freestatetaxsites.com Recordkeeping will help you do the following. Www.freestatetaxsites.com Monitor the progress of your farming business. Www.freestatetaxsites.com   You need records to monitor the progress of your farming business. Www.freestatetaxsites.com Records can show whether your business is improving, which items are selling, or what changes you need to make. Www.freestatetaxsites.com Records can help you make better decisions that may increase the likelihood of business success. Www.freestatetaxsites.com Prepare your financial statements. Www.freestatetaxsites.com   You need records to prepare accurate financial statements. Www.freestatetaxsites.com These include income (profit and loss) statements and balance sheets. Www.freestatetaxsites.com These statements can help you in dealing with your bank or creditors and help you to manage your farm business. Www.freestatetaxsites.com Identify source of receipts. Www.freestatetaxsites.com   You will receive money or property from many sources. Www.freestatetaxsites.com Your records can identify the source of your receipts. Www.freestatetaxsites.com You need this information to separate farm from nonfarm receipts and taxable from nontaxable income. Www.freestatetaxsites.com Keep track of deductible expenses. Www.freestatetaxsites.com   You may forget expenses when you prepare your tax return unless you record them when they occur. Www.freestatetaxsites.com Prepare your tax returns. Www.freestatetaxsites.com   You need records to prepare your tax return. Www.freestatetaxsites.com For example, your records must support the income, expenses, and credits you report. Www.freestatetaxsites.com Generally, these are the same records you use to monitor your farming business and prepare your financial statements. Www.freestatetaxsites.com Support items reported on tax returns. Www.freestatetaxsites.com   You must keep your business records available at all times for inspection by the IRS. Www.freestatetaxsites.com If the IRS examines any of your tax returns, you may be asked to explain the items reported. Www.freestatetaxsites.com A complete set of records will speed up the examination. Www.freestatetaxsites.com Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Www.freestatetaxsites.com You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses. Www.freestatetaxsites.com You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Www.freestatetaxsites.com See  chapter 2. Www.freestatetaxsites.com If you are in more than one business, you should keep a complete and separate set of records for each business. Www.freestatetaxsites.com A corporation should keep minutes of board of directors' meetings. Www.freestatetaxsites.com Your recordkeeping system should include a summary of your business transactions. Www.freestatetaxsites.com This summary is ordinarily made in accounting journals and ledgers. Www.freestatetaxsites.com For example, they must show your gross income, as well as your deductions and credits. Www.freestatetaxsites.com In addition, you must keep supporting documents. Www.freestatetaxsites.com Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. Www.freestatetaxsites.com These documents contain the information you need to record in your journals and ledgers. Www.freestatetaxsites.com It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return. Www.freestatetaxsites.com Keep them in an orderly fashion and in a safe place. Www.freestatetaxsites.com For instance, organize them by year and type of income or expense. Www.freestatetaxsites.com Electronic records. Www.freestatetaxsites.com   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Www.freestatetaxsites.com When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Www.freestatetaxsites.com An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Www.freestatetaxsites.com The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Www.freestatetaxsites.com All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Www.freestatetaxsites.com Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Www.freestatetaxsites.com The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Www.freestatetaxsites.com You still have the responsibility of retaining any other books and records that are required to be retained. Www.freestatetaxsites.com The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Www.freestatetaxsites.com This test is not considered an examination and the results must be shared with you. Www.freestatetaxsites.com If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Www.freestatetaxsites.com If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copybooks and records in a manner that allows you and the IRS to determine your correct tax. Www.freestatetaxsites.com For details on electronic storage system requirements, see Rev. Www.freestatetaxsites.com Proc. Www.freestatetaxsites.com 97-22. Www.freestatetaxsites.com You can find Rev. Www.freestatetaxsites.com Proc. Www.freestatetaxsites.com 97-22 on page 9 of Internal Revenue Bulletin 1997-13 at  www. Www.freestatetaxsites.com irs. Www.freestatetaxsites.com gov/pub/irs-irbs/irb97-13. Www.freestatetaxsites.com pdf. Www.freestatetaxsites.com Travel, transportation, entertainment, and gift expenses. Www.freestatetaxsites.com   Specific recordkeeping rules apply to these expenses. Www.freestatetaxsites.com For more information, see Publication 463. Www.freestatetaxsites.com Employment taxes. Www.freestatetaxsites.com   There are specific employment tax records you must keep. Www.freestatetaxsites.com For a list, see Publication 51 (Circular A). Www.freestatetaxsites.com Excise taxes. Www.freestatetaxsites.com   See How To Claim a Credit or Refund in chapter 14 for the specific records you must keep to verify your claim for credit or refund of excise taxes on certain fuels. Www.freestatetaxsites.com Assets. Www.freestatetaxsites.com   Assets are the property, such as machinery and equipment, you own and use in your business. Www.freestatetaxsites.com You must keep records to verify certain information about your business assets. Www.freestatetaxsites.com You need records to figure your annual depreciation deduction and the gain or (loss) when you sell the assets. Www.freestatetaxsites.com Your records should show all the following. Www.freestatetaxsites.com When and how you acquired the asset. Www.freestatetaxsites.com Purchase price. Www.freestatetaxsites.com Cost of any improvements. Www.freestatetaxsites.com Section 179 deduction taken. Www.freestatetaxsites.com Deductions taken for depreciation. Www.freestatetaxsites.com Deductions taken for casualty losses, such as losses resulting from fires or storms. Www.freestatetaxsites.com How you used the asset. Www.freestatetaxsites.com When and how you disposed of the asset. Www.freestatetaxsites.com Selling price. Www.freestatetaxsites.com Expenses of sale. Www.freestatetaxsites.com   The following are examples of records that may show this information. Www.freestatetaxsites.com Purchase and sales invoices. Www.freestatetaxsites.com Real estate closing statements. Www.freestatetaxsites.com Canceled checks. Www.freestatetaxsites.com Bank statements. Www.freestatetaxsites.com Financial account statements as proof of payment. Www.freestatetaxsites.com   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Www.freestatetaxsites.com These include account statements prepared for the financial institution by a third party. Www.freestatetaxsites.com These account statements must be legible. Www.freestatetaxsites.com The following table lists acceptable account statements. Www.freestatetaxsites.com IF payment is by. Www.freestatetaxsites.com . Www.freestatetaxsites.com . Www.freestatetaxsites.com THEN the statement must show the. Www.freestatetaxsites.com . Www.freestatetaxsites.com . Www.freestatetaxsites.com Check Check number. Www.freestatetaxsites.com Amount. Www.freestatetaxsites.com Payee's name. Www.freestatetaxsites.com Date the check amount was posted to the account by the financial institution. Www.freestatetaxsites.com Electronic funds  transfer Amount transferred. Www.freestatetaxsites.com Payee's name. Www.freestatetaxsites.com Date the transfer was posted to the account by the financial institution. Www.freestatetaxsites.com Credit card Amount charged. Www.freestatetaxsites.com Payee's name. Www.freestatetaxsites.com Transaction date. Www.freestatetaxsites.com    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Www.freestatetaxsites.com You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Www.freestatetaxsites.com Tax returns. Www.freestatetaxsites.com   Keep copies of your filed tax returns. Www.freestatetaxsites.com They help in preparing future tax returns and making computations if you file an amended return. Www.freestatetaxsites.com Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2. Www.freestatetaxsites.com 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. Www.freestatetaxsites.com Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. Www.freestatetaxsites.com A period of limitations is the period of time after which no legal action can be brought. Www.freestatetaxsites.com Generally, that means you must keep your records for at least 3 years from when your tax return was due or filed or within 2 years of the date the tax was paid, whichever is later. Www.freestatetaxsites.com However, certain records must be kept for a longer period of time, as discussed below. Www.freestatetaxsites.com Employment taxes. Www.freestatetaxsites.com   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. Www.freestatetaxsites.com Assets. Www.freestatetaxsites.com   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. Www.freestatetaxsites.com 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. Www.freestatetaxsites.com   You may need to keep records relating to the basis of property longer than the period of limitation. Www.freestatetaxsites.com Keep those records as long as they are important in figuring the basis of the original or replacement property. Www.freestatetaxsites.com Generally, this means as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Www.freestatetaxsites.com For example, if you received property in a nontaxable exchange, you must keep the records for the old property, as well as for the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Www.freestatetaxsites.com For more information on basis, see chapter 6. Www.freestatetaxsites.com Records for nontax purposes. Www.freestatetaxsites.com   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. Www.freestatetaxsites.com For example, your insurance company or creditors may require you to keep them longer than the IRS does. Www.freestatetaxsites.com Prev  Up  Next   Home   More Online Publications
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Www. Www.freestatetaxsites.com freestatetaxsites. Www.freestatetaxsites.com com Index A Accounting methods Accrual method, Accrual Method Cash method, Cash Method Change in, Change in Accounting Method Methods you can use, Methods you can use. Www.freestatetaxsites.com Accounting periods 52-53 week tax year, 52-53-Week Tax Year Business purpose tax year, Business Purpose Tax Year Calendar year, Calendar Year Improper tax year, Improper Tax Year Partnerships, Partnership Accrual method Expenses, Expenses Income, Income Advance payments, Advance Payment for Services Sales, Advance Payment for Sales Services, Advance Payment for Services Assistance (see Tax help) B Business purpose tax year, Business Purpose Tax Year C Calendar year, Calendar Year Cash method, Income Expenses, Expenses Income, Income Change, accounting method, Change to accrual method. Www.freestatetaxsites.com , Change in Accounting Method Comments on publication, Comments and suggestions. Www.freestatetaxsites.com Constructive receipt of income, Constructive receipt. Www.freestatetaxsites.com Corporation tax periods, Corporations (Other Than S Corporations and PSCs) Cost identification, Identifying Cost D Death of individual, short period return, Death of individual. Www.freestatetaxsites.com E Economic performance, Economic Performance Excluded entities, cash method, Excluded Entities F Fiscal year, Fiscal Year Form 1128, Improper Tax Year, Change in Tax Year 8716, Making the election. Www.freestatetaxsites.com , Making back-up election. Www.freestatetaxsites.com 8752, Required payment for partnership or S corporation. Www.freestatetaxsites.com , Activating election. Www.freestatetaxsites.com 970, Adopting LIFO method. Www.freestatetaxsites.com Free tax services, How To Get Tax Help H Help (see Tax help) I Inventories Cost identification, Identifying Cost FIFO, FIFO Method LIFO, LIFO Method Lower of cost or market, Lower of Cost or Market Method Perpetual or book, Perpetual or Book Inventory Retail method, Retail Method Specific identification, Specific Identification Method Uniform capitalization rules, Inventories. Www.freestatetaxsites.com Valuing, Valuing Inventory M More information (see Tax help) P Partnerships, Partnership Personal service corporation, Partnerships, S Corporations, and Personal Service Corporations (PSCs) Limit, use of cash method, Qualified PSC. Www.freestatetaxsites.com Required tax year, Partnerships, S Corporations, and Personal Service Corporations (PSCs), Personal Service Corporation (PSC) Publications (see Tax help) R Related persons, Related Persons S S corporations, S Corporation Section 444 election, Section 444 Election Short period return, Short period return. Www.freestatetaxsites.com Short tax year, Short Tax Year Suggestions for publication, Comments and suggestions. Www.freestatetaxsites.com T Tax help, How To Get Tax Help Tax year Change in, Change in Tax Year Corporations, Corporations (Other Than S Corporations and PSCs) Fiscal year, Fiscal Year Personal service corporation, Personal Service Corporation (PSC) S corporations, S Corporation Section 444 election, Section 444 Election Short tax year, Short Tax Year Taxpayer Advocate, Taxpayer Advocate Service. Www.freestatetaxsites.com TTY/TDD information, How To Get Tax Help U Uniform capitalization rules Exceptions, Exceptions. Www.freestatetaxsites.com General rules, Uniform Capitalization Rules Prev  Up     Home   More Online Publications