Farm bookkeeping and the federal income tax

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Farm bookkeeping and the federal income tax
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United States -- Bureau of Agricultural Economics
United States -- Dept. of Agriculture
United States -- Bureau of Agricultural Economics
United States -- Extension Service
Publisher:
U.S. Dept. of Agriculture, Bureau of Agricultural Economics and Extension Service ( Washington, D.C )
Publication Date:

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Resource Identifier:
aleph - 028448536
oclc - 173820337
System ID:
AA00017369:00001


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UNITED
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DEPARTMENT


AGRICULTURE
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Bureau of Agricultural Economics
and
Extension Service


Farm


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UNIV OF- FL L:E
DOCUMENTS DEr"
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U.S. DEPOSITORY

Washington, D.Cl
Issued January 1943
Issued January 19 43


Revised October 1943
II


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STATE


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Federal Income Tax Requirem t......
.,': ::'- '"'.''''' l^ B
1. Who must file a return?
A single person, or married pn"W wt1
with husband or wife, with. a
$500 or more. : r.. i
A married person living with hbsm4
.. :. & 7
with a gross income of $624 or more.
sonal exemption under the regular
is still $1,200 but because of the victor
return must be filed if gross income is $Cj
more. ,::q
A return MUST be filed if the gr ..s bmmn... .
reaches the specified amount even thoughi..
sequent deductions mean that no taxisdue.I' ^
A farmer counts as gross income all reAet..lt
from farm and from nonfarm sources.,.iiI
ing the value of any merchandise reemwlI'T,
exchange for farm products or services
others. : A 'f '
"::; 5? ::", .11
2. When is the return due?. .:
For the income of the calendar year 19iBPtt'
kinds of reports are required under the teasl
of the Current Tax Payment Act of ,4t : Aii
declaration of estimated tax must be filed -0w1
before December 15, 1943, by farmers.: w Irl
at least 80 percent of their gross inom l.w
farming. Others must file declaration a *
before September 15, 1943. A .'i 4
covering the calendar year 1943 is ide.ii
before March 15, 1944. A farmer who Ieg3t;
uses a fiscal (farm) year for his accoutig
records and who gets at least 80 percent of:
gross income from farming must file a dee:3..l
tion of estimated tax on or before the fe ;
day of the last month of his fiscal year-. a.. !
return not later than 2% months after ti close.,i
of his fiscal year. ,
3. Where and with whom must the ineenlts
return be filed?
With the Collector of Internal Revenue:. lns
internal revenue district in which the peni rij|
lives or has his chief place of business. It ini'1
be filed by mail or in person. ; :ii
; *. .'.'"Ji
4. What forms are needed? l
The Declaration of Estimated Tax (.
1040 ES) and the Individual Income rTaxzC
turn (Form 1040) are needed by all fa e
The "Schedule of Farm Income and Ezxpen
,(Form 104010F), also is required for those
report on a'calj.tasis, and is optional for
who report on an accrual basis. All three fn:
can be obtained -.from Collectors of In
Revenue, and Usually are also available '
bapks, post offices,, and similar places. ..
THER1 1I ,NO SUBSTITUTE FOR A ,::
FUL ST'tbY OF THE FORMS
"."" n...
Is : F::
I"T : L' 4.:'~i









The purpose of this statement on Farm
Bookkeeping and the Federal Income Tax is
to present some of the requirements for
making adequate summaries of the farm
business for Federal income-tax returns and
to help farmers understand some of the
problems involved. This is not a set of
directions for setting up a system of farm
accounts, nor is it a complete set of instruc-
tions for filling out an income-tax blank.
But if this statement is carefully studied
and its suggestions, are followed, many
farmers will find they can readily arrange
and summarize their business records and
fill out the income-tax forms. Problems
peculiar to particular situations usually can
be settled best after consultation with Col-
lectors of Internal Revenue.


Farm Bookkeeping and the Federal Income
Tax1
Ability to summarize their financial transac-
tions systematically is of vital importance to
the millions of persons subject to the provisions
of the Federal income-tax laws. Farm people
are no exception. Inability to summarize his
business dealings correctly and completely may
even be costly to an individual farmer.
The individual income-tax liability is a per-
sonal liability. The farm enterprise as such
has no income-tax liability except in the case
of incorporated farms. In the usual situation
the "net profit" of the farm enterprise is tax-
able only because it is personal income of the
owner or the operator. As farmers are closer
to their business than most other taxpayers,
the separation of items that are personal from
those that are business, as required in the law,
becomes a particularly important problem.
Each taxpayer must think through these sepa-
rations as they relate to his own operations, as
some of the items may be business in one
situation and personal in another, or may be
divided in various proportions. Thus, for a
farmer as an individual the "net farm profit"
may be only one of the sources of income and
there may be a number of personal expenditures
that represent permissible deductions from his
personal income. The discussion that follows
is concerned primarily with accounting for
those items that enter into determining the net
farm profit. The references to other personal
income and deductions are intended mainly to
suggest a few of the reasons why a record of

SThis statement has the approval of the Bureau
of Internal Revenue.
553687s-43 1





.. ..........
nonfarmnn personal and family items ii
helpful in the preparation of the ra":L
Records for Tax P urpo.e:......... 1
... +........... ....

Farm people have rather generally ..
their affairs without formal bo
the principal requirements of their.
personal financial relationship.
have required very few doc... 1
The extension of businessand"l
tices to farm operation has d id.a$'
to study their own performance, usilg
records. Such records now have ...ddM...
ness as basic information for preparqg
tax returns. .. ..... .. ,
Basically the principles involved .in
accounts are relatively simple. Bo'.e
for income-tax returns is more simple 1
needed for an adequate study of ope.atu1 S
formance. State and Federal agnci e -
count books which will serve both-andd
can help farm people in their ho. -.s.
Other sets of forms also can be Obtai The
facts are more important than the fI ..o....M....
Those farm people who have regularly kept
written accounts of their business opgi c
systematically saved various bills and ter
memoranda of financial transactions usually
have been able to rearrange their facts for Ia-
come-tax filing in a reasonable amount .od tinae
each year. Some orderly arrangement: d ats
supported by evidence is now more tma.
worth a farmer's time, not only as a p In
guiding the business that provides his we,
but also as a help in meeting his oliti
under the income-tax laws. The Bureau iT"-
ternal Revenue has never insisted that .. -
payers keep books in any special way d b
devising. Any of the recommended fast--
count books can be used to good advantage: as a
"work sheet" for 1943. Effort spent no In o k-
ing up facts for 1943 will be good pr al
experience toward keeping current records id
ing 1944. ..
Farmers who have not previously Wqortud
will need to study the requirements anm ]ae
decisions regarding the handling of oefliu
items in their returns. Some of the disis
will be particularly important for those -iwho.
previously have kept no formal accouMt.
Those who have reported previously will he
made these decisions as to procedure. But
under certain conditions that are pointed out
later, they may change their methodS.
Explanations here offered are incomplete
with respect to many points of practice in ok-
keeping. The many transactions essential yof
the same kind but differing slightly in minor
details make bookkeeping seem complicated.
On matters of income-tax law, and on interpre-
tations of the prevailing regulations there-:e,.
many of the complications that appear result
from the necessity for providing general rules
to cover a great many different individual situa-
tions that actually occur rather infrequtly.




Hence, for the most part, only the general
principles have been stated for the convenience
of those farm people who have usual situations.
Those who have exceptional problems may need
special help from Collectors of Internal Revenue,
their deputies, or local people who have been
instructed in the subject. But, regardless of
help asked and received, the taxpayer is re-
sponsible for providing information about the
facts.
Choosing the Tax Year
For most farmers, a calendar year fits per-
sonal and business interests as well as any other
12-month period. Some other period, such as a
crop or rental year, can be used if the taxpayer
regularly keeps his accounts that way. A "tax
year" once established must be used thereafter,
until arrangements for a change have been
made with the Commissioner of Internal Reve-
nue. Application for a change in year, made
by furnishing the information called for in
Form 1128, must be made at least 60 days before
the close of the fractional part of the year for
which a report would be required, to effectuate
the change. A report for a fractional part of a
year is required because no return can cover a
period of more than 12 months. For example,
if permission were granted to change the tax
year from one ending December 31 to one end-
ing March 31, it would be necessary to file a
report covering the 3-month period from Janu-
ary 1 to March 31, in the year in which the
change is made. Reports made thereafter
would cover 12-month periods ending on March
31 of each year.

Choosing the Accounting Method
A farmer who is just starting a set of books
or one who contemplates a change in his system
of handling various items will need to consider
the alternatives in the light of his individual
business. The major choice, of course, is be-
tween determining income on a "cash" basis
or on an "accrual" basis. Effective reporting
requires much the same sort of records regard-
less of the basis used in computing income.
Some of the basic bookkeeping requirements
common to both methods of reporting income,
as well as some of the differences, are here
pointed out to help the farmer in making his
choice.
The principal differences between the "cash"
and the "accrual" methods of accounting, par-
ticularly from the income-tax point of view,
lie in the handling of stock or produce carried
over from one year to another and in the han-
dling of incomplete financial transactions.
Under the cash method only those transactions
completed during the taxable year are included
in figuring income or expense. For example,
grain sold or feed purchased is included in the
accounts for the year when payment is made
or received. Under the accrual method atten-
tion is. directed at the income produced or





earned during the taxable year ll
when the money, or the value, pau
party to another. The "expenses*" .......
include all costs applicable to the :'
tions, whether or not the bills have ei
It is also necessary to have an i .n oo.. -
showing the value of all produce, .... .
and supplies on hand at the be
the end of each year. To facilitate .t ..'a..'t .
tion of summaries of income and f...l
a n .cr a ..is ....... ...... :"...........
an accrual basis, appropriate details ms
worked into the record. The accrual MEi .
technically reflects more accurately the. *
of the production and business a .tvit"k
particular tax year than does the oask e
In ordinary years the differences in the M...
of income shown probably are not iof JqdEL
significance.
Farmers have three classes of business ow.
erty about which certain information sho1;AB
kept available. These are (1) land (2) -
preciable capital goods, and (3) other oS
used in the business. Land does not enter iCA
income or expense under either method f :a
counting. Gain or loss occurs only in case n
sale, and is considered part of the fanasrs
personal financial activity and not part of the
farm-enterprise activity. Furthermoresas pi
or loss from the sale of real estate used in the
"business" of the taxpayer is subject to c.b
special provisions in the income-tax laws it '
necessary to have complete information in oer
to figure tax liability correctly. Often it wil Ie
desirable to discuss specific- problems with the
collector. .::
"Depreciable capital goods" includes aHl 4
the buildings and land improvements (except
the owner's dwelling), machinery, equipment,
work animals, and breeding and dairy stok.
Usually, property of this class has bes ac-
quired by purchase. Instead of deducting the
cost of these items from the total farm receipts
in the year of purchase, the cost is recoveredo
in part during each year of useful life s- te
property is used up in the productive pro se.
The part of the cost recovered annually in tb.
way is the depreciation contemplated in i
income-tax laws and regulations. It must.:A b
taken each year, as it may not be accum.ulated
as a credit and used to reduce taxable Ifee.
in just any year selected by the taxpayer. A
A record of depreciable capital goods may fe
part of the annual record book or may be k:ept
in a separate book which serves for 6, 8, 10, or
more years. In either case to be most usfut
the record should show information as to "d
of purchase, original cost, additions, depni
tion in previous years and current year, ad
amount yet to be recovered. The parti
form will vary with the type of enterprise.It
often is timesaving to group many of the .ites
by ages and types. In any event, a reot
once started on a sound basis can easily e
carried on from year to year by indicating a-
ditional purchases or sales and by maldngttM
necessary entries to show the depreciation 4d
ing the current year.





Gain or loss from the sale of buildings and
land improvements is treated as coming from
a personal financial transaction, as was the case
with land. In the case of a sale of machinery
and durable equipment, the gain or loss is
mingled with those from other transactions
completed in the regular course of business.
For income-tax purposes this gain or loss can
be looked at as an adjustment for overdeprecia-
tion or underdepreciation in previous years.
Work animals and breeding and dairy stock
may be treated in any of several different ways
so long as a consistent practice is followed. If
the animals were purchased, they may be
treated as capital items, the same as machinery
and durable equipment, and depreciation
claimed. Under the accrual method there is the
additional choice of treating such animals as
inventory items along with other crops or prod-
ucts for sale. If the work animals and breeding
and dairy stock were raised and the cash method
is used, they do not affect the accounts except
when sold and then as income to the full amount
received from the sale. Under the accrual
method such animals may be carried in the
inventory during the years before they reach
maturity. After they reach maturity they may
be transferred to a capital account at the in-
ventory value used at the end of the preceding
year. Subsequently, depreciation may be
claimed the same as on other capital items.
The third class of property includes the grow-
ing livestock, the produce held for sale or for
farm use, and the feed and supplies on hand at
the end of the accounting period. The farmer
on the cash basis presumably has counted the
purchased items as expense at the time of pur-
chase, except in the case of items purchased for
resale, the cost of which will be deducted from
the sales price in computing profit for the year
of sale. The farmer on the accrual basis holds
them out of expense "on inventory," where they
do not affect his income or his expenses until
they are converted into cash or some other form.
A list of the property used in the business
has a value entirely aside from its value as an
aid in computing an annual income summary.
A list of property, kind by kind and group by
group, with additions and sales appropriately
indicated, is an excellent device for evaluating
progress from time to time. The entries are
part of the record of the whole business and
exist primarily for the convenience of the in-
dividual farmer.
In addition to the information about the
"'property used in the business," a record of
receipts and disbursements is necessary for
both cash and accrual reporting. By definition,
under the cash method receipts or disburse-
ments apply in the year when the cash was
received or was disbursed. Under the accrual
method the date of cash settlement is of no
special significance in the assignment of income
or expense to a particular year.
A reconsideration of the problems peculiar
to his business may lead a farmer to the con-





clusion that it would be desirable toi
accounting method which has bee
making income tax returns in t1h.' .
can be done by making application for
sion to the Commissioner of Internal Le
The application must be filed with in...............
after the beginning of the first table
be affected by the change. In order te:.
tuate a change, adjustments must be iude 't:
a basis that will satisfy the Commiuulwa 15a4 I
income has been properly reflected wtibvt
prejudice to taxes properly due. The: etei
of the adjustment necessary will varw::h :*
individual situations and is essentially a matte
for negotiation with the Commissioner. : ....
The following discussion of farm income Sd
expenses is expressed largely in terms at ie
income tax forms. The forms are ara
with many typical commodity names and kb
of expenses to save writing and to ill strte
classifications. Each reader, however, suld
substitute the descriptive labels that t his own
particular operations.
Farm Income
Farm income for tax purposes then deter-
mined on a "cash" basis may, for convenience,
be considered as the sum of four groups of
items: (1) The amount of the cash or the value
of merchandise or other property received from
the sale of livestock which was raised during
the taxable year or prior years, (2) the same
for crops and produce raised and sold, (3) the
profits from the sale of any livestock or other
items which were purchased, and (4) other
farm income. When income is determined on
an "accrual" basis, inventory change must -be
taken into account, and purchased produce is
not separated out as in item 3.
Income from livestock raised:
For livestock raised on the farm, "income" on0
a cash basis is the total receipts from the ae
of the livestock. If livestock is traded for mer-
chandise or other property, the income reprte
must include the value of the property received
in exchange. The entire sale value of animals
raised on the farm is "income" in the year of
sale; the value added during the year to animals
not sold is not counted. On the accrual bein
the "income" sought to be taxed is the difference
between the sale price and the costs incurred
over the entire period of growth. This is found
by using inventories. Because of the difficulty
of ascertaining actual costs for inventory pr-
poses, farmers may use the 'Y"farm price
method," which provides for the valuation of
inventories at market price less direct costs t
disposition. Those with inventory problems
peculiar to their operations will do well to con-
suit the collector.
Income from crops and produce raised:
The procedure for reporting income from
crops and produce (including livestock, das,.





and poultry products) raised is similar to that
for livestock. Quantities and cash receipts (or
value of goods received in exchange) are en-
tered separately for each class of item. If
crops are stored on the farm beyond the end
of the year (or fiscal period) during which they
are raised, all the income falls in the year when
the crop is sold when reporting on a cash basis,
but only the difference between the amount re-
ceived and the expense of raising such crop falls
in the year of sale when reporting on an ac-
crual basis.
If a loan is obtained from the Commodity
Credit Corporation, the farmer may elect to
include it in his income in the year in which
the loan is received instead of in the year when
the commodity is finally sold. Whichever
method is elected must be followed in succeed-
ing years unless special permission to make a
change is obtained from the Commissioner.
Profits from the sale of livestock or products
purchased:
To arrive at the profit figure to be included in
income, Form 1040F calls for the following in-
formation in addition to the description of the
animal or product: (1) The date acquired, (2)
the sale price, (3) the cost, (4) the depreciation
allowed or allowable for previous years, and
(5) the profit. The profit is the amount of the
excess of the sales price over the amount repre-
senting the depreciated cost; that is, the original
cost minus the depreciation allowed (but not
less than the amount allowable) since acquisi-
tion. If some of the livestock marketed from
the farm were raised and some previously pur-
chased, it may be desirable to discuss with the
Collector the questions involved in segregating
the two groups. Individual identification may
perhaps be waived for small animals like
chickens and lambs, and not waived in the case
of animals of high value.
Another question that may need to be dis-
cussed with the Collector is the matter of a
depreciation method. This is important not
only in the case of breeding and dairy animals
and the like, which were purchased and later
sold, but also in the case of draft animals and
property in general as mentioned later.
Other farm income:
Values, or amounts, are to be reported for
any other items of income arising from the
farm business. Included are such income items
as payments from the Agricultural Adjustment
Agency, merchandise received for produce, ma-
chine work, hire of teams, breeding fees, rent
received in crop shares, work off farm, forest
products, and any other like receipts. In gen-
eral, anything of value received instead of cash
must be treated as income to the extent of its
market value.
Hail or fire insurance for growing crops that
were injured or destroyed should be included
in gross income to the extent of the amount
received in cash or the cash equivalent if re-
ceived in kind.





The value of home-grown farn........
is consumed by the farmer, and his
not be reported as income, butexpn ...
in raising produce thus consume t .......
be claimed as deductions. SepEarMt.iw
pense items may cause some -dicu
reasonable estimate should be made N. ..i'
duce consumed on the farm by tme.;Carsi1|
is not reported as income. IUlialtis...
income, no segregation of 01p lftit
necessary on that account. I::;,
Earnings from personal services of... limr
should be included with the income of theil
for income-tax purposes unless uwder twAhe.
of the State earnings of a minor bWozjg Sft
minor. io:
"Other Farm Income" does net IelMs T'
receipts arising from the sale of the 'fro ias
any part of it. Such transaction m ij :"M
ered not part of the farm bushes, but;,e
sonal, and are taken care of directly a.I
1040.: "- :::
Farm Expenses .. .
A proper record of the farm expenses aai i
as significant to a farmer as the reco oLrj ,
income. Deductions are often difficult .to,
lish unless one has a record. Many pay....
are made in relatively small amounts on ne
ous occasions. If they have been systemataeq
recorded, preparing entries for Form 1007 m
reduced to classifying and totaling. in ge9.. |
disbursements necessary in the prn
operations of the farm are allowable de
in arriving at the net farm profit. hxpbs
are counted in the year in which payment |
made in reporting on a cash basis. In repo
ing on an accrual basis, expenses are counted
in the year in which incurred, whether psi4 Or
not. Depreciation allowances are to be tmq
each year. .
Labor hired:
Wages paid for farm work done are ind
but no allowance for the value of the work
the farmer, his wife, or dependent minor
dren is deductible. Board furnished to 'r
labor is deductible only to the extent that i
is purchased by the farmer or his family, ti
excluding the value of food raised on the fat
and used in boarding laborers. Thea value
rations purchased and furnished to laborers and
sharecroppers is deductible as part of the 'sp
expense. Hired household work is dedctibj
only to the extent that the services are. used
boarding or otherwise caring for farm lbfl*
not including the farmer's own household. ...
Production supplies: H'
Amounts expended for feed, seed, fertile
lime, manure, and all similar supplies puref
and used in the production of crops and Lives
are deductible expense items. The valt
seed, feed and manure produced and used onIf
farm is not deductible. .

8Th.





Taxes:
In general, most State and local taxes are
deductible, either on Form 1040F as items of
farm expense or on Form 1040 as personal
taxes paid by the farmer. Property taxes on
the farm land, machinery, livestock, and other
production items are deductible as farm ex-
penses. The part of the property tax that ap-
plies to the dwelling, and household or personal
effects, is a personal, not a business expense,
and is entered directly on Form 1040. As will
be pointed out later, this distinction is very
important now that the return includes a com-
putation of victory-tax liability. Special taxes
and assessments, such as levee, drainage, and
certain irrigation taxes, are not deductible if
they tend to increase the value of the property
assessed. Federal income taxes, estate, inherit-
ance, and similar taxes also are not deductible.
Taxes, such as those on retail sales, applying to
items used in the farm business may be consid-
ered as part of the cost of the items. Taxes on
gasoline used in operating vehicles as part of
the farm business operations are deductible as
business expenses. State and local retail-sales.
taxes.paid in connection with the farmer's per-
sonal and family expenditures are deductible
on Form 1040 whenever the tax has been sepa-
rately stated, and paid by the purchaser.
Insurance:
Insurance paid in connection with farm opera-
tions is deductible. This will include all fire
and similar insurance on buildings, machinery,
and crops, but not insurance on the farm dwell-
ing or on personal and household effects.
Interest:
Interest paid on obligations, such as mort-
gages and notes, arising out of the farm busi-
ness may be deducted as a business expense.
Most other interest paid is a personal item and
is entered directly on Form 1040.
Rent:
Rent paid in cash is deductible, but rent paid
in the form of crops is not deductible, although
the expenses incurred in raising the crops may
be deducted.
Tools, machinery, and equipment:
The cost of small tools and items of short
life used in the business may be deducted as
expenses. Automobile operating expenses, re-
pairs and maintenance, and depreciation may be
deducted if the vehicle is used entirely for the
farm business but if the vehicle is also used
for personal travel, the expense must be divided
and only that portion corresponding to the rela-
tive use in the business is deductible as an ex-
pense. The amounts expended for automobiles,
farm machinery, farm buildings, and other
equipment of a permanent nature are not deduc-
tible as expenses, because such expenditures are
regarded as investment of capital which is re-

w 9




..... ..... .... ad.:.Am:.
turned to the owner through depr...iti...
ances prorated over the usd1 bfrns
property. .. ..
Depreciation: i if r
", .. .... ..I... ....
Depreciation is a deduction SrOf i
which is considered to represent p
particular item that was usedi
the income for the year. A fMaiii
ance for depreciation with respect
buildings (except the farmer's awn Tl^0
farm machinery, automobiles (in p ...... ..
their use strictly for farm opera
other physical property may dbe .1
There may also be deducted a eaenae: '
lowance for depreciation of livestock 4Mqor
for work, breeding, or dairy purpose, if
animals are carried in a "capital" aceoutfit
the animals are carried in the "invnir ;"b '
depreciation can be claimed as a sepa&.te i.. H
The amount of depreciation in a given 3
depends upon the "useful life of the vpefl'
The period of usefulness varies great ib g
different kinds of property. The taxpayer:.:
establish his own tentative plan o de' t
'allowances but once it is bacceptedb te
Bureau of Internal Revenue he will be exp ed
to use this plan thereafter. Thus, it oflt .I
be advisable for the individual farmer to dl-
cuss his depreciation problem with the eollnt
Preparing a depreciation claim for twhe s:
income-tax return requires especial career.'
cause the general plan adopted at thi ime T
must be used in determining depreeU.h.a
succeeding years unless special Lustae.
warrant a change. In any event, as a ba&'l o*
a consistent depreciation plan and m evi6SMM
Sin support of annual claims for depreciStiOs S
farmer will do well to prepare a list of depre
able property. Besides identifying the : s
of property, the list may properly show I&
facts as the date each item was acquired',&t&|
cost, the depreciation allowed or allowable i
previous years, the remaining cost to 'be
covered, and the depreciation allowable t
year. These facts are useful in themselves
once set up, the list may be used year 5
year. :
For any farmer's full list of property tie
depreciation sum may vary from year to i,
depending on when and how many itemsnEg
added or disposed of during the year. .
The sum of the expense and depreal
items constitutes the deduction from gr-
profits for arriving at a figure for stetarb
profit. This net-farm-proflt figure' 1I0.3
farmer's personal income from his farm ope
tions, the amount which he enters onP Fori 4
Nonfarm Receipts amd Expeadiw_ a
The desirability of records of nonfarm ,
sonal and family receipts and expenditure
distinct from farm business records, 1Itei1:L
overlooked. For many farm people the p
items are so small or so scattered through
year that they may be difficult to rec rd
substantiate unless some systematically kept
10





record is available. Where the items are large
it may be even more important to have a record.
One item of personal income that will mean
more to many farmers now than in the past is
compensation for work done off the farm. This
will be a substantial sum for many who have
been working in industrial or commercial estab-
lishments for extended periods. Other items
of personal income that must be reported in-
elude interest on savings accounts, dividends on
investments, and other miscellaneous kinds of
income. Earnings from personal services of
minor children must be included with the in-
come of the parents for tax purposes unless
under the laws of the State the earnings of the
minor belong to the minor. If a minor has in-
come of his own from property in his own name
or held in trust for him, a separate return
must be filed if he has gross income of $500
or more, if single, or $624 or more, if married.
Gains or losses arising from the sale or ex-
change of "capital assets" must be shown on
the return. Gain or loss from a "capital asset"
receives special treatment depending on the
period during which it was held. Under present
law, 100 percent of the gain or loss must be
reported if the capital asset has been held for
6 months or less. Only 50 percent of the gain
or loss is taken into account if the capital asset
has been held for more than 6 months. Any
profit or loss from the sale of depreciable prop-
erty and land used in the trade or business of
the taxpayer and held more than 6 months is
given special treatment. Thus if all or part of
the farm has been sold, it would be well to dis-
cuss with the collector the question of handling
the gain or loss.

Income Tax Net Income
The introduction of the victory tax means
that each taxpayer now must determine sepa-
rately "income tax net income" and "victory
tax net income." The general rule in comput-
ing income tax net income is that an individual
may not deduct personal living or family ex-
penses except certain extraordinary medical
expenses. But certain items can be deducted
if their amount can be established. A few have
been mentioned in connection with similar
business items. One example relates to taxes
paid. That part of the property tax that is ap-
plicable to the farm residence or nonfarm per-
sonal property is a deductible personal expense.
State and local retail-sales taxes on personal
and family-living items are deductible to the ex-
tent that they are separately stated and paid
by the purchaser. Federal taxes that may be
deducted are those on admissions, club dues,
telephone and telegraph services, safe deposit
boxes, transportation of persons and property,
use of motor vehicle or boat, and documents.
In no case should a tax expenditure be claimed
as a personal deduction if it already has been
included in business expenses.
Contributions and gifts to charitable, reli-
gious, educational, and certain other organize..
11








but the total deduction is Iinitd:t
of the net income computed .w...t.......
of such deduction. '
Amounts paid as interest On
connected with the farm busheii l
except where the indebtedness .nse' '
tion with the purchase of c hrtl
securities; also deductible are ls
debts. .... .
The deductibility of certain
medical and dental expenses wus i
the Revenue Act of 1942. Med. ......
fined in the law to include "amoa6i
the diagnosis, cure, mitigation,
prevention of disease, or for the u
affecting any structure or function f
(including amounts paid for aden r
insurance)." There may be dedud
income as much of such expenses as
percent of net income computed without
fit of this deduction, with a maximum a
tion of $2,500 for a joint return of sban fl
wife or return of the head of -- !::..
$1,250 for other individuals. .
Income-tax net income then is te tS:ii.
the personal-income items, including t.h
profit from farming, minus the sum of the 1!
mitted personal deductions. The gSa41 .
surtaxes, beginning with 13 p erue t i,
net income minus the personal ee- Miit :
credit for dependents. The normal taziii
percent applies to the net income rebtW
the personal exemption, the credit for d'
ents, the earned-income credit, and the t e:St t
of interest on certain United States obbgsacie.
Victory Tax Net Inch m
The victory tax net income for farmer ?:'i
have no income from nonfarm sources w..i ....
essentially the net profit from farm psnt i
It will be larger than income-tax net '
because most of the personal items, such a:is
tributions, personal taxes, interest on
debt, and the like, are not dod
the victory tax few deductions other thia .
that appear in the farm-business smHmaaitt
permitted.
This emphasizes the importance of
separate in the accounts those items w
personal and those which are business..
particularly desirable to give attetionB t-
bursements that must be divided between.
two classes. One example that is an
many States is the State retail sales ta
on most purchases. That part of such a '.
tax that applies to items purchased in
tion with the farm business may be
as a business expense or considered as
the cost of such items. No sales taxes, ho......
that are paid in connection with persaotl::l,
12




Family expenditures are deductible in comput-
ing victory tax net income, although they are
deductible in computing income tax net income.
If items of this sort are not clearly identified
in a record of some kind it will be difficult to
make a correct tax return.
Victory tax net income for most farmers
will be the sum of the personal-income items,
including the net profit from farming, but ex-
Seluding capital gains or losses. The victory
tax of 5 percent applies to victory tax net in-
come minus the specific exemption of $624.
In case of a joint return on which income is
reported for both husband and wife the specific
exemption is $1,248, unless the victory tax net
income of one spouse is less than $624. In this
latter case the total exemption permitted on
the return is limited to $624 plus the victory tax
net income of the spouse having the smaller in-
come. A post-war credit or refund amounting
to 25 percent of the victory tax for single per-
sons and 40 percent for married persons, plus 2
percent for each dependent is provided for in
the law. The credit may not exceed $500 for a
single person, $1,000 for a married couple, and
$100 for each dependent. The amount of vic-
tory tax actually paid on 1943 income can be
reduced if the post-war credit is absorbed cur-
rently by credits allowed for payments for life
insurance, debt reduction, or war bonds.

Pay-As-You-Go Provisions
The Current Tax Payment Act of 1943 pro-
vided certain significant changes in income tax
procedure. The major object of this law is to
provide that payment of income taxes be timed
to agree more closely with the period during
which the income is received. For taxpayers
whose main source of income is wages and
salaries, this is accomplished by providing for
withholding or collecting at the source most of
their tax liability. Collection at the source,
however, is not of special interest to farmers
except as they may be employed off the farm
by industrial or commercial employers who are
required to withhold taxes from wages earned
by their employees. Farmers are not required
to withhold any taxes from payments to their
hired help as wages paid to agricultural labor
are specifically exempt from the withholding
provisions.
To enable the self-employed, and other tax-
payers whose liability is not met by withhold-
ings, to pay their income taxes currently the
law provides for the filing of "declarations of
estimated tax." For taxpayers generally, this
declaration for 1943 was due on or before Sep-
tember 15, 1943, but for those who receive 80
percent or more of their income from farming
a special deadline of December 15 is provided
in the law. (Wage workers on farms are not
farmers for this purpose.) Beginning in 1944,
the declarations for taxpayers generally are
due on March 15, while farmers have until
December 15 each year.













determined on a return to .I
March 15, 1944. At this
is made for any difference
of incomplete information oaJ..
ness at the time the estimate I.,I
For most taxpayers the taxm.
1944 will be the equivalent o .
tax, whichever is the laIsrM
of the smaller. (If the .
is between $50 and f66.67, a ...M
If less than $50, -!l is.
that must be paid in
amount figured in. this .
paid during 1943 in cn
turn for 1942, (2) a d.
tax for 1943, and (3) any -..
nonfarm income. Incidentally
may postpone payment of
percent referred to above Unti
if he wishes. An examinations.
reveal that the task of the.;
adequate records is not anI,
was the reporting in the

It is clear that a "wrjt .
and expenditures is hghly
farmer when h is preparing ..... I.
turns. It is i ded that a
accounts, files f receipts and
ever kind, shall be sufficient
tax returns. Generally, any "
the taxpayer's needs will s
tor, provided that effeetive .
available and the taxpayer
the essential "reality of cil
made. Books as such are ..t
anything, but in connection wi
dence which the book entri
describe, account books are'"
The usefulness of account
extends far beyond any.-
as income-tax reporting
farm business required in orl|
is the best of several alto |
year, method of determim .
tion rates, etc., naturally 1"
the records for guidance on-
management. Better farqift
better off will be the logic .
accounts are used to analy. e
results of farm operations.. ..
..... : *": ERS iiiTY ,
... : : .. -...: .:

,, ,, ,,, ,: ii
3.1*. UUVREEEEMBT PESTlES OfltScuU
UNIVERSITY

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