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 -- Bureau of Agricultural Economics
United States -- Extension Service
s.n. ( Washington, D.C. )
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Burea,u of AgricilturJl Econoics
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Washington, D. C.
December 19'l

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1. Who must file a return?

A single person with a gross income of at least $750.

A married person living with husband or wife, or a heed of a
family with a gross income of at lest $1,500.

Gross income includes all the receiT.ts of the farmer from both
farm and nonfarm sources and also includes the value of mer-
chandise received in e::change for farm products.

A return must be filed if the gross income reaches the specified
amount even though subsequent deductions result in no tax being

2. When is the return due?

Two and one-half months after thie close of the year covered by
the return. This will be !arci 15 for most farmers who will
use the calendar year. Some faunmers rill find it easier to think
in terms of a "fr-r-i ye,-r." The regulations permit the use of
almost any l2-mjnth period that fits che needs of the business.
But once a fiscal period is established it must be used for all
succeeding annual returns unless special p3rmission to make a
change is obtained fror. the Comnissioner of Internal Revenue.

3. Where can you get income tax blanks?

The Individual Income Tax Return (Form 10'0) and the Schedule
of Farm Income and Expenses (Form 1C'4OF) can be obtained from
acny collector of internal revenue. In addition they are usually
available at banks, post offices and similar places.

4. How can you ma'ke your return?

If a farmer h'as a booki-!eep-in system ne probably will find all
the required infcr-ntionr. u-nder the variou-s headings in his beook.

If the farmer has not ">.-,*-..t bno.:s" he vill need to work up the
best statement he car. fc"r iLizi ics of inzoome ar.d expense. He
probably will find that he h".s v.. rious meLiorrnda bills and
statements, cancelled checks and. the- li!ke that will help fix
the exact rmo'mntr of nr.ny ite-ms. The burden of Froof is upon
the individual if the collecrnr ralse3 a-y 0'.uCStilns about his
return. Any good farm account boo.: .ill be vPe-- el".ful in
suggesting various items that .ay hnv,.j entered into inco-e and
eypnenso. The same book actually used next year will simplify
the wv-ork that has given concern this year.


The purpose of this statement on Far.:m Bookkceeping, and the Fed-
ern.1 Income Tax is to help farmers 'nieL'st,-nd soii of the bookkeeping
requirements for ._.aking f,-docuate Federal income tax retuiirns is
not a substitute for careful reading of ths Tnstructions printed onr.
the income tax blanks nor is it a comnilete substitute for coniultration
with cclicctors of internal revenue. However, if tMis statement ic
carefull.yr studied andL its suggestions are folloi cd, ncny farmers will
find they themselves can fill out the necessary income tax forr,.
Should consultation still be necss-ar;-, fqrmer3 Wil!_ be b'oetter able
to discuss their special pr' with collectcrsof internal revenue.

FARM B00Io:c N:.p Ah-D 'IS r RAl IITCA:.TH TA !/

Perhaps as many as a million farmers, many of wnom have never kept
any formal b-asiness record or accounts, are facic. for the first time
with the task of rre-oerin.g Fedoral income to'.x return. Tk-ese farmers
will need to ask themselves many q{uetions ?bout their bus inos-s opera-
tions as tacy try to determnin3- the orrornLr -A fajre., to enter on the tax
forms. An- f'.'rner who has bpen uapinp corsistvc.ntly, soiMe aerro-rintc
method of bookkeeping Ps those recommended1 b. the ren-.rtrent of
Agriculture or the various Stoite colleges of a,-r!.cult-aro has The reans
for su.p .ying the informr-..ticn required b,; the uLt..-L of In7cr-Lal PevCnue.
Even those -ho heve not kept- books usually fi.iar that they have various
records and statements with respect to receip-cF nr.d eraPnjitares and can
remember the other necessary items if they cystemnrtically search tncir

Some system of aeconr-ts is invaluable for meaic.n end supporting
income t,-N returns. The ?irepru of Inte-nal Re-enxi.e has never insisted
that taxpayers kesp books in any special way of its devising. It is
administratively required, however, that the indi-idual items or classes
of items be a6.rranged and treated in prescribed waos .n the in,-mome tax
form.s. 'he treatment of some items .lay be quite different from. that used
in moet farm account books. But, anyone who h,-s written records, alrost
regardless of form, is in particularly alovantae-ous -.'sition for making
returns and explaining his figures should any questions of interpretation
later arise.

A bookkeeping system acquired now will be of no service in supply-
ing documentary evidence in supTort at l%.Ll income ta: returns. It can,
however, be used to good advantage in assembling the items of information

1/ This statement has the approval of the Bureau of Internal Revenue.


needed to vork un a statenent of 1941 inz-omi and expenses. In any event,
now is not too soon to start tho record for J942 oneratior.s, which will
be the basis for the income tax return to be filed in 1343.

The forms to be used in 1942 for reporting income tax liability
for the year 1954. will be available e-ly iL Jauary. Copies may be
obtained from collectors of internal revenue, local banks, and post
offices. Farmers generally will need to fill out Form 1040F which sun-
narizeq the financial results of their farm operations for transfer to
Form 1040, which also includes additional items of income and deductions
which relate to the farmers' personal financial operations. The discus-
sion which follows deal principally with the requirements for using
farm accounts for developing the "net farm profit" on Fom 10o40F.

Most farmers will find it more feasible to r.ko their returns on
a "cash basis" rather than on an "accrual basis," which involves very
complete sets of -c'-ounts. Farners who hav3 kept such complete accounts
and w-ish tc report on an rccraal basis m.oa find it r-dvisable to discuss
their special problems with the collector of internal revenue. In gen-
eral, this statement on farm bookkeeping and the Federal income tax
refers chiefly to the rcash basis of reportinC, although the interpreta-
tions of the proper use of the v-.rious items aro the same if the report
is made on an accrual basis.

F"rn Ircome

An adequate; set of books reflects income for a period natural to
the farm business. For irost :.Laiers a calendar y.,ear fits personal habits
and interests as well as any other. If for special reasons a different
farm (fiscal) year is needed, arrangements may be nade with t!'e Commis-
sioner of Internal Revenue.

Farm income for tax purposes is 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 cr rrior ;ears, (2) the same for crons and produce raised and sold,
(3) the rrofitz from tn- sale of any livestock or other items which were
purchased, ani (t) other farm income.

Income frin li-:est-ck raised:

For livestock : r-i-e& onr the f'rm the "income" is the total
receipts from the sale c h--:' t rstr.:- If livestock is traded
for merchandise cr other -rn-oert- the income must include the
value of the pronert;y received i:. e:.cnang.:. On Form 1C0OF the
number or quantities s'ld and thc i.-come front evch 'item are to
be shown. This nrocedire places the entire sale valuai of animals
raised on the far. as income in the year of sx Ic and ignores the
v;ilue added dnring the year to animals not s.'i.d B;- contrast on
an accrual basis the value added to a -iven animal would be dis-
tri'mited over several years through changes in the in-rntory
vnlue of the animal as it matured.

Income from cro-s end produce raised:

The pro-oce'ire for reporting income from crops and produce
includingr livestock, dairy and poultry products) raised it sim-
ilar to that for livestock.. Q.iantities and cash receipts (cr
value of 1mods receive-d in exchange) are entered on separate
lines for each ite,. Here again, if crops are stored on the
farm beyond t1e end of the year (or fiscal period) when raised,
thi income falls in the year warn the crcp is sold.

If a loan is obtained from the Commodity Credit Corpora-
tion the farmer may elect to include it in his income in the
year in which the loan is received instead of in the year lhen
the commodity is finally sold. Whichever method is elected
must be followed in succeeding years unles! special erm-Lission-
to make a change is obtained from the Commissioner.

Profits from the sale of livestock or products purchased:

To arrive at the profit fi1r'r, to be included in income,
Form O14OF calls for the following information in addition to
the description of the animal or product: (1) The iate acquired,
(2) the sale price, (3) the coct, (W) the doprecintion allowed
or allowable for previous yLars, and (5) the profit. The profit
is the amount of the Ex'uss cf the sales onrice over the3 amount
representing the depreciated cost, that is, tnc orignal cost
l'is the depreciation allowed (tL-i not less than the amount
allowable). If sore of the lirestoc'- nrrketed from the farm
were raised and sore pre-.-iousti ,- c ::. asod it ,way be dTesirable
to disca-s with the collector ui;b;tions invol,-ed in segregti-Lng
the two cro'Lps. TiLdividuel identification :a.y perhaps le waived
for snail animals like chic.jen ind. lrabs, eand not wa-ivcd in the
case of animals of hi-h s-cecif'c vE.-lue.

Another question that may need discLsslon .ith the collec-
tor is the matter of a depreciation metnol. This is important
not only in the case of breedin animals ar.d ths like which were
purchased anid subsequently sole, but also in the ca'm of draft
animals and property in -enera. as will be mentioned later.

Other farm income:

Values or amounts are to be reported for any other items
of income arising from the far=i business. This will include suvh
income items as: Payments fro.- the AAA, merchandise received
for produce, machine work, hire of tcans, breeding fees, rent
received in crop shares, work off fnrm, forest products, ar.d
any other like receipts. In general anything of va-lue receiwcd
instead of cash muct be treated as income to the extent of its
market value.

Hail or fire insursnco receipts on account of rnwving nrois
injured or destroyed should be included in crors incrrie to tno
amount received in cash or the cash equivalent if recei-red in kind.

The vplue of home-grown farm pro'uco w'iich is constted by
the farmer and his family need not be roportpd as income, but
erocnses incurred in raising produce thur. consumedi m' st not be
claimed as deductions. Separating such expense iteems mLy crr-e
so0e difficulty but a reasonable estimate should be if the
produce consumed on the farm is nrt reported. as income. If i;
is reported &sS income no segregation of e,-ense items is neces-
sary on that account.

Income of ninors should be included with That of the
parent for income tax T.purose3 unless (1) the r:irrr h.s s:uffi-
cient income to be required to file n return n:i. (2) the laws
of the State provide that earnings of a minor Sbe? ong to the minor.

"Other Farm Incon'," &o-s not inclulc any receipts arisin;.
from the sale of the farm or an;, pa-t of it. Such tranzactio.s
arc considered not nart of thz farm business, but personal an-d
are taken cares of directly on Fcrr. 1C'40.

Having arrived at a fi,-ure for the ,_jros .roitn of tleS
farm business, the next stern .s a determiination of ;h. allowoble
deductions for ex-enses and. dnpr:cigtion in Crder to arrive at
a "net farm profit."

Farm Errenses

The farm expenses that are proper bu.sinoss deductiinn are often
difficult to remember unless cre has some kind of rncr:t'. Kany of themn
are paid out in relatively small amounts on n-.jrner'us o. :a.tiom If
entered in a book of accounts, preparin" entries fTr Firm 1-OC'F is lar.-8,ly
a matter of classifying and totaling. In general, rlis'urseerts. necessary
in the production operations of the farm are allnwable detuctions in arriv-
ing at the net farm profit. AKso deductible a-re certain depreciation
items as will be -ointed out.

Labor hired:

Wages peid fnr fr.rm work done are included, but no allow-
ance for the value of the work: of the farmer, his wifo, or depond-
ent minor children is deductible unless the amount deducted is
reported. as income. Boart. fuirnished to hired labor is deductible
only to the extent that it is purchased, thug erucliding the vsl:e
of food raised on the farm: and used in bor.rdlIng leaorcrs. The
value of rations purchased and furnished t leabcrers :.rnd share-
croppers is deductible as jart of the labor 'nypcns?. Hired ho-use-
holld work is deductible only to the extent that the s-rvices are
used in boarrding or other-isi c'iring for farm laborers, aot in--
cludinFg the farmcr's own household.


Production supplies:

The cost of feed, seed., fertilizers, line, manures and all
similar supplies purchased and used in the production of crops
and livestock are deductible expense items. The value of seed,
feed, and manure produced and used on the farm is not deductible.


In general most State and local taxes are deductible either
on Form lO4oF as items of farm expense or on Form 10OhO as personal
taxes paid by the farmer. As the technical form in which these
taxes are levied may determine whether or not some of the taxes in
the latter class are deductible it may be advisable to discuss the
matter of taxes in a given State witn the collector. Property
taxes on the farm land, machinery, livestock and other production
items are deductible as farm expenses. That portion of the property
tax applying to the dwelling, and household, or personal effects is
a pers not a business expense, and is entered directly on the
Form 1040. 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, inheritance and similar taxes also are not deductible.
Taxes such as retail sales taxes applying to items used in produc-
tion may be considered as part of the cost. Taxes on gasoline
used in operating vehicles as part of the farm business operations
are deductible as business expenses. Sales and gasoline taxes
paid in connection with the farmer's personal expenditures may or
may not be deductible, depending on the State law. Consult the
collector of internal revenue. In any event, some sort of record
is essential to make it possible easily to substantiate such


Insurance paid in connection with farm operations is deduc-
tible. This will include all fire and similar insurance on build-
ings, machinery, and crops, but not insurance on the farm dwelling
or personal and household effects.


Interest paid on obligations, such as mortgages and notes,
arising out of the farm business may be deducted as a business
expense. Most other interest paid is a personal item and is
entered directly on Form l040.


Rent paid in cash is deductible, but rent paid in the form
of creps is not deductible, although the expenses incurred in
raising the crops may be deducted.


Tools, machinery, and equipment:

The cost of small tnols and items of short life used in the
business may be deducted as expenses. Au.toenbile operating ex-
penses, repairs, and maintenance, and depreciation may be ded'icted
if used entirely fmr 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 relative use in the business is de-
ductible as an expense. The amounts expended fnr automobiles, fa.rm
machinery, farm buildings, and other equipment ef a permanent nature
are nit deductible as expenses as such expenditures are regarded as
investment nf capital which is returned tn the owner through de-
preciation allowances nrnrated over the useful life of the property.


De-nreciatinn is a deduction from gross profits which is con-
sidered. to represent that part of the particular item that was
used up in producing the income for the year. A reasonable allow-
ance fnr depreciation with respect to farm buildings (except the
farmer's own dwelling), farm machinery, automobiles, in proportion
to their use strictly fnr farm operations, and other physical
property may be all.nwed as a deduction. There may also be deducted
a reasonable. all-sance f.-r depreciation of.livestock acquired for
work, breeding mr dairy purposes, if the report is on a cash basis.
Where an accrual basis is used, these latter items will be re-
flected through the inventory valuation.

The amount of dep-eciation in a given year depends upon the
"useful life mf the property." The period of usefulness varies
greatly among different kinds of property. The taxpayer may set
his own tentative rate nf depreciation, but after it is accepted
by the Bureau of Interrnal Revenue he will b- er-pected to use this
rate for the entire. period of useful life of the item for which
it was established. Thus, it often will be advisable for the
individual farmer to discuss his depreciation problem with the

The preparation of the list of depreciable property and
establishing the depreciation rates warrant especial care in con-
nection with the first return filed b.;cause the same rates are
expected to be used throughout the life of the item. In order to
have a basis for considering the depreciation allowable for given
items the farmer will need to supoiy the following information
for Pach item:

1. Kind of property.
2. Date acquired.
3. Cost.
4. Estimr ted total useful life.
5. Remaining useful life.
6. Deprnciation allowed (&r allowable) in prior years.
7. Remaining cost to be recovered.
8. Depreciation allowable this year.

7 -

For any farmer's full list of property the depreciation
sum may vary from year to year, depending on when and how many
items are added or disposed of during the year.

The sum of the expense and depreciation items constitutes
the deduction from gross profits for arriving at a figure for net
farm profit. This net farm profit figure is entered cn Form 1040
as the farmer's persouel income from his farm operations.

The next step in completing the income tax return is to
enter on Form l10o any other items of personal income such as
savings account interest, dividends, and the like. Also entered
arc deductions, such as contributions, interest and taxrs net
connected with the farm business, bad debts, and other deductions
authorized by law. The final steps are to deduct from the taxable
net income, the personal exemption and credit for dependents, and
to compute the surtax; then to deduct in addition the earned income
credit and to compute the normal tax.

It is clear that a written record of receipts and expenses
is highly important to a farmer in connection with preparing his
income tay returns. The usefulness of booki-eeping, however, ex-
tends far beyond any single purpose such as this. Farmers who
have made a practice of ':eep-int books use their records in gliding
their decisions on questions of farm management. Bookkeeping
really worth doing grows in usefulness as the farmer uses it to
analyze the financial results of his farm operations.

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