Making tax time easier

I'm just finishing up the annual tax-related review, and I thought I'd talk a little about what I do to make things a little easier. 

The first thing that I do is get rid of cash, for the most part.  Cash that I pay out; we still accept cash!  The reason that I do that is that it's the hardest thing for me to track.  So for most of the purchases, certainly all of the major purchases, it's a check or a credit card.  

Checks are actually, for me, a little better.  You can make a note on them related to what you're purchasing, and this can remind you a year later when you're scratching your head.... "What did I buy on February 12th for $173.33?"

Credit cards are useful for those items that break, or may need to be returned.  Some credit cards offer extended warranty periods for stuff you buy; and offer you an alternative if there is some issue with returning an item that isn't working out for whatever reason.  So for items that I think are likely to break, or need to be returned, or need to be purchased online because I can't get whatever it is locally, a credit card is my payment method of choice. 

I also collect all of the paper associated with purchases.  I usually don't need it, but in the event of an IRS audit or question, it's very nice to be able to produce that feed bill to back up the check.  Regulations say you're supposed to keep that stuff for at least 3 years, and more like 7 years if you're paranoid.  And I am. 

Now all of this creates a paper trail, and that will allow a taxing authority to know more about you, and your finances.  That's absolutely the case. 

But it's also the case that the USDA offers very attractive financing for farmers, and various lenders, like Farm Credit Services, and having your income be above the table might turn out to be very handy if you need a land or operating loan.  Yes, you can avoid some taxes by going all cash, and some folks do, but there are people who would have otherwise been able to buy a farm who were prevented from doing it by not filing the appropriate tax forms.  (fourth paragraph down in that story)

The USDA is often the lender of last resort for farmers, and the government wants to see you paying your taxes.  And lenders will want to see your revenue and incomes as part of what they expect when you buy land. 

In my own experience I had to provide tax returns, profit and loss statements and bank account statements for the past 3 years for my entire operation to buy the new farm.   If I hadn't been doing all of the right things it would have made it much more difficult to qualify for financing. 

Once you've got your purchase paper trail down, I find it very useful to use bookkeeping software to actually do the books.  But I suggest you go an extra step if you're going to be doing the books for a farm.  Find a CPA that does the taxes for farms, and buy an hour or two of their time.  Have them recommend what software you use, and how you should use it.   When you go back to the CPA to have your taxes done (did I say that I recommend having your taxes done by a professional?) you will find that the process is much simpler and much cheaper than if you toss a box of paper at the guy. 

A CPA that knows farm operations will be up to date on farm regulations and taxes, know where problem areas are, and can give you advice on handling your finances in a way that minimizes your taxes, and I have found that a good CPA more than pays for whatever they charge you.  For a couple of hours of consultation I'd expect a few hundred dollars will cover it.  Good advice is never free. 

Finally, for my own farm and business, I've found that having one day a month when I sit down and review the books and receipts and reconcile the accounts is a formality that works for me.  I do have a number of people working for me, and to make sure that I know exactly what's spent between account reviews, I sign every check that goes out the door.   Yes, it's a nuisance, but having a clear check-and-balance and everyone knowing that I keep careful track of the finances makes sure that there's fewer temptations.  

Finally, having a basic grasp of accounting principles is something that I would say every business owner needs, for self-defense if nothing else.  While the CPA does prepare the tax return, it's your signature on the bottom line.  If you don't understand it and it's wrong, you won't get any pity.   I'd suggest a book like this one as a good start. 

Having good financial information will help you a great deal, no matter what sort of business you're in.  For a game of pennies it's a necessity.