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H&r block Publication 525 - Additional Material Prev  Up  Next   Home   More Online Publications

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H&r block 1. H&r block   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. H&r block 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. H&r block Tax records are not the only type of records you need to keep for your farming business. H&r block You should also keep records that measure your farm's financial performance. H&r block This publication only discusses tax records. H&r block 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. H&r block For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www. H&r block ffsc. H&r block org. H&r block For more information, contact Countryside Marketing, Inc. H&r block in the following manner. H&r block Call 262-253-6902. H&r block Send a fax to 262-253-6903. H&r block Write to: Farm Financial Standards Council N78 W14573 Appleton Ave. H&r block , #287 Menomonee Falls, WI 53051. H&r block 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. H&r block Benefits of Recordkeeping Everyone in business, including farmers, must keep appropriate records. H&r block Recordkeeping will help you do the following. H&r block Monitor the progress of your farming business. H&r block   You need records to monitor the progress of your farming business. H&r block Records can show whether your business is improving, which items are selling, or what changes you need to make. H&r block Records can help you make better decisions that may increase the likelihood of business success. H&r block Prepare your financial statements. H&r block   You need records to prepare accurate financial statements. H&r block These include income (profit and loss) statements and balance sheets. H&r block These statements can help you in dealing with your bank or creditors and help you to manage your farm business. H&r block Identify source of receipts. H&r block   You will receive money or property from many sources. H&r block Your records can identify the source of your receipts. H&r block You need this information to separate farm from nonfarm receipts and taxable from nontaxable income. H&r block Keep track of deductible expenses. H&r block   You may forget expenses when you prepare your tax return unless you record them when they occur. H&r block Prepare your tax returns. H&r block   You need records to prepare your tax return. H&r block For example, your records must support the income, expenses, and credits you report. H&r block Generally, these are the same records you use to monitor your farming business and prepare your financial statements. H&r block Support items reported on tax returns. H&r block   You must keep your business records available at all times for inspection by the IRS. H&r block If the IRS examines any of your tax returns, you may be asked to explain the items reported. H&r block A complete set of records will speed up the examination. H&r block Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. H&r block You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses. H&r block You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. H&r block See  chapter 2. H&r block If you are in more than one business, you should keep a complete and separate set of records for each business. H&r block A corporation should keep minutes of board of directors' meetings. H&r block Your recordkeeping system should include a summary of your business transactions. H&r block This summary is ordinarily made in accounting journals and ledgers. H&r block For example, they must show your gross income, as well as your deductions and credits. H&r block In addition, you must keep supporting documents. H&r block Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. H&r block These documents contain the information you need to record in your journals and ledgers. H&r block It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return. H&r block Keep them in an orderly fashion and in a safe place. H&r block For instance, organize them by year and type of income or expense. H&r block Electronic records. H&r block   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. H&r block 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. H&r block 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. H&r block The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. H&r block All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. H&r block Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. H&r block 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. H&r block You still have the responsibility of retaining any other books and records that are required to be retained. H&r block The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. H&r block This test is not considered an examination and the results must be shared with you. H&r block If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. H&r block 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. H&r block For details on electronic storage system requirements, see Rev. H&r block Proc. H&r block 97-22. H&r block You can find Rev. H&r block Proc. H&r block 97-22 on page 9 of Internal Revenue Bulletin 1997-13 at  www. H&r block irs. H&r block gov/pub/irs-irbs/irb97-13. H&r block pdf. H&r block Travel, transportation, entertainment, and gift expenses. H&r block   Specific recordkeeping rules apply to these expenses. H&r block For more information, see Publication 463. H&r block Employment taxes. H&r block   There are specific employment tax records you must keep. H&r block For a list, see Publication 51 (Circular A). H&r block Excise taxes. H&r block   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. H&r block Assets. H&r block   Assets are the property, such as machinery and equipment, you own and use in your business. H&r block You must keep records to verify certain information about your business assets. H&r block You need records to figure your annual depreciation deduction and the gain or (loss) when you sell the assets. H&r block Your records should show all the following. H&r block When and how you acquired the asset. H&r block Purchase price. H&r block Cost of any improvements. H&r block Section 179 deduction taken. H&r block Deductions taken for depreciation. H&r block Deductions taken for casualty losses, such as losses resulting from fires or storms. H&r block How you used the asset. H&r block When and how you disposed of the asset. H&r block Selling price. H&r block Expenses of sale. H&r block   The following are examples of records that may show this information. H&r block Purchase and sales invoices. H&r block Real estate closing statements. H&r block Canceled checks. H&r block Bank statements. H&r block Financial account statements as proof of payment. H&r block   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. H&r block These include account statements prepared for the financial institution by a third party. H&r block These account statements must be legible. H&r block The following table lists acceptable account statements. H&r block IF payment is by. H&r block . H&r block . H&r block THEN the statement must show the. H&r block . H&r block . H&r block Check Check number. H&r block Amount. H&r block Payee's name. H&r block Date the check amount was posted to the account by the financial institution. H&r block Electronic funds  transfer Amount transferred. H&r block Payee's name. H&r block Date the transfer was posted to the account by the financial institution. H&r block Credit card Amount charged. H&r block Payee's name. H&r block Transaction date. H&r block    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. H&r block You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. H&r block Tax returns. H&r block   Keep copies of your filed tax returns. H&r block They help in preparing future tax returns and making computations if you file an amended return. H&r block Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2. H&r block 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. H&r block 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. H&r block A period of limitations is the period of time after which no legal action can be brought. H&r block 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. H&r block However, certain records must be kept for a longer period of time, as discussed below. H&r block Employment taxes. H&r block   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. H&r block Assets. H&r block   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. H&r block 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. H&r block   You may need to keep records relating to the basis of property longer than the period of limitation. H&r block Keep those records as long as they are important in figuring the basis of the original or replacement property. H&r block 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. H&r block 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. H&r block For more information on basis, see chapter 6. H&r block Records for nontax purposes. H&r block   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. H&r block For example, your insurance company or creditors may require you to keep them longer than the IRS does. H&r block Prev  Up  Next   Home   More Online Publications