Top Tips for Farm Recordkeeping
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We recently interviewed Kenny Nearhoof, a farm accounting officer for AgChoice Farm Credit. AgChoice’s farm accounting team provides a number of services to clients including accounting, records, payroll and taxes. Kenny discussed farm records and offered practical recordkeeping tips.
Let’s start with some basics about farm records. What’s included when we talk about ‘farm recordkeeping,’ and why is keeping good records important?
I wonder how many people just rolled their eyes at this subject because records do not make anybody excited. It's a necessary evil for any business and a farm operation is what we're going to focus on today. It really is necessary and there has to be an organized approach to it or it's going to make your life even worse, even if you didn't do them at all. You have to have an organized approach.
You want to make sure that wherever you're keeping them, how you're keeping them, that you're providing data in your record system that is going to help the business' profitability and allows you to monitor the business over time. Actually more than anything for accountants in my position, what tells your farm story is your records because they're going to help me help you do your tax return and they're going to help us make financial decisions and help plan for your business in the future. It also is going to allow a reference for all sorts of things in the past that we want to go back to and make sure we understand or use that as a reference point for any future planning.
I guess you're probably thinking, well, what does farm records consist of? That's a really big area. It’s anything that's really a go-to document that's going to help you with having information, understanding where you're spending your money and tracking items that are directly involved with your business. Farm records, a lot of people are going to say, "Well, that's income items, that's expense items." Yes, that's certainly true, and here are some examples of those.
First are expense receipts, such as sales slips, loan documents, settlement statements, bank statements, livestock, crop, labor type records. DHI reports are also considered farm records you need to keep track of. Labor records are very important for certainly doing workman's comp audits.
Financial statements, including a balance sheet that you should be doing once a year for basically a health checkup on your business. And income statements, at least, monthly or quarterly to see how you're doing.
You also have canceled checks are very helpful to have, pay stubs, credit card statements. We have so much stuff that's mixed these days on credit card statements. We have so many to sort through. Even inventory records.
If you're in the business of doing business for people, you're going to have a list of all your receivables. Who owes you money? Who's your payables? Who do you owe money? Contracts and sales agreements are all examples.
Now that we know the ‘why’, let’s focus on the ‘how.’ As a farm accountant, I’m sure you see many differences in how farms keep records. What suggestions to you have for how farmers keep records?
Everybody has a different system, and a lot of times we're working with multiple generations and somebody has learned from the prior generation and that's the way they do it and that's the way they're always going to do it. I can really work with anybody as long as they're consistent and they're not messy.
Good recordkeeping starts with that general idea of what is your chart of accounts? What is the foundation for which accounts are you using? This helps determine what level of detail do you want in your records. We can have high level detail or we can have subcategories.
One example is repairs. Let’s break that down. Some are real estate, some are buildings, some are equipment, some are rental houses. That's the type of breakdown that I would say when you look at how many levels you have in your chart of accounts.
At the end of the day, the tax accountant can wrap it all up and it's helping them with accurate reporting, certainly to keep yourself in good graces with the IRS. And you also want them to help you make timely and accurate business decisions.
If you have a little bit of trouble getting started with the chart of accounts, I always say for a farm to go to the Schedule F from your tax return and look how they have all the expenses listed out and the income items and we'll go from there.
When it comes to choosing the right system, there are a lot of options out there. It can be extremely intimidating.
There's software choices that allow you to actually print the checks out. That's one of the features that many people with expanding businesses are really interested in – many people don’t want to manually enter information and then writing checks separate. Options are QuickBooks or CenterPoint, an agricultural specific software offered by Red Wing that AgChoice works with internally. Even just using good old Microsoft Excel can sometimes be the simplest thing to do and make everybody's life pretty simple and happy.
But some of the best records I've seen, and I'm going to tell people don't even bother wasting your time with the computer for your size or how good you're organized, are paper records. It could be checkbook registers, a farm record book from AgChoice or Extension. Even ledger sheets still have a place within the systems of keeping records on most farms these days. You have to find what's going to fit you best and provides you the most input out of it to make management decisions.
When it comes to software systems, you have a lot of customization that you can do. You can work with an accountant or you can figure it out on your own.
For QuickBooks users specifically, our accounting team created tutorials that many people have found very helpful. Check them out on our library at AgChoice.com/QuickBooks.
Farm records are a lot to keep track of, and likely you have a list of common errors in farm recordkeeping. What are your top tips for farmers related to recordkeeping?
Where do I start? Very good question. I'm glad I get to get on my soap box a little bit about this, Raechel and I'm going to talk about some things I want everybody to make sure they do right.
First and foremost, if you're writing it down and you want an accountant to work with it or you're going to make a management decision on it, we need to determine is this a business-related expense, or is it not? You should keep everything separated personal versus farm/business-related. Good examples might be your electric, telephone or internet bills that technically in most cases, unless you have a business office or property completely separate with your house, some of it's going to be personal use. We need to have some type of allocation percentage that we might say is personal. We can do that at the time of tax planning and tax preparation, basically to make sure that in good faith, we're doing that.
Items that are truly personal should be broken out if there's not really a percentage allocation. That might be for personal wills or certainly improvements to your own personal house. One of those tricky things we always run into is how about a farm truck? How much is personal and how much is not? We could make a whole other podcast on that, so I'll keep moving on. But I think you get the idea of what I'm trying to say there.
We also want to track specific purchases a little bit more than others. For the most part, you want to keep all your invoices, all your receipts and especially on larger purchases. This gives myself and other accountants that opportunity to say, "Hey, we might want to do a couple interesting things here or help you with depreciation." One of those being, if you have some really large repairs on stuff that is out of the ordinary, we might decide to depreciate that versus expense it in certain years. We like to have the ability to find more detail.
You want to use bank statements as much as possible to reconcile your checkbook, especially if you're a business that's more than just a sole proprietor because we're going to be doing a balance sheet and reconciling cash in a partnership return and other entities.
Itemized expenses on your credit card statement. There's so much that's mixed sometimes, we need to break those out.
Actually, when it comes to taxes, we also need to understand your inventory records as well, because animals that are raised and sold on the farm are treated totally different than those that are purchased on the farm so we need to have a breakdown of what was raised and how old they are and what was purchased. Then we can track those purchases on your depreciation schedule.
Last on my list is about 1099 reporting. It's very important that you do this right and you're giving out 1099s to your vendors that you're paying them over $600 a year and they're an independent contractor or they're a landlord. Those are the two biggest ones we focus on. You want to make sure you get everything recorded correctly and have those totals by the end of the year so your 1099s can be prepared by the end of January and those are sent out. One thing in particular, most everybody needs one except when you're a corporation, but veterinarians and attorneys technically should always get a 1099 too. If you're having trouble getting 1099 information, basically Social Security numbers and correct address and name, you can use the W-9 form to formally request that from your vendors that you're working with to get their information.
All of this comes back to organization, consistency and following a chart of accounts that you've put together and tailoring it to make sure it's providing all of the information you want it to.
As we wrap up, is there anything else you’d like to share with our listeners about farm recordkeeping?
Yes, the most important thing, do it consistently and don't just leave it to do once a month or once a quarter. You need to do something once a week.
If you're lucky enough to go on vacation or have other things to do, you need to get back at it as soon as you return. It just becomes more miserable the longer you put it off. Keep your hand in it every week in a business.
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