Last night I ‘did’ a webinar for the New Farmer Project about farm taxes. It was a concepts-based presentation, as opposed to a forms-based presentation. New Farmer Webinars
NOTE: IRS announced that the March 1 tax filing deadline for farmers who do not pay estimated taxes has been moved back to April 15, 2013. Farmers who do not make quarterly estimated tax payments usually must file federal income tax by March 1. But because Congress did not pass tax legislation until 2013, this deadline has been moved. To use the April 15 deadline for a farm return, the taxpayer must complete IRS Form 2210-F and check the ‘waiver’ box.
Farmers must file the farm return, Form 1040 Schedule F. This is where you list your farm income and farm expenses. The bottom line is profit. And that number is carried onto your Form 1040, which summarizes all of your personal sources of income, deductions, exemptions, and taxes already paid. The bottom line on this one is Taxes Due or Amount to be Refunded.
So, it takes a decent accounting system to record, and sort, the different types of income that your farm has produced for you. This includes profit, capital gains, and maybe some income from government farm programs. The same goes for expenses- you will have cash expenses- including stuff you bought on credit cards. You may be depreciating assets that you bought in the year that will last for several years, if so, use Form 4562, Depreciation to report this non-cash expense. The number from this form moves onto your Schedule F.
IRS has worked with Extension people across the country for nearly 60 years to make sure that Publication 225 fits the agriculture that is happening in the country. I have served on this committee for about 10 years. We edit the whole booklet each spring, to update examples, add some things and delete others. IRS does not accept all of our suggestions, but they do listen. I have tried for several years to get the letters ‘CSA’ in there, but ‘truck gardens’ is as close as they dare come. I will try again this May.
A few years ago, to save on printing, IRS decided to remove the comprehensive farm tax example from Publication 225. So the group of Extension people decided to create a website to hold such an example. If you go to RuralTax.org you can find 3 farm tax examples, with filled out forms, and annotations, so you can track a number as it moves from one Schedule and onto a Form. There are also a number of “Tax Topics” that are short articles on things like depreciation, who is a farmer for tax purposes, farm losses or hobby losses, over 30 articles in all. We have tried to make these articles more understandable than the IRS booklets.
IRS Publication 17, Your Federal Income Tax, is great. About 90% of all personal tax questions can be answered from this one publication. IRS booklets come with a good index in the back of each one. (As of 2/13/13, the 2011 was still the one IRS had on-line, Congress not passing a tax bill until Jan 2013 has made this tax season very difficult. If you want to use Pub 17 as a guide, check on-line to see if the 2012 version is ready.)
Oh, and one last thought. We communicate with the IRS using the language of IRS forms and schedules. When we must report to IRS about our farm, we need to use the language of IRS forms. Or we can hire a translator- a tax practitioner.
Tax practitioners come in at least 3 flavors: Registered Preparer, Enrolled Agent, and Certified Public Accountant. All three need initial training, a passing score on an exam, and a certain number of hours of annual training.
Registered Preparer is a brand new designation. 2013 is the first year that a person who does taxes for someone else will be required to have training and registration. At least I think it is required, there is current court case, and I am not exactly certain where this stands at the minute. But, IRS has had increasing concern about ‘fly by night’ tax practitioners who are in business for a year, then are gone. Leaving behind clients who may have received a large, erroneous, tax refund then after a year or two must face IRS alone and pay back taxes, interest and penalties. Registered Prepares must pass an exam, and need hours (or days) of training each year to keep their certification. Many people have been doing taxes for years, and are now facing a requirement to be certified.
Enrolled Agent is a designation that has existed for a number of years. This person has been trained, has passed a number of exams, and can represent you before an IRS examiner if your return gets audited. There are exams for different kinds of returns: individual, corporate, trusts, etc. These folks really know their stuff.
And Certified Public Account is a broader term; each state has their own licensing board. I do not think that all CPAs do taxes, some work in companies, some work for school districts, etc.
Anyway, IRS requires a report of everybody’s income. And then they have computer programs that inspect the returns, and determine the chance of a problem with each return. IRS must believe that you have paid the correct amount of tax. If they think there is a problem with your return, you will get a letter. That might solve the problem, or they may need more information. Or in some cases, you may get an audit, and you may have to prove certain numbers on your return.