Ten Things to Know about Farm Income and Deductions

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If you earn money managing or working on a farm, you are in the farming business. Farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables. Here are 10 things about farm income and expenses that the IRS wants you to know.

1. Crop insurance proceeds. Insurance payments from crop damage count as income. They should generally be reported the year they are received.

2. Deductible farm expenses. Farmers can deduct ordinary and necessary expenses as business expenses. An ordinary farming expense is one that is common and accepted in the farming business. A necessary expense is one that is appropriate for that business.

3. Employees and hired help. You can deduct reasonable wages you paid to your farm’s full and part-time workers. You must withhold Social Security, Medicare and income taxes from your employees’ wages.

4. Items purchased for resale. If you purchased livestock and other items for resale, you may be able to deduct their cost in the year of the sale. This includes freight charges for transporting livestock to your farm.

5. Repayment of loans. You can only deduct the interest you paid on a loan if the loan proceeds are used for your farming business. You cannot deduct interest on a loan used for personal expenses.

6. Weather-related sales. Bad weather may force you to sell more livestock or poultry than you normally would. If so, you may be able to postpone reporting a gain from the sale of the additional animals.

7. Net operating losses. If deductible expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8. Farm income averaging. You may be able to average some or all of the current year’s farm income by spreading it out over the past three years. This may lower your taxes if your farm income is high in the current year and low in one or more of the past three years. This method does not change your prior year tax. It only uses the prior year information to figure your current year tax.Things to Know.

9. Fuel and road use. You may be able to claim a tax credit or refund of federal excise taxes on fuel used on your farm for farm work.

10. Farmers Tax Guide. More information about farm income and deductions is in Publication 225, Farmer’s Tax Guide. You can download it at IRS.gov, or call the IRS at 800-TAX-FORM (800-829-3676) to have it mailed to you.

Top Six Tax Tips for the Self-Employed

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When you are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

1. Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.

2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.

3. If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment tax includes Social Security and Medicare taxes. You figure this tax using Schedule SE, Self-Employment Tax.

4. If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.

5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ‘capitalized.’ This means you can deduct a portion of the expense each year over a period of years.

6. You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

Are you ready for tax season? The IRS is not….

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The IRS has delayed the start of the 2013 tax return processing year.  The original date the IRS would begin processing income tax returns was January 21. The earliest tax returns will be processed is January 28, but they have the option of beginning as late as February 4.

What does this mean?  Normally when the Service delays the beginning of the tax season it goes glove and hand with a delay in the approval of tax forms.  If they won’t accept a return to process until January 28, it’s a good bet that the forms won’t be approved until then also.  This avoids any issue with someone filing a tax return too early. 

This delay will indeed trickle down to corporate and partnership returns.  Forms for those returns were not approved until the end of February 2013 for the 2012 tax return filing season.

 These backlogs create problems for the IRS as they will normally get a tremendous flow of returns in the remaining days of the tax season (the start date has been delayed, not the due date, that is still April 15 for 1040 filers).  This return flow outstrips their ability to process returns and historically leads to e-filing and paper filing delays and outages in their systems.

What should you do?  Get you information into us as soon as possible.  We can have your information loaded and ready to process for when the forms are approved and get your e-file refund back to you as soon as possible.

The end of the year is right around the corner. Are you ready?

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(From Left) Brian Godfroid, Julio Davila, Bill Kruse, Abby Romberger, Blake Will, Jessica Murphy

What should small business owners consider before closing their books and heading home for Christmas?  Because of the diversity in small business transactions, a more complete answer can be provided if you’d like to call our office.  However, some of the big picture items which are missed by small business owners are as follows:

1.  Personal use of a business owned automobile.  Go ahead and make at least a rough estimate of the miles in you daily commute.  Include at least these miles in your W2 at the end of the year.    Remember you can’t count the commute as business miles and IRS guidance requires this to be included in your W2.

2.  Health insurance for an S-Corp owner.  If you are an S-Corporation owner, make sure your final W2 includes your personal health insurance cost.  You will not be charged social security tax on the cost of the insurance if it is done properly.  Another IRS required W2 item.

3.  Small business (less than 50 FTE’s) health insurance plans.  The Affordable Care Act is still being tweaked for who or what is required for 2014, however, small businesses should be contacting their health insurance broker and make sure they get their plan renewed prior to December 31 to ensure you miss the big rate increases heading down the pike for coverage of pre-existing conditions.

4.  Prior year Adjusting Journal Entries.  You probably received adjusting journal entries with your 2012 tax return.  If these have not been posted, then your balance sheet will not agree to the 2012 tax return.  Your 2013 return preparation will take longer as we try to figure out why.

5.  Reconcile payroll.  The social security tax hot button is still on fire with the IRS.  Make sure you have reconciled your payroll Form 940 and 941 to your income statement and balance sheet.  This is the first thing they ask for when beginning an audit.  Do it now while the year is fresh.

6.  File Form 1099.  Be careful with contractors and other service providers who have not filed out the appropriate forms for filing Form 1099.  This is another hot button with the Service, so making sure you have filed ALL  of these as necessary is very important.

Getting started early.  Your 2009 return will fall off the grid with the filing of 2013, so let’s file early!  Give us a call and let’s get on your schedule for early January or February. We can be reached at 314-993-4285.