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 OTITEJ S2AT2S DEPARTMSEI Oj 1 ASRIOJLIl 7 : 
 Bureau, of Agricultural Ecor.ois:".cs '- 
 Extension Service 
 
 FARM 300 KISS? I ng a:;d tee 
 FED2HAL IUCOME TAX 
 
 „ UNIV. OF FL LIB' - 
 
 U.S. DEPOSITORY 
 
 Washington, D. I 
 December 19^-1 
 
THE FARKZR'S REL ATION TO TE2 rSDSRA I Ii: 1 3 IE _T_ AX 
 
 1. Who must file a return? 
 
 A single person with a gross income of at least $750- 
 
 A married person living with husband or wife, or a head of a 
 family with a gross income of at least $1,500. 
 
 Gross income includes all the receij.ts of the farmer from "both 
 
 nn and nenfarm sources and also includes the value of mer- 
 chandise received in exchange for farm products. 
 
 A return must "be filed if the gross income reaches tho specified 
 amount even though subsequent deductions result in no tax being 
 due. 
 
 2. When is the return due? 
 
 Two and one-half months after the close of the year covered by 
 the return. This will be March Vj for most farm era who will 
 use the calendar year. Some fanners will find it easier to think 
 in terms of a "farm year." The regulations permit the use of 
 almost any 12-month period that fi : ;s the needs of the business. 
 But once a fiscal period is established it must be used for all 
 succeeding annual returns unless special permission to make a 
 change is obtained from the Commissioner of Internal Revenue. 
 
 3. Where can you get income tax blanks? 
 
 The Individual Income Tax Return (Form 10^0 ) anc the Schedule 
 of Farm Income and Expenses (Form 1CU0F) can be obtained fr 
 any collector of internal revenue. In addition they are usual y 
 available at banks , post offices and similar places. 
 
 4. How can you make your return? 
 
 If a farmer has a bookkeeping system he probably will find all 
 the required information under the various headings in his book. 
 
 If the farmer has not "kept books" he will need to work up the 
 best statement he can for I 1 ice is of income and expense. He 
 probably will find that he has v. rious memoranda - bills and 
 statements, cancelled checks and the like - that will heir fix 
 the exact amounts of wny items. The burden of proof is upon 
 the individual if the collector raises " 
 
 return. Any good farm account book will be vi ■ lelpful in 
 suggesting various items that oay v ..' r Lncome and 
 expense. The same book actually used next year will simplify 
 the work that has given concern this year. 
 
The purpose of this statement on Farm Bookkeeping and the Fed- 
 eral Income Tax is to help farmers understand some of the bookkeeping 
 requirements for making adequate Federal income tax returns. This is 
 not a substitute for careful reading cf the instructions printed on 
 
 the income tax blanks nor is it a complete substitute for consultation 
 with collectors of internal revenue. However, if this statement is 
 careful] 7 studied and its suggestions are followed, me .ay farmers will 
 find they themselves can fill out the necessary income tax formi . 
 Should consultation still be necessary, farmers will be better able 
 to discuss their special problems with collectors of internal revenue. 
 
 ,x 1/ 
 
 FARM BOOKKEEPING- AMD TEE FEDERAL II T C0:E TAX 
 
 Perhaps as many as a million farmers, many of whom have never kept 
 any formal business record..-, cr accounts, are faced for the first time 
 with the taak of preparing a Federal income tax return. These farmers 
 will need to ask themselves many questions about their business opera- 
 tions as they try to determine the proper figures to enter on the tax 
 forms. Any farmer who has been using consistently some appropriate 
 method of bookkeeping such as those recommended by the Department of 
 Agriculture or the various State colleges of agriculture has the means 
 for supplj ing the information required by the Bureau of Internal Revenue. 
 Even those who have not kept books usually find that they have various 
 records and statements with respect to receipts and expenditures and can 
 remember the other necessary items if they systematically search their 
 memories. 
 
 S^me system of accounts is invaluable for making and supporting 
 income tax returns. The Bureau of Internal Revenue has never insisted 
 that taxpayers keep books in any special way of its devising. It is 
 administratively required, however, that the individual items or classes 
 cf items be arranged and treated in prescribed ways on the income tax 
 forms. The treatment of some items may be quite different from that used 
 in most farm account books. But, anyone who has written records, almost 
 regardless of form, is in a particularly advantageous r. *sition for making 
 returns and explaining his figures should any questions of interpretation 
 later arise. 
 
 A bookkeeping system acquired now will be of no service in supply- 
 ing documentary evidence in support of l;;Ul income tax returns. It can, 
 however, be used to good advantage in assembling the items of information 
 
 !_/ This statement has the. approval of the Bureau of Internal Revenue. 
 
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 needed to vor v up a statement of 19^1 income end expenses. In any event, 
 now is not too scon to start the record for 39^*2 operations, which will 
 be the basil for the income tax return to be filed in lj u 5- 
 
 The forms to "be used in 19^2 for reporting income tax liability 
 for the year 19*1 trill be available eai'ly in January. Copies may be 
 obtained froii collectors of internal revenue, local banks, and post 
 offices. Farmers generally will need to fill out Form lOtOF which sum- 
 marizes the financial results of their far-.,, operations for transfer to 
 Form 10^0, which also includes additional items of income and deductions 
 which relate to the farmers 1 persona l financial operations. The discus- 
 sion which follows will deal principally with the requirements for using 
 farm accounts for developing the "net farm profit" on Form lOUOF. 
 
 Most farmers will find it more feasible to make their returns on 
 
 a "cash basis" rather than on an "accrual basis," which involves very 
 complete sets of accounts. Farmers who have kept such complete accounts 
 and wish to report on an accrual basic may find it advisable to discuss 
 
 their special problems with the collector of internal revenue. In gen- 
 eral, this statement on farm bookkeeping and the Federal income t 
 refers chiefly to the cash basis of reporting, although the interpreta- 
 tions of the proper use of the various items are the same if the report 
 is made on an accrual basis. 
 
 F' 1 rm Income 
 
 An adequate set of book? reflects income for a period natural to 
 the farm basiness. For most farmers a calender year fits personal liabits 
 and interests as well as any other. If for special reasons a different 
 f^rm (fiscal) year is needed, arrangements may be made with the Commis- 
 sioner of Internal He venue. 
 
 Farm income for tax purposes is the sum of four groups of items: 
 (l) The amount of the cash or the value of merchandise or ether property 
 received from the sale of livestock which was raised during the taxable 
 year cr prior years, (2) the same for crops and produce raised and sold, 
 (3) the profits from the sale of eny livestock or other items whJ re 
 purchased, and (h) other farm income. 
 
 Inco me fron lives tock r ai sed : 
 
 For livestock raised on the farm the "income" is the total 
 receipts from the sale of the lives • . If livestock is traded 
 for merchandise cr other* roperty the income must include the 
 value of the property received in esicnango . On Form 10UOF the 
 number or quantities sold and the income from each 'item a^e to 
 be show:!. This procedure places the entire sale value of animals 
 raised on the farm as income in the year of ■■•' le and ignores the 
 value added during the year to animals not sold. By contrast on 
 an accrual basis the value added to a given L would be dis- 
 tributed over several years through changes in the ir.-rntory 
 v.-.lue of the animal as it matured. 
 
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 In come f rom crops end prod uce ra ised : 
 
 The procedure fcr reporting income from crops and produce 
 (including livestock, dairy and poultry products) raised is sim- 
 ilar to that for livestock. Quantities and cash receipts (cr 
 value of goods received in exchange) are entered on separate 
 lines for each item. Here again, if crops are stored on the 
 farm beyond the end of the year (or fiscal period) when raised, 
 the income falls in the year when the crop is sold. 
 
 If a loan is obtained from the Commodity Credit Corpora- 
 tion the farmer may elect to include it in his income in the 
 year in which the loan is received instead of in the year when 
 the commodity is finally sold. Whichever method is elected 
 must be followed in succeeding years unless special permission 
 to make a change is obtained from the Commissioner. 
 
 Profits from the s ale o f livest ock or products pur chased : 
 
 To arrive at the profit figure to bo included in income, 
 Form lO'+OF calls for the following information in addition to 
 the description of the animal or product: (l) 'The date acquired, 
 (2) the sale price, (3) the cost, (h) the depreciation allowed 
 or allowable for previous years, and (5) the profit. 1!^.e profit 
 is the amount of the excess of the sales price over the amount 
 representing the depreciated cost, that is, the original cost 
 loss the depreciation allowed (but not less than the amount 
 allowable). If some of the livestock marketed from the farm 
 were raised and some previously -purchased it may he desirable 
 to discuss with the collector Questions involved in segregating 
 the two groups. Individual identification may perhaps be waived 
 for small animals like chickens and lambs, and not waived in the 
 case of animals of high specific value. 
 
 Another question that may need, discussion with the collec- 
 tor is the matter of a depreciation method. This is important 
 
 not only in tne case of breeding animals and the like which were 
 purchased arid subsequently sole 1 , but also in the case of draft 
 animals and property in general as will be mentioned Ir.ter. 
 
 Other fa rm income : 
 
 "Values or amounts are to be reported for pr.y other items 
 of income arising from the faiv business. This will inclu.de Such 
 income items as: Fayments fro.-, the AAA, merchandise received 
 for produce, ma-chine work, hire of teams, breeding fees, rent 
 received in crop shares, work off farm, forest products, ar.d 
 any other like receipts. In general anything of value recoiled 
 instead of cash must bo treated as income to the extent of its 
 market value. 
 
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 Hail or fire Insurance receipts on account of rowi? 
 lnjured or destroyed shooJd be included in gron -e to t 
 
 amount received in cask or the cash equivalent if re 
 
 The value of home-grown farm produce which is consul r ' I 
 the farmer and his family nrecL not c* reported as incc . . but 
 expenses incurred in raising produce thus consume z°. 
 
 claimed as deductions. Separating such expense its i~e 
 
 none difficulty "but a reasonable estimate . if the 
 
 produce consumed on the far;: is not reported as income. Ii iz 
 is reported as income no segregation of expense items is neces- 
 sary on that account. 
 
 Income of minors should be included with that of the 
 
 parent for income tax purposes unless (l) the minor has suffi- 
 cient income to be required to file a return and (2) the 1- 
 of the State provide that earnings of a minor belong to the minor, 
 
 "Other Farm Income" does not include any receipts ari3in 
 
 from the sale of the farm or any part of it. Su ctioj s 
 
 e.rc considered not oart of tho farm business, but personal i 
 are taken ca.ro of directly on Form I Oho. 
 
 Having arrived at a figure for the ^ross profits -f tire 
 
 farm business, the next stej- is a determination of yh? al .ov/orlu 
 deductions for expenses and depreciation in order to arrive at 
 a "net farm orofit." 
 
 Farm Zxpo-.ses_ 
 
 The farm expenses that a.re proper business deductions are often 
 difficult to remember unless one has some hind of rocr: - . Kany Df them 
 are paid out in relatively small amounts on numerous oc as ions. If 
 entered in a book rf accounts, preparing: entries for Form 1" Is lar 
 a natter of classifying and totaling. In general , disbursements n^cessrry 
 in the production operations of the farm a.re allowable deductions in arriv- 
 ing at the net farm profit. Also deductible e.re certain depreciation 
 items as will be pointed out. 
 
 Labor hired : 
 
 Wages paid f^r farm work Cone are included, but no allow- 
 ance for the value of the work of the farmer, hi? wife, or depend- 
 ent minor children is deductible unless th mt deducted is 
 reported as income. Board furnished to hired labor is deductible 
 only to the extent that it is purchased, thus excluding the value 
 of food raised on the farm and used in boarding laborers. 
 value of rations purchased and furnished t^ laborers .• nd share- 
 croppers is deductible as part of the labor expense. Hired house- 
 hold work is deductible only to the extent that th B< rvices are 
 used in boarding or otherwise caring for farm laborers, not in- 
 cluding the farmer's own household, 
 

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 Production supplies ; 
 
 The cost of feed, seed, fertilizers, line, manures and all 
 similar supplies pjn^has_ed and used in the production of crops 
 and livestock are deductible expense items. The value of seed, 
 feed, and manure produced and used on the farm is not deductible . 
 
 Taxes : 
 
 In general most State and local taxes are deductible either 
 on Form 10U0F as items of farm expense or on Form 10^0 as personal 
 taxes paid by the farmer. As the technical form in which these 
 taxes are levied may determine whether or not some of the taxes in 
 the latter class are deductible it may be advisable to discuss the 
 matter of taxes in a given State witn the collector. Property 
 taxes on the farm land, machinery, livestock and other production 
 items are deductible as farm expenses. That portion of the property 
 tax applying to the dwelling, and household, or personal effects is 
 a personal , not a b usiness expense, and. is entered directly on the 
 Form lOUO. Special taxes and assessments such as levee, drainage 
 and certain irrigation taxes are not deductible if they tend to 
 increase the value of the property assessed. Federal income taxes, 
 estate, inheritance and similar taxes also are not deductible. 
 Taxes such as retail sales taxes applying to items used in produc- 
 tion may be considered as part of the cost. Taxes on gasoline 
 used in operating vehicles as part of the farm business operations 
 are deductible as business expenses. Sales and gasoline taxes 
 paid in connection with the farmer's personal expenditures may or 
 may not be deductible, depending on the State law. Consult the 
 collector of internal revenue. In any event, some sort of record 
 is essential to make it possible easily to substantiate such 
 claims . 
 
 Insurance : 
 
 Insurance paid in connection with farm operations is deduc- 
 tible. This will include all fire and similar insurance on build- 
 ings, machinery, and crops, but not insurance on the farm dwelling 
 or personal and household effects. 
 
 Interest : 
 
 Interest paid on obligations, such as mortgages and notes, 
 arising out of the farm bus i ne s s may be deducted as a business 
 expense. Most other interest paid is a personal item and is 
 entered directly on Form lOHo. 
 
 Rent ; 
 
 Pent paid in cash is deductible, but rent paid in the form 
 of crops is not deductible, although the expenses incurred in 
 raising the crops may be deducted. 
 
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 Tools, machinery, and equipment : 
 
 The oost of small tools and items cf short life used la the 
 "business may be deducted, r.s expenses. A - >bile operating ex- 
 penses, repairs, and maintenance, and depreciation may "be d^duetpd 
 if used entirely for the far;.: "business "but if the vehicle is also 
 used for personal travel, the expense r_aist "be divided and only tnat 
 portion corresponding to the relative use in the "business is de- 
 ductible as an expense. The amounts expended for automobiles, farm 
 machinery, farm "buildings, and other equipment of a permanent nature 
 are not deductible as expense:* as such expenditures are regarded as 
 investment of capital v/hich is returned to the owner through de- 
 preciation allowances prorated over the useful life of the property. 
 
 Depreciation : 
 
 Depreciation is a deduction from gr'-ss profits which is con- 
 sidered to represent that part of the particular item that was 
 used up in producing the income for the year. A reasonable allow- 
 ance for depreciation with respect to farm "buildings (c-ceet the 
 farmer's own dwelling), farm machinery, automobiles, in proportion 
 to their use strictly for farm operations, and other physical 
 property may "be allowed as a deduction. There may also "be deducted 
 a reasonable allowance for depreciation of .livestock acquired for 
 work, "breeding ir dairy purposes, if the report is on a cash oasis. 
 Where an accrual "basis is us^d, these latter items will "be re- 
 flected through the inventory valuation. 
 
 The amount of depreciation in a given year depends upon the 
 "useful life of the property." The period of usefulness varies 
 greatly among different kinds of property. The taxpayer may set 
 his own tentative rate of depreciation, hut after it is accepted 
 "by the Bureau of Internal Revenue ho will bo expected to use this 
 rate for the entire period of useful life of the item for which 
 it was established. Thus, it often null be advisable for the 
 individual farmer to discuss his depreciation problem with the 
 colleetor . 
 
 The preparation cf the list of depreciable property and 
 establishing the depreciation rates warrant especial care in con- 
 nection with the first return filed b. cause the sane rates are 
 expected to be used throughout the life of the item. In order to 
 have a. basis for considering the depreciation allowable for given 
 items the farmer will need to supply the following* information 
 for each item: 
 
 Kind of property. 
 
 Date acquired. 
 
 Cost. 
 
 Estimated total useful life. 
 
 Remaining useful life. 
 
 Depreciation allowed (or allowable) in prior years. 
 
 Remaining cost to be i r>red. 
 
 Depreciation._allowable this year. 
 
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 For any farmer's full list of property the depreciation 
 sum may vary from year to year, depending on when and how many 
 items are added or disposed of during tne year. 
 
 The sum of the expense and depreciation items constitutes 
 the deduction from gross profits for arriving at a figure for net 
 farm profit. This net farm profit figure is entered en Form 10^+0 
 as the farmer's personal income from his farm operations. 
 
 The next step in completing the income tax return is to 
 enter on Form lOUo any other items of personal income such as 
 savings account interest, dividends, and the like. Also entered 
 are deductions, such as contributions, interest and taxes net 
 connected with the farm "business, had dents, arid other deductions 
 authorized by lav. The final steps are to deduct from the taxable 
 net income, the personal exemption and credit for dependents, and 
 to compute the surtax; then to deduct in addition the earned income 
 credit and to compute the normal tax. 
 
 It is clear that a written record of receipts and expenses 
 is highly important to a farmer in connection with preparing his 
 income tax returns. The usefulness of bookkeeping, however, ex- 
 tends far beyond any single purpose such as this. Farmers who 
 have made a practice of keeping books use their records in gliding 
 their decisions on questions of farm management. Bookkeeping 
 really i\ r orth doing grows in usefulness as the farmer uses it to 
 analyze the financial results of his farm operations. 
 
UNIVERSITY OF FLORIDA 
 
 3 1262 08921 5429