*I am not a tax professional. Take my advice and experience with a grain of salt. I’m sharing what we do, not making any recommendations about what YOU should do. Consult a tax professional for detailed input.*
*Also, please keep in mind the size and type of my operation vs your operation. These are concepts that work on a small scale. They might not work well for you.*
Raise your hand if you enjoy doing taxes.
Yeah, me neither.
I’m not super-organized or a paperwork specialist. I’m much more of a piler, not a filer. We’re also not high-tech paperwork folks. We’re “a box of receipts” folks. We don’t use Quickbooks for the farm, or scan in our receipts and keep digital files. We don’t run quarterly income and loss statements or have a lot of complex or variable expenses. If that’s where you’re headed, this post will not be helpful. This post is for small farms that turn a minor profit, function on a simple cash basis, and file a Schedule F annually.
The Schedule F can be used by IRS-defined “small farms” of up to $26M in annual sales. That’s “M” as in million. That’s not really how we define “small farm,” personally. So that’s not the scale we’re talking about here.
After a few years of trial and error, we’ve hit on a low-maintenance tax record-keeping system that works for us and makes tax time a little bit easier. The key is knowing how the IRS classifies your expenses, so you’re filing your paperwork by their definitions all year. At first, I was using what made sense to me. And I had to end up re-sort everything at the last minute to fit the Schedule F requirements.
Full Disclaimer–we have a tax professional prepare and file our taxes for us every year. This is the system I use to manage the paperwork right up until we hand it over to him. Then he figures out the best way to actually file it all. I highly recommend getting professional help. Especially for the first few years.
You can read the IRS Publication 225 on Schedule F Profit and Expenses HERE…..
What Is a Schedule F?
The IRS Schedule F (Form 1040) is an addendum form for reporting farm income and expenses in conjunction with your regular Form 1040 for income taxes. You have all your standard income tax filing information and then there are additional Schedule F forms for your farm income and expenses. We tend to refer to these as our “home” and “farm” taxes even though technically they are the same, and are all filed together.
You can find a copy of the actual Schedule F HERE…
You can find a copy of the IRS’s Instructions for Schedule F HERE…
You can file your Schedule F using the Accrual Basis or Cash Basis. I’m no expert on the differences, but we use Cash Basis because the record-keeping is much simpler. Everything follows the calendar year, so all my records can be boxed up at the end of the year and filed and we start fresh in January. The organization methods in this post use the cash basis.
Your choice may be dependent on your operation type, so be sure to discuss this with your tax professional.
Does Your Small Farm Qualify to File a Schedule F?
Small farm income and expenses are reported on an IRS Schedule F. The first thing to understand is what the IRS says a small farm is, to know if you need to file a Schedule F. There are different forms for bigger or more complex farm businesses.
The Schedule F is for small farm businesses, not for hobby farms or homesteads. So you should be able to show the following…
You are farming for profit.
Not just to fill your own freezer or selling a few dozen extra eggs to the neighbors each year. Not just because you like the view of the back 40 with some cows wandering around. Not just 4H rabbits. The easiest way to show that you are farming for profit is to actually have a profit. The IRS likes to see positive income 3 out of 5 years. This means you need to be tracking both your expenses and your income to know if you have a net positive.
If you don’t make a positive net income, other ways you can show that you are operating as a business would be things like having a written business plan (which you are following), records indicating adjustments made to increase profitability, records of substantial time investment, and records of growth over time even if you’re not quite at the actual profit stage yet. Hobby farm expenses are not deductible, so make sure you talk through this with your tax professional if you have a history of losses to justify.
You are a sole proprietor.
Schedule F is for simple business entities, which can be defined as a sole proprietor. If your farm is incorporated, a complex partnership, or something other than a husband and wife joint enterprise without other employees, there might be a different form. Consult your tax professional for guidance.
Hard Copy Expense Record-Keeping for the Schedule F
*I am not a tax professional. Take my advice and experience with a grain of salt. I’m sharing what we do, not making any recommendations about what YOU should do. Consult a tax professional for detailed input.*
*Also, please keep in mind the size and type of my operation vs your operation. These are concepts that work on a small scale. They might not work well for you.*
I find that Schedule F covers a wide range of farm activities and expenses, and only a handful of them regularly apply to our operation. We don’t have employment expenses, or crop insurance, for example. We also don’t pay a separate mortgage for our farm or participate in a farm pension program. I find the key to good record-keeping is to determine what applies to us most of the time and set our system up around that.
In the first couple of years of farming, I grouped our expenses by category based on what we did the most. So I had categories like “feed,” “bedding,” “building supplies,” “tractor,” and “truck.” It made sense to me.
Bad idea.
There is no “bedding” or “building supplies” on Schedule F. And they don’t care about expenses per vehicle. Bedding and building supplies both go under Supplies. And vehicle expenses aren’t broken down by the vehicle. They are broken into Mileage; Gas, Fuel, Oil; and Repairs and Maintenance. So I had to sit down and regroup all my records and re-add-up all my receipts before we could fill out the form. What a headache!
Then I saw a couple of examples of tracking income and expenses by month. That seemed to make sense in every other business context, why not farming? Well, here’s the thing–if you store your receipts by month then you still have to pull them all out and sort them by type to file your taxes. Schedule F has nothing to do with time or chronology. It’s all about the type of expense.
So another bad idea.
I was making this really hard on myself. So here’s what I did…
We created a Tax Record Binder.
I got a pack of full-size, 3-hole punched, 8.5×11, expense envelopes, and a simple 1-inch 3-ring binder.
At the time I didn’t realize that this size envelope would be such a challenge to find. But it’s very important that they are a full 8.5 x11 size. Farm receipts come in all shapes and sizes and I try to fold stuff as little as possible so it stays legible for as long as possible. Receipts are terrible for fading out! But I reuse the same set of envelopes every year, so it’s not a big deal.
On each envelope, I wrote one of the Schedule F categories that we use regularly.
The biggest key here is that I don’t have an envelope for every single expense on Schedule F. I have one for the stuff we use either annually, or at least more than once. We don’t have an envelope for “Freight and Trucking” (Line 18). We have never used those services. And if we did, once, I would probably put it in my OTHER folder for that particular year.
When I had picked my common categories, I made sure to write some notes about what expenses were included in that category. Some of them were not intuitive to us at first. We basically had to “pick” a category for certain expenses and be consistent in applying that. For example, we decided that salt and mineral would go under Feed (Line 16) but it could also easily go under Supplies (Line 28) or even Medicine (Line 31). Another tricky one at first was ear tags. Do they go under Breeding (Line 31) because we tag them as lambs? Or under Supplies (Line 28)? We picked Supplies, but the key is to make yourself enough notes to be consistent. This way if I ever get something “wrong” according to the IRS, at least I can clearly explain what I did and know that we did it consistently to untangle it!
So, for example, I have “Repairs and Maintenance.” (Line 25) It also says “filters, brakes, tires, inspections, outside shop costs–truck, tractor, trailers.“
I have “Vet, Breeding, and Meds.” (Line 31) It also says “vet costs, lambing supplies, tail docking, wormers, needles, syringes, Survive!” as a list of common supplies we use in that category.
I make sure to have a LIVESTOCK envelope for buying live animals, which are usually treated differently, and an OTHER envelope as well, for stuff I’m not sure about. Our tax professional helps me decide if it goes in one of the other envelopes or is an unusual expense category (for us) and is filed differently.
Then throughout the year, we just put the receipt in the applicable envelope and everything’s all together at the end of the year.
It’s helpful to take a minute before putting receipts in the envelope and make notes on it if needed. For example, if there are personal expenses on there, I cross them out. If it’s building supplies, I’ll note “chicken house” or “repair barn” at the top. If it’s vehicle stuff, I’ll note which vehicle it is at the top.
At tax time, I transfer each envelope into a file folder and put the year, the category, and the receipt total on the outside of the folder. Then put all the folders into a 10×13 envelope and that’s what I take to our tax preparer. (Some years I need a bigger manila envelope.) When our taxes are done, we add a copy of the forms from our preparer into the envelope, put the date on it, close it up, and file it at home.
**A note about expenses without a receipt.** This is very common in small farming. If we don’t get a receipt for something like purchasing livestock or buying a used piece of equipment…or even a load of hay from a local farmer…we just keep a basic receipt book in each of our vehicles and write ourselves a receipt and put it in the envelope. You still note the date, the item, and the cost, and I try to write an address or name.
Tracking Mileage for the Schedule F
Small farm mileage is a bit of a challenge because we don’t always have farm-dedicated vehicles. We use our personal vehicles as much as the “farm truck.” And if you want to expense out your mileage, it has to be specific to the farm-related business. So a Mileage Log is the low-tech way to go.
I use these Mini Comp Books for our Mileage Logs. They are perfect for fitting in the glove box. I just put the Vehicle and the Year on the cover, then log the date/time, start point, end point, mileage, and purpose. At the end of the year, I collect all the books that have a record in them (some years the Mazda is empty) and put them in our 10×13 manila folder.
Income Record-Keeping for the Schedule F
There are several income lines on Schedule F, but we basically only use one–Line 2 Sales of Livestock, Produce, Grains, and Other Products You Raised. There are also sections for government ag payments, insurance payments, and any ag grants like CRP payments. But for us small farmers, those are usually a once or twice-type thing and not an annual issue.
I put another 8.5 x 11 expense envelope in the back of our Tax Records Binder and mark it as Income.
I do exactly the same with that envelope as the expense envelopes. We keep all our income records in it. Receipt carbons, sales logs, etc. At the end of the year, I move it into a file folder and it goes into our 10×13 manila envelope and we start over for the next year.
Keeping income records on the small farm can be a little challenging. A lot of the business we do doesn’t automatically generate a receipt. We use a basic receipt book for large purchases like lamb customers or selling equipment. A lot of times they don’t care about the receipt, but we have the carbon copy regardless. At the end of the year, I move any outstanding carbon copies into the Income envelope.
For small purchases like a dozen eggs, we use a Sales Log. For us, I usually put it in the back of our family calendar right on the kitchen counter so it’s easy to grab and add to. When it’s filled I file it in the Income envelope in our farm binder and we start another one.
>>>>>>Check out our Farm Fresh Egg Sales Log PRINTABLE.
Digital Record-Keeping for the Schedule F
You can stop before you get to this paragraph if you want to. You can just add up your paper receipts with a calculator and put the totals on Schedule F. You’ll still know where everything is if you need to look it up for some reason. If you’re audited, you just pull out your envelope for that year and it’s all in there.
That will work for tax purposes, but it’s not very helpful for business purposes. You can’t use the info to make decisions.
I use 2 simple Excel spreadsheets.
One spreadsheet file is an annual expense record, with a tab for each one of our categories.
The individual sheet has a space to note the Date, Vendor/Store, Item, Cost, and Other Notes right off the receipts. This way I can let Excel do the math for me, and I can see where our total costs came from without having to pull and stack paper receipts. The Other Notes is a good place to put those hand-written notes from the receipts, like “GMC oil change” or “barn roof.” I make sure to put a little checkmark in the corner of all receipts once I enter them into the spreadsheet. The kids are great for helping as an extra pair of eyes for simple QA/QC on stuff like this.
The second file is an Income and Expense Summary.
This one lists all our expense categories on the right side and the totals for each year across the top. This lets me get a quick snapshot of change over time. There’s a line for Income per year at the bottom and a quick calculation of Difference (which some would call Profit if there is any). This spreadsheet lets me know if we’re making progress toward our goals, if expenses are holding steady, or if we need to really dive into some business planning.
It’s nice to have this info digitally so I don’t have to go upstairs and dig it out by hand. I have 15 years of data in spreadsheets now, while I only keep 3 years of files downstairs at any one time. The rest of my tax envelopes are filed away upstairs. They say you don’t need to keep them forever, but, well…I am for now.
What About Your Regular Income Tax Filing Info?
Well, I’m all about simple. So I also have an 8.5 x 11 expense envelope labeled HOME in the back of our Tax Records Binder. I have this Tax Prep Checklist from Moritz Design glued to the front and a full-sized copy printed out for each year. Everything on there goes into that last envelope (except the “Business Owner section) checked off as I add them.
I’ve been using this checklist for several years now and the only thing I’ve ever had to add was “tolls” and “work clothes/boots” for Mr. Fix-it, to make sure I brought in our receipts. Everything else I’ve ever needed is right on there. No need to re-create the wheel. Once I’ve got the whole list checked off and in the envelope, I schedule the meeting with our tax preparer.
Having a firm date for that meeting always pushes me to finish any last-minute paperwork filing and get my farm receipts added up. {smile}
Limits to This System
This system is specifically designed around filing your taxes.
What it doesn’t do is give you all the detailed income and expense reports you might need to make business decisions. It also doesn’t give you feedback on the profitability of specific enterprises or give you a cost-benefit breakdown for specific projects.
And it doesn’t even touch keeping track of operation records. It is a $ in, $ out system. And it’s an organized way to make sure you have all your paperwork in one place, where you can find it. There’s also peace of mind to it, for me, because we have a philosophy that if “it’s not in the envelope, it’s not on our taxes” so I feel fairly confident I can answer any questions that might come up.
Looking for more Record-Keeping Help?
>>>>>>Check out our post on Using Google Calendar for Farm Records.
>>>>>>Check out our Farm Fresh Egg Sales Log PRINTABLE.
*I am not a tax professional. Take my advice and experience with a grain of salt. I’m sharing what we do, not making any recommendations about what YOU should do. Consult a tax professional for the detailed input.*
*Also, please keep in mind the size and type of my operation vs your operation. These are concepts that work on a small scale. They might not work well for you.*
Starting a Small Farm: BUILDINGS and SHELTERS
Starting a Small Farm: FOOD and WATER
Starting a Small Farm: HEALTH and WELLNESS(with printable!)
Starting a Small Farm: CHOOSING LIVESTOCK (Part 1) and (Part 2) and (Part 3)
Starting a Small Farm: THE HOMESTEAD GARAGE
Starting a Small Farm: SMALL FARM TAX BINDER
Starting a Small Farm: USING GOOGLE CALENDAR FOR MAINTENANCE RECORDS
