It's tax time

[cowsrus]

was wondering if anyone here has been audited by the IRS and what it entailed. i lose money every year and it kind of worries me even though all my deductions are legal and i report all my sales. I'm not afraid of being called in but it would be a hassle

[tom4018]

Not what you asked about but is it me or is all the paper work slower coming out this year?

Got my FSA statement today and 2 forms from banks. Just thought we were getting it quicker in the past.

[Jim62]

I asked my tax person about this, and she said as long as you're using legal, provable deductions, you got nothing to worry about. If they do get to checking on it, there's a lot of stuff that they consider to determine real profit or loss. Depreciation is one of them. Many years, I showed some profit as far as income vs. expenses, but depreciation put me in the loss column. Another thing is whether your property is appreciating in value due to the money you're spending on it.

Worst case scenario, you could be demoted to "hobby farm" status if they decide that you're really not trying to make money. You disprove that by operating in a business-like manner, keeping good records, etc.. As a hobby farm , you would be able to deduct expenses only to the extent of your income, so the result would be a wash as far as profit or loss.

I understand that they are tightening down some on farms and ranches, but word on the street is that they are looking at the BIG operators, not the guy that has 15 or 20 head of cows. They'd be wasting their time to audit a small operator where the most they could expect to gain would be a couple hundred bucks. I figure the audit people look over the possible victim's returns, and deal with those that appear to have good potential for them to make some big bucks.

Tom, I was thinking the same thing. It seems that in previous years I had all my stuff together by now. This year, I have only one interest statement so far.......Go figger....

[tom4018]

I asked my tax person about this, and she said as long as you're using legal, provable deductions, you got nothing to worry about. If they do get to checking on it, there's a lot of stuff that they consider to determine real profit or loss. Depreciation is one of them. Many years, I showed some profit as far as income vs. expenses, but depreciation put me in the loss column. Another thing is whether your property is appreciating in value due to the money you're spending on it.

Worst case scenario, you could be demoted to "hobby farm" status if they decide that you're really not trying to make money. You disprove that by operating in a business-like manner, keeping good records, etc.. As a hobby farm , you would be able to deduct expenses only to the extent of your income, so the result would be a wash as far as profit or loss.

I understand that they are tightening down some on farms and ranches, but word on the street is that they are looking at the BIG operators, not the guy that has 15 or 20 head of cows. They'd be wasting their time to audit a small operator where the most they could expect to gain would be a couple hundred bucks. I figure the audit people look over the possible victim's returns, and deal with those that appear to have good potential for them to make some big bucks.

Tom, I was thinking the same thing. It seems that in previous years I had all my stuff together by now. This year, I have only one interest statement so far.......Go figger....

Jim glad you made the comment about depreciation. We usually cash flow money sold more than we spent but when our taxes get done and they factor in depreciation we lose. One thing that really opened my eyes is my neighbor one day asking me if we made a budget to try and plan to make money. Started doing that last year and went with a more elaborate spreadsheet this year. As you enter expense it keeps track if you above of below budget for that category. Really makes you think about it even more.

[novatech]

Just got audited a couple of months ago. They want to see that you use a good record keeping system. He new nothing about agriculture or cattle. I took him out to the pastures and explained how and why I did what I did for future profit. (The spotter bull happened to be mounting a cow while we were there. That was a lot of fun explaining that one. ) He asked a question almost in passing. How often do you come out to the cattle? I replied that I will spend at least an hour per day at each pasture (3). And a lot more time when making hay or working the cattle. This is a key question from them. You must spent at least 500 hours per year in actual work relating to the business. Be very careful about all responses you give to questions. They may have a reason behind them that you are not aware of.

[tom4018]

Just got audited a couple of months ago. They want to see that you use a good record keeping system. He new nothing about agriculture or cattle. I took him out to the pastures and explained how and why I did what I did for future profit. (The spotter bull happened to be mounting a cow while we were there. That was a lot of fun explaining that one. ) He asked a question almost in passing. How often do you come out to the cattle? I replied that I will spend at least an hour per day at each pasture (3). And a lot more time when making hay or working the cattle. This is a key question from them. You must spent at least 500 hours per year in actual work relating to the business. Be very careful about all responses you give to questions. They may have a reason behind them that you are not aware of.

Novatech, trying to ask this without being too nosy. Are you a fulltime farmer or is this a second job? Just wondering if they audited a small or big operation.

I will share mine just so you know. This is a second job or side job for me.

[Brandonm22]

Things are really going to change NEXT YEAR and the year after that as I understand the ongoing tax debate. Obama and the Dems want to take the tax issue off the table so most Americans will no longer pay any income taxes. In their vision, as I understand it if you make ~$30,000 or less you pay no income taxes; but get a big honking earned income tax credit of ~$3400 based on your number of dependents (thank you tax payers), $30,000 to $50,000 pay no income taxes but get a check back of ~$1000. $50,000 to $60,000 either pay no income taxes or what they pay is cancelled out by the $1000. ~$60,000 to 99,000 pay about what they pay now. The rich are going to get hammered. During the campaign "the rich" were over $250,000. During recent speeches, "the rich" has become 'over $200,000', 'over $150,000', and/or 'over $100,000'. Depending on where they ultimately set that line expect a 4-6% increase effective for either 2009, 2010, or 2011. There is also a strong possibility that they will take the ceiling off of FICA taxes and raise the capital gains rate and the rate that they tax dividend income. We really need to follow what exactly comes out of Washington closely and adjust your tax strategies accordingly.

[novatech]

Things are really going to change NEXT YEAR and the year after that as I understand the ongoing tax debate. Obama and the Dems want to take the tax issue off the table so most Americans will no longer pay any income taxes. In their vision, as I understand it if you make ~$30,000 or less you pay no income taxes taxes; but get a big honking earned income tax credit of ~$3400 based on your number of dependents (thank you tax payers), $30,000 to $50,000 pay no income taxes but get a check back of ~$1000. $50,000 to $60,000 either pay no income taxes or what they pay is cancelled out by the $1000. ~$60,000 to 99,000 pay about what they pay now. The rich are going to get hammered. During the campaign "the rich" were over $250,000. During recent speeches, "the rich" has become 'over $200,000', 'over $150,000', and/or 'over $100,000'. Depending on where they ultimately set that line expect a 4-6% increase effective for either 2009, 2010, or 2011. There is also a strong possibility that they will take the ceiling off of FICA taxes and raise the capital gains rate and the rate that they tax dividend income. We really need to follow what exactly comes out of Washington closely and adjust your tax strategies accordingly.

Kind of sounds like a penalty for working hard or smart. Bring every one down to a single class society. Everyone but the politicians of course.

[cowsrus]

Jim glad you made the comment about depreciation. We usually cash flow money sold more than we spent but when our taxes get done and they factor in depreciation we lose. One thing that really opened my eyes is my neighbor one day asking me if we made a budget to try and plan to make money. Started doing that last year and went with a more elaborate spreadsheet this year. As you enter expense it keeps track if you above of below budget for that category. Really makes you think about it even more.






Thanks for your reply.

I would be interested in hearing more about your spreadsheet that keeps track of expenses, is this one you developed or is it available commercially?

[Caustic Burno]

A good CPA is the most important thing to have, my returns usually cost 600 to 700 a year and she is worth every penny. This is one place I don't skimp on,the laws and rules change every year.
I still use the old fashion ledger book my CPA set up years ago just take it in with all the 1099's.

[Brandonm22]

Kind of sounds like a penalty for working hard or smart. Bring every one down to a single class society. Everyone but the politicians of course.

That is kind of what I am scared of. If you do contract work, it sounds like you can go full tilt to the $50,000 net threshold, kind of slow it down as you get near $60,000; then you might want to sit down and talk with a CPA to see how far past the $60g net figure you really want to go.....and certainly before you blow past the six digit mark. I am not likely to ever pass that six digit mark (I would likely get too lazy to go that far); but I certainly want there to be people out there who do make that so I can sell cattle, land, timber, hunting rights etc to them. It is kind of hard to make money off of people with no disposable income.....unless you are in the pawn shop or payday loan business.

[Wewild]

A good CPA is the most important thing to have

Good post.

[Limomike]

I agree with CB.... I use the same CPA each year, and he keeps me up on the newest laws, and info for my cattle business. Its worth it to have someone like him. And if I read something that might affect me, then I call him up and ask him about it. He usually knows about it.

[tom4018]

Jim glad you made the comment about depreciation. We usually cash flow money sold more than we spent but when our taxes get done and they factor in depreciation we lose. One thing that really opened my eyes is my neighbor one day asking me if we made a budget to try and plan to make money. Started doing that last year and went with a more elaborate spreadsheet this year. As you enter expense it keeps track if you above of below budget for that category. Really makes you think about it even more.






Thanks for your reply.

I would be interested in hearing more about your spreadsheet that keeps track of expenses, is this one you developed or is it available commercially?

We made these sheets ourselves. We have things itemized by common categories on the tax form, our tax person loves them as everything is totaled by the way it goes on the form. I have a miscellaneous column for things I am not sure about and they just separate them out. The people that own the tax place also farm and do investing so they are experienced.

The budget just tracks what you have spent for each category and you set what you want to spend on each that year. Then just estimate how many calves you think you will sell and pick an average price you think they will bring, it can be adjusted at any time. They are no substitute for a good tax person but more to let us know where me are and make it easier on them, it saves us money as it makes their job quicker. The budget is just a plan to make money and control expenses. Our sheets have progressed over several years with input from a lot of people including our tax professional.

[TheBullLady]

I confess.. I wouldn't be able to do it without our CPA.. we've had him for about 18 years now. Like mentioned earlier, unless you want to read every new tax law (and comprehend it!) it's a good thing to consider. Where my husband and I both have our own businesses, plus the ranch, there's no way I can keep track.

We're hearing a lot of grumbling here in Texas about the capital gains taxes for next year.. it's going to really impact land sales I'm sure!