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Free h&r block software 1. Free h&r block software   Importance of Records Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Benefits of Recordkeeping Kinds of Records To Keep How Long To Keep Records Introduction A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount of tax. Free h&r block software This chapter explains the benefits of keeping records, what kinds of records you must keep, and how long you must keep them for federal tax purposes. Free h&r block software Tax records are not the only type of records you need to keep for your farming business. Free h&r block software You should also keep records that measure your farm's financial performance. Free h&r block software This publication only discusses tax records. Free h&r block software The Farm Financial Standards Council has produced a publication that provides a detailed explanation of the recommendations of the Council for financial reporting and analysis. Free h&r block software For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www. Free h&r block software ffsc. Free h&r block software org. Free h&r block software For more information, contact Countryside Marketing, Inc. Free h&r block software in the following manner. Free h&r block software Call 262-253-6902. Free h&r block software Send a fax to 262-253-6903. Free h&r block software Write to: Farm Financial Standards Council N78 W14573 Appleton Ave. Free h&r block software , #287 Menomonee Falls, WI 53051. Free h&r block software Topics - This chapter discusses: Benefits of recordkeeping Kinds of records to keep How long to keep records Useful Items - You may want to see: Publication 51 (Circular A), Agricultural Employer's Tax Guide 463 Travel, Entertainment, Gift, and Car Expenses See chapter 16 for information about getting publications. Free h&r block software Benefits of Recordkeeping Everyone in business, including farmers, must keep appropriate records. Free h&r block software Recordkeeping will help you do the following. Free h&r block software Monitor the progress of your farming business. Free h&r block software   You need records to monitor the progress of your farming business. Free h&r block software Records can show whether your business is improving, which items are selling, or what changes you need to make. Free h&r block software Records can help you make better decisions that may increase the likelihood of business success. Free h&r block software Prepare your financial statements. Free h&r block software   You need records to prepare accurate financial statements. Free h&r block software These include income (profit and loss) statements and balance sheets. Free h&r block software These statements can help you in dealing with your bank or creditors and help you to manage your farm business. Free h&r block software Identify source of receipts. Free h&r block software   You will receive money or property from many sources. Free h&r block software Your records can identify the source of your receipts. Free h&r block software You need this information to separate farm from nonfarm receipts and taxable from nontaxable income. Free h&r block software Keep track of deductible expenses. Free h&r block software   You may forget expenses when you prepare your tax return unless you record them when they occur. Free h&r block software Prepare your tax returns. Free h&r block software   You need records to prepare your tax return. Free h&r block software For example, your records must support the income, expenses, and credits you report. Free h&r block software Generally, these are the same records you use to monitor your farming business and prepare your financial statements. Free h&r block software Support items reported on tax returns. Free h&r block software   You must keep your business records available at all times for inspection by the IRS. Free h&r block software If the IRS examines any of your tax returns, you may be asked to explain the items reported. Free h&r block software A complete set of records will speed up the examination. Free h&r block software Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Free h&r block software You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses. Free h&r block software You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Free h&r block software See  chapter 2. Free h&r block software If you are in more than one business, you should keep a complete and separate set of records for each business. Free h&r block software A corporation should keep minutes of board of directors' meetings. Free h&r block software Your recordkeeping system should include a summary of your business transactions. Free h&r block software This summary is ordinarily made in accounting journals and ledgers. Free h&r block software For example, they must show your gross income, as well as your deductions and credits. Free h&r block software In addition, you must keep supporting documents. Free h&r block software Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. Free h&r block software These documents contain the information you need to record in your journals and ledgers. Free h&r block software It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return. Free h&r block software Keep them in an orderly fashion and in a safe place. Free h&r block software For instance, organize them by year and type of income or expense. Free h&r block software Electronic records. Free h&r block software   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Free h&r block software When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Free h&r block software An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Free h&r block software The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Free h&r block software All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Free h&r block software Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Free h&r block software The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Free h&r block software You still have the responsibility of retaining any other books and records that are required to be retained. Free h&r block software The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Free h&r block software This test is not considered an examination and the results must be shared with you. Free h&r block software If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Free h&r block software If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copybooks and records in a manner that allows you and the IRS to determine your correct tax. Free h&r block software For details on electronic storage system requirements, see Rev. Free h&r block software Proc. Free h&r block software 97-22. Free h&r block software You can find Rev. Free h&r block software Proc. Free h&r block software 97-22 on page 9 of Internal Revenue Bulletin 1997-13 at  www. Free h&r block software irs. Free h&r block software gov/pub/irs-irbs/irb97-13. Free h&r block software pdf. Free h&r block software Travel, transportation, entertainment, and gift expenses. Free h&r block software   Specific recordkeeping rules apply to these expenses. Free h&r block software For more information, see Publication 463. Free h&r block software Employment taxes. Free h&r block software   There are specific employment tax records you must keep. Free h&r block software For a list, see Publication 51 (Circular A). Free h&r block software Excise taxes. Free h&r block software   See How To Claim a Credit or Refund in chapter 14 for the specific records you must keep to verify your claim for credit or refund of excise taxes on certain fuels. Free h&r block software Assets. Free h&r block software   Assets are the property, such as machinery and equipment, you own and use in your business. Free h&r block software You must keep records to verify certain information about your business assets. Free h&r block software You need records to figure your annual depreciation deduction and the gain or (loss) when you sell the assets. Free h&r block software Your records should show all the following. Free h&r block software When and how you acquired the asset. Free h&r block software Purchase price. Free h&r block software Cost of any improvements. Free h&r block software Section 179 deduction taken. Free h&r block software Deductions taken for depreciation. Free h&r block software Deductions taken for casualty losses, such as losses resulting from fires or storms. Free h&r block software How you used the asset. Free h&r block software When and how you disposed of the asset. Free h&r block software Selling price. Free h&r block software Expenses of sale. Free h&r block software   The following are examples of records that may show this information. Free h&r block software Purchase and sales invoices. Free h&r block software Real estate closing statements. Free h&r block software Canceled checks. Free h&r block software Bank statements. Free h&r block software Financial account statements as proof of payment. Free h&r block software   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Free h&r block software These include account statements prepared for the financial institution by a third party. Free h&r block software These account statements must be legible. Free h&r block software The following table lists acceptable account statements. Free h&r block software IF payment is by. Free h&r block software . Free h&r block software . Free h&r block software THEN the statement must show the. Free h&r block software . Free h&r block software . Free h&r block software Check Check number. Free h&r block software Amount. Free h&r block software Payee's name. Free h&r block software Date the check amount was posted to the account by the financial institution. Free h&r block software Electronic funds  transfer Amount transferred. Free h&r block software Payee's name. Free h&r block software Date the transfer was posted to the account by the financial institution. Free h&r block software Credit card Amount charged. Free h&r block software Payee's name. Free h&r block software Transaction date. Free h&r block software    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Free h&r block software You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Free h&r block software Tax returns. Free h&r block software   Keep copies of your filed tax returns. Free h&r block software They help in preparing future tax returns and making computations if you file an amended return. Free h&r block software Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2. Free h&r block software How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Free h&r block software Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. Free h&r block software A period of limitations is the period of time after which no legal action can be brought. Free h&r block software Generally, that means you must keep your records for at least 3 years from when your tax return was due or filed or within 2 years of the date the tax was paid, whichever is later. Free h&r block software However, certain records must be kept for a longer period of time, as discussed below. Free h&r block software Employment taxes. Free h&r block software   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Free h&r block software Assets. Free h&r block software   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Free h&r block software You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure your basis for computing gain or (loss) when you sell or otherwise dispose of the property. Free h&r block software   You may need to keep records relating to the basis of property longer than the period of limitation. Free h&r block software Keep those records as long as they are important in figuring the basis of the original or replacement property. Free h&r block software Generally, this means as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Free h&r block software For example, if you received property in a nontaxable exchange, you must keep the records for the old property, as well as for the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Free h&r block software For more information on basis, see chapter 6. Free h&r block software Records for nontax purposes. Free h&r block software   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Free h&r block software For example, your insurance company or creditors may require you to keep them longer than the IRS does. Free h&r block software Prev  Up  Next   Home   More Online Publications
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Free h&r block software 2. Free h&r block software   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Free h&r block software You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Free h&r block software This chapter discusses accounting methods. Free h&r block software For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free h&r block software Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Free h&r block software Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Free h&r block software Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Free h&r block software A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Free h&r block software An item considered material for financial statement purposes is generally also considered material for income tax purposes. Free h&r block software See Publication 538 for more information. Free h&r block software You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Free h&r block software If you later want to change your accounting method, you generally must get IRS approval. Free h&r block software How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Free h&r block software Types of accounting methods. Free h&r block software   Generally, you can use any of the following accounting methods. Free h&r block software Each method is discussed in detail below. Free h&r block software Cash method. Free h&r block software Accrual method. Free h&r block software Special methods of accounting for certain items of income and expenses. Free h&r block software Combination (hybrid) method using elements of two or more of the above. Free h&r block software Business and other items. Free h&r block software   You can account for business and personal items using different accounting methods. Free h&r block software For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Free h&r block software Two or more businesses. Free h&r block software   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Free h&r block software Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Free h&r block software Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Free h&r block software However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Free h&r block software See Accrual Method Required , later. Free h&r block software Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Free h&r block software Items of income include money received as well as property or services received. Free h&r block software If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Free h&r block software See chapter 3 for information on how to report farm income on your income tax return. Free h&r block software Constructive receipt. Free h&r block software   Income is constructively received when an amount is credited to your account or made available to you without restriction. Free h&r block software You do not need to have possession of the income for it to be treated as income for the tax year. Free h&r block software If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Free h&r block software Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Free h&r block software Direct payments and counter-cyclical payments. Free h&r block software   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Free h&r block software Delaying receipt of income. Free h&r block software   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Free h&r block software You must report the income in the year the money or property is received or made available to you without restriction. Free h&r block software Example. Free h&r block software Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Free h&r block software She was told in December that her payment was available. Free h&r block software She requested not to be paid until January 2014. Free h&r block software However, she must still include this payment in her 2013 income because it was made available to her in 2013. Free h&r block software Debts paid by another person or canceled. Free h&r block software   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Free h&r block software If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Free h&r block software See Cancellation of Debt in chapter 3. Free h&r block software Deferred payment contract. Free h&r block software   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Free h&r block software However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Free h&r block software Example. Free h&r block software You are a farmer who uses the cash method and a calendar tax year. Free h&r block software You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Free h&r block software You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Free h&r block software However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Free h&r block software Repayment of income. Free h&r block software   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Free h&r block software If the repayment is more than $3,000, a special rule applies. Free h&r block software For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Free h&r block software Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Free h&r block software This includes business expenses for which you contest liability. Free h&r block software However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Free h&r block software See chapter 4 for information on how to deduct farm business expenses on your income tax return. Free h&r block software Prepayment. Free h&r block software   Generally, you cannot deduct expenses paid in advance. Free h&r block software This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free h&r block software Example. Free h&r block software On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Free h&r block software In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Free h&r block software In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Free h&r block software An exception applies if the expense qualifies for the 12-month rule. Free h&r block software See Publication 538 for more information and examples. Free h&r block software See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Free h&r block software Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Free h&r block software The purpose of an accrual method of accounting is to correctly match income and expenses. Free h&r block software Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Free h&r block software See Accrual Method Required and Farm Inventory , later. Free h&r block software Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Free h&r block software Under this rule, include an amount in income on the earliest of the following dates. Free h&r block software When you receive payment. Free h&r block software When the income amount is due to you. Free h&r block software When you earn the income. Free h&r block software When title passes. Free h&r block software If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Free h&r block software Inventory. Free h&r block software   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Free h&r block software An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Free h&r block software See Publication 538 for more information. Free h&r block software Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Free h&r block software Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Free h&r block software The all-events test has been met. Free h&r block software This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Free h&r block software Economic performance has occurred. Free h&r block software Economic performance. Free h&r block software   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Free h&r block software If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Free h&r block software If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free h&r block software Example. Free h&r block software Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Free h&r block software She entered into a contract with ABC Farm Consulting in 2012. Free h&r block software The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Free h&r block software It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Free h&r block software Jane paid ABC Farm Consulting $2,000 in December 2012. Free h&r block software Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Free h&r block software Economic performance for Jane's liability in the contract occurs as the services are provided. Free h&r block software Jane incurs the $2,000 cost in 2013. Free h&r block software An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Free h&r block software For more information, see Economic Performance in Publication 538. Free h&r block software Special rule for related persons. Free h&r block software   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Free h&r block software Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Free h&r block software For more information, see Internal Revenue Code section 267. Free h&r block software Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Free h&r block software A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Free h&r block software A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Free h&r block software A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Free h&r block software A tax shelter. Free h&r block software Note. Free h&r block software Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Free h&r block software Family corporation. Free h&r block software   A family corporation is generally a corporation that meets one of the following ownership requirements. Free h&r block software Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Free h&r block software Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Free h&r block software Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Free h&r block software For more information on family corporations, see Internal Revenue Code section 447. Free h&r block software Tax shelter. Free h&r block software   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Free h&r block software Its principal purpose is the avoidance or evasion of federal income tax. Free h&r block software It is a farming syndicate. Free h&r block software A farming syndicate is an entity that meets either of the following tests. Free h&r block software Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Free h&r block software More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Free h&r block software   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Free h&r block software   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Free h&r block software Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Free h&r block software This record should show the actual count or measurement of the inventory. Free h&r block software It should also show all factors that enter into its valuation, including quality and weight, if applicable. Free h&r block software Hatchery business. Free h&r block software   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Free h&r block software Products held for sale. Free h&r block software   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Free h&r block software , must be included in inventory. Free h&r block software Supplies. Free h&r block software   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Free h&r block software Deduct the cost of supplies in the year used or consumed in operations. Free h&r block software Do not include incidental supplies in inventory as these are deductible in the year of purchase. Free h&r block software Livestock. Free h&r block software   Livestock held primarily for sale must be included in inventory. Free h&r block software Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Free h&r block software See also Unit-livestock-price method , later. Free h&r block software If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Free h&r block software Growing crops. Free h&r block software   Generally, growing crops are not required to be included in inventory. Free h&r block software However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Free h&r block software See Uniform capitalization rules below. Free h&r block software Also see Uniform Capitalization Rules in  chapter 6. Free h&r block software Items to include in inventory. Free h&r block software   Your inventory should include all items held for sale, or for use as feed, seed, etc. Free h&r block software , whether raised or purchased, that are unsold at the end of the year. Free h&r block software Uniform capitalization rules. Free h&r block software   The following applies if you are required to use an accrual method of accounting. Free h&r block software The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Free h&r block software The costs of animals are subject to the uniform capitalization rules. Free h&r block software Inventory valuation methods. Free h&r block software   The following methods, described below, are those generally available for valuing inventory. Free h&r block software The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Free h&r block software Cost. Free h&r block software Lower of cost or market. Free h&r block software Farm-price method. Free h&r block software Unit-livestock-price method. Free h&r block software Cost and lower of cost or market methods. Free h&r block software   See Publication 538 for information on these valuation methods. Free h&r block software If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Free h&r block software However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Free h&r block software Farm-price method. Free h&r block software   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Free h&r block software Market price is the current price at the nearest market in the quantities you usually sell. Free h&r block software Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Free h&r block software If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Free h&r block software Unit-livestock-price method. Free h&r block software   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Free h&r block software You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Free h&r block software The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Free h&r block software Unit prices and classifications are subject to approval by the IRS on examination of your return. Free h&r block software You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Free h&r block software IRS approval is not required for these adjustments. Free h&r block software Any other changes in unit prices or classifications do require IRS approval. Free h&r block software   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Free h&r block software This method accounts only for the increase in cost of raising an animal to maturity. Free h&r block software It does not provide for any decrease in the animal's market value after it reaches maturity. Free h&r block software Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Free h&r block software   Do not include sold or lost animals in the year-end inventory. Free h&r block software If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Free h&r block software The animals on hand at the end of the year are considered those most recently acquired. Free h&r block software   You must include in inventory all livestock purchased primarily for sale. Free h&r block software You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Free h&r block software However, you must be consistent from year to year, regardless of the method you have chosen. Free h&r block software You cannot change your method without obtaining approval from the IRS. Free h&r block software   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Free h&r block software If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Free h&r block software However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Free h&r block software This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Free h&r block software It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Free h&r block software Uniform capitalization rules. Free h&r block software   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Free h&r block software This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Free h&r block software Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Free h&r block software Example 1. Free h&r block software You are a farmer who uses an accrual method of accounting. Free h&r block software You keep your books on the calendar year basis. Free h&r block software You sell grain in December 2013 but you are not paid until January 2014. Free h&r block software Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Free h&r block software Example 2. Free h&r block software Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Free h&r block software Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Free h&r block software Deduct the costs of producing the grain in the year you pay for them. Free h&r block software Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Free h&r block software Crop method. Free h&r block software   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Free h&r block software You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Free h&r block software Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Free h&r block software    See chapter 4 for details on deducting the costs of operating a farm. Free h&r block software Also see Regulations section 1. Free h&r block software 162-12. Free h&r block software Other special methods. Free h&r block software   Other special methods of accounting apply to the following items. Free h&r block software Amortization, see chapter 7. Free h&r block software Casualties, see chapter 11. Free h&r block software Condemnations, see chapter 11. Free h&r block software Depletion, see chapter 7. Free h&r block software Depreciation, see chapter 7. Free h&r block software Farm business expenses, see chapter 4. Free h&r block software Farm income, see chapter 3. Free h&r block software Installment sales, see chapter 10. Free h&r block software Soil and water conservation expenses, see chapter 5. Free h&r block software Thefts, see chapter 11. Free h&r block software Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Free h&r block software However, the following restrictions apply. Free h&r block software If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Free h&r block software If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Free h&r block software Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Free h&r block software Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Free h&r block software You may also have to pay a fee. Free h&r block software To obtain approval, you must generally file Form 3115. Free h&r block software There are instances when you can obtain automatic consent to change certain methods of accounting. Free h&r block software See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Free h&r block software For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Free h&r block software Also see Publication 538. Free h&r block software Prev  Up  Next   Home   More Online Publications