The value of your relationship with your tax professional rests in his or her advice and council, not necessarily his or her ability to prepare taxes. You might want to ask your tax adviser how you can organize and better prepare to make the most of your time together—and your tax return. It’s amazing how the value of the service and productivity of a meeting increases when we’re not sorting receipts or adding ledgers during a tax appointment.
Here are a few suggestions to facilitate the process and provide greater security in the event the Internal Revenue Service (IRS) comes knocking:
- Separation of activities. It’s a challenge to separate financial reporting when multiple business entities are in play. Accountants stress the importance of keeping transactions separate for each entity, as well as maintaining separate bank accounts. This might sound elementary but you’d be surprised how easy it is to develop shortcuts in your accounting processes that cause an IRS examiner to frown. Structure your transactions as if those entities were owned by someone else and you are being held accountable to them.
- Accounting systems. We encourage clients to use accounting software that records transactions concurrent with the transaction. In addition to keeping records up to date, these systems, which are usually computer based, allow farmers/managers to use interim reporting tools to analyze cash flow and identify financial opportunities. Accounting software encourages monthly bank reconciliations, ensuring all transactions are accounted for and posted.
- Farming activity. As a farmer, you might think your occupation intertwines with your personal finances, tempting you to report them together. The challenge then for your accountant is trying to differentiate what is personal or farm income or expense. Trust me, an IRS examiner will see a distinct difference between a grocery bill and farm supplies. One of the best solutions we’ve found to simplify and clarify personal versus farm finances is to use ledger books. A ledger gives you greater confidence and clarity in where you should post a transaction.
- Rental activity. Rental properties present their own unique set of challenges. Since we have to separately account income and expenses for each rental property, it multiplies the recording effort. Simply listing all expenses associated with a property in one column leaves the arduous task of separating the expenditures into classifications (i.e., repairs, insurance and taxes). Ask your accountant for a rental activity ledger, which will provide adequate guidance and separate record keeping for each property for tax reporting.
- Tax organizer. At year-end, your accountant might provide a worksheet of sorts to help guide the tax preparation process and paperwork. The worksheet will list items of interest from prior years to ensure no income or expense is overlooked. Initially, you might find it challenging to fill out the worksheet; however, the primary objective is to ensure complete and accurate data is given to the tax professional. Once our clients are more familiar with the process, they often find great value in using the worksheet to organize and secure items of relevance. By the way, it’s best to use a pencil when filling out the worksheet to make any necessary changes during the process.
Through published tax court cases, we have the opportunity to observe areas where the IRS is increasing its level of focus on a business or farm activity. From my perspective, those businesses who cross every “t” and dot every “i” tend to do much better in the end game, particularly when faced with an IRS examiner.
This column is not a substitute for tax advice.