Business Basics

A business is one or more activities regularly carried on with the intention of producing a profit for the business owners. 

Farm and ranch business activities are producing crops, livestock, or crop and livestock products for sale. Other related business activities might include renting farm land or equipment, or providing specialized services such as grazing or pollination. 

Fishing businesses actively fish with the intention of selling the catch at a price greater than the costs of running trips. 

A business is regularly carried on if its activities are perceived as both frequent and continuous.  An activity is regularly carried on, even if it is seasonal, if it happens for a substantial period of time each season. An activity is regularly carried on even if it is only for only a few days of the month, as long as there is frequent activity while the business is in operation, for example selling at a flea market three Sundays a month, but with many different sales transactions at each flea market. 

A business must be run with the intention of making a profit. A business does not need to actually make a profit every year, but it must always be operated with the goal of making a profit, either in the current year, or in future years due to efforts made in current years. 

Farm and ranch businesses produce crops and livestock for sale. A landowner who uses crops and livestock to improve the ecological health of the land is not in the business of farming or ranching, even if they receive payments to offset some of their costs. Someone who produces crops or livestock with no plan to sell them is not in the business of farming or ranching even if they donate the crops to feed others, because there is no way to profit if there is no plan to earn income. 

The owners of a business are the people who contribute the money and effort needed to manage and operate the business. 

A business may take a variety of legal forms, and the legal form of the business affect how owners are paid and how they are taxed. 

A sole proprietorship is a business owned by one person only, if that person has not taken any steps to create a separate legal entity. Owners of a sole proprietorship may put money into the business and take money out of the business as they wish. An owner of a sole proprietorship may not be on the payroll of the business. The owner of a sole proprietorship files a regular individual tax return and reports the income and expenses of the business on a Schedule F for a farm or ranch business, or a Schedule C for any other type of business. No where on the tax forms does a sole proprietor report how much of their money they put into or took out of the business, because the owner is taxed on the net income of the business regardless of how much money they contributed or withdrew. 

A partnership is a business owned by more than one person if those people all intend to work together in some way to share risk and reward and they have not taken any steps to create a separate legal entity. A partnership is governed by a written partnership agreement, or else by state law. Generally partners may contribute money to the business and withdraw money from the business as they see fit, subject to limitations they may have put in the partnership agreement. Partners may not be on the payroll of the partnership. A partnership files its own federal and state tax returns, but does not pay taxes. The partnership tax returns generate a Form K-1 for each partner, showing that partner’s share of taxable income and expense from the partnership. The partners then each report the items on the K-1 on their individual income tax returns. Although the amounts partners put into or take out of the partnership are not part of calculating their taxable income, there are complex rules governing what happens if the total amount each partner has invested in the partnership does not equal the ownership percentages reported on the partnership tax returns. 

A limited liability company or a corporation is a legal entity created by one or more business owners to provide protection under state law, to limit the financial responsibility of the owners for debts and other liabilities of the business. A limited liability company may be considered a “disregarded entity” for tax purposes. This means it is ignored. If there is one owner, it is, for tax purposes as if it were a sole proprietorship. If there is more than one owner, it is, for tax purposes, as if it were a partnership. 

An S-corporation is a special type of limited liability company that allows the business owner to be on the payroll of the company. Owners of a sole proprietorship or a partnership may not be on the payroll of the business. An S-corporation files its own tax return and gives each owner both a W-2 for payroll wages paid, and a K-1 for other income and expense items.

Managing a business is not the same as working in a business. A worker is concerned with the business operations - producing and selling. A manager must be concerned with operations and also regulatory compliance (things the government requires) and short- and long-term strategic management (things required in order to make a profit and attain long-term financial security). 

Regulatory Compliance Essentials 

Income Tax: A business owner must report the income and expense of the business on the appropriate state and federal income tax return forms. 

The IRS requires you to have evidence sufficient to demonstrate that the statements on your income tax returns are true and accurate. The rules for what kind of evidence you need to have include general rules and special rules for certain types of transactions. 

In the event of an IRS inquiry or audit you are required to present evidence to substantiate any claims the IRS questions. In the absence of evidence the IRS may force you to take the least favorable tax position and in some cases you may incur negligence penalties. 

Property Tax: Businesses with more than a certain amount of business property may need to file County Business Property Tax forms. Check with your County Tax Assessor to see the limits for your county. 

Sales Tax: In California, food items are exempt from sales tax. Flowers and fiber are not. Check with the California Department of Tax and Fee Administration for more information. 

Financial Records: You are required to keep financial records that are adequate to support the items of income and expenses that you must report on income tax, property tax, and sales tax returns. 

Labor: California has strict laws protecting workers. If you employ anyone other than your legally married spouse or your children or parents to help you in your business, they must be covered by a workers compensation policy. Most workers on a farm or ranch are required to be on payroll with state and federal payroll taxes paid. In addition, you are required to keep detailed records showing that you are in compliance with laws covering hours worked, breaks given, the time, manner and amount of payment, safety training, heat and illness prevention, and a number of other protections. 

Environmental Regulations: California has strong environmental protections particularly with respect to water, land use, and waste disposal. Almost anything you want to do that involves moving earth or water requires a county permit, and there are special rules for disposal of waste generated by a business. Check with your county agricultural commissioner, or county agricultural extension office for more information. 

Food Safety: Farms are subject to food safety regulations. Here are a few resources to get you started: cdfa.ca.gov/is/i_&_c/sffsg.html and ucsmallfarmfoodsafety.ucdavis.edu. 

Management Records and Plans

In addition to the basic financial records you are required to keep to comply with tax reporting requirements, you need additional financial and other records in order to make plans to manage your business for current and future profits. 

Essential Non-Financial Records 

Production Records help you to make better decisions in the future based on what you did in the past. They are also required in order to access  business credit, crop insurance programs, and disaster assistance, and will affect the value of your land if you own land and later sell it. Production records include: 

• What, where and when you planted;
• Harvest dates and yield amounts;
• Volumes of catch during various fishing seasons;
• Animal breeding records with breeding and birthing dates, weights, growth rates and vaccination schedule.

Sales Records help you to make better decisions in the future based on what you did in the past. They are also required in order to access agricultural credit, crop insurance programs, and disaster assistance. Sales records include: 

• Product and amounts sold by customer or market;
• Price per unit; 
• Payment terms;
• Customer payment performance.

Equipment Records help you to manage one of the most important parts of your operation. You need basic equipment lists to comply with tax reporting requirements but you also need use and maintenance data to plan for future equipment maintenance or replacement. 

Essential Plans 

Marketing plans include specific plans for how a product will be packaged and transported to market and specific plans for where products will be sold. 

Production plans are specific plans for what will be produced in the next 1-4 seasons taking into account rotations, market demand and availability of seed, equipment and labor. 

Management plans are specific plans for ensuring you are operating your business to attain current and future profits and minimize your risk of loss. These include plans for: 

• Financial Recordkeeping: Keeping track of transactions on a daily and weekly basis 
• Bookkeeping: Organizing financial records into a standard system designed to provide you with current, accurate, and meaningful information
• Labor Management: Managing all of the regulatory requirements associated with labor, as well as managing contact information, scheduling, hiring, performance evaluations, etc. 
• Cash and Credit: Systems to ensure you receive prompt payment and pay your financial obligations as they come due. Systems to help you evaluate your predicted cash availability and cash needs (cash flow) and your need for credit to help manage cash flow or to help you purchase equipment or land. 
• Risk Management: Adequate insurance including property insurance, liability insurance and crop insurance as well as plans to evaluate and mitigate physical risks associated with land and operations and financial risks associated with your markets, buyers, customers and key vendors. 

Can you operate a successful business without any technology? Perhaps. But you will be very limited in your interactions and opportunities. 

Can you operate a successful business using only a smart phone? Perhaps. But at some point you will be unable to access information and services using only a phone, and this will limit your ability to manage your business beyond a certain size or amount of annual profit. 

Do you need a computer in order to run a successful business? Probably. There are many resources that are not formatted for good access on a phone. In particular, you will never be able to see and understand more than basic financial reports on a phone. More complex financial reports, the ones that help you make important decisions about your financial future, require a larger screen. It is also almost impossible to read and understand payroll tax forms and income tax returns on a phone screen. 

If you do not already have a computer and know how to use it to perform the basic functions of: accessing websites, reading pdf documents such as income tax returns, creating basic written documents, and creating basic spreadsheets, you should consider going to your local library to get started. They can usually teach you the basics and give you access to a computer. From there you can access any number of classes that will give you step-by-step instructions to help you develop the skills you will need to use a computer in your business. 

It's easy to understand the impact of a physical robbery at your home. However, data theft can be just as, if not more, damaging, and often goes unnoticed until significant harm has been done.

Data thieves can:

• Steal your identity and use it to take out credit in your name
• Access your bank accounts and steal your money
• Access your cell phone number and hold your cell phone hostage and use it to get into all of your accounts

California’s Commitment to Data Protection

The State of California has some of the strongest protections in the country to make sure that organizations like California FarmLink or bookkeeping and tax preparation firms keep your data safe. There are steep fines if we fail to follow best practices in protecting your data. This is why we ask you to transmit data to us using secure links and not using e-mail or text messages.

What to Know About Secure Systems:

• Encryption: Data is made unreadable to outsiders. Look for systems or files marked as "encrypted" or "secure."
• Storage Security: Use trusted platforms (like Google Drive or Dropbox) with strong passwords and two-factor authentication (2FA).
• Transmission Security: Avoid sending documents over plain email. Use encrypted file portals (like ShareFile, Dropbox with password protection, or your bookkeeper’s secure portal).

Secure methods of Storing and Transmitting Data

1. Verify the Recipient Before You Send Anything:  Before sending data, call or text your CPA, tax preparer, bookkeeper, or Community Development Financial Institution (CDFI) to verify their email or portal details. Scammers often impersonate trusted professionals to steal data.
2. Use Strong Passwords and 2-Factor Authentication (2FA) for storage: Create unique, 12+ character passwords (mixing letters, numbers, and symbols, phrase) for your accounts. Here are a few tips for how to create passwords you will remember: .‍
   
   1. Use a phrase: CABerryFarmersAreBEST!!9753‍
   2. Use a combination with the name of a favorite town or place, the number of children, cousins, siblings or friends you think of most often, and a symbol that makes sense to you: Patzcuaro&4, ElTepozteco3! ‍
   3. Use an abbreviation: Make a password from the first letter of each word in a sentence.
   4. Sentence: I Love Farmering, Ranching, and Fishing in California!
   5. Abbreviation: ILFR&FIC!!25

3. Securely Store Your Passwords:‍
   
   1. Multi-Factor Authentication (MFA): A security method requiring you to verify your identity in multiple ways before you're granted access to an online account, app, or system.
   2. Something you have: A code sent to your phone via text message, an authenticator app that generates a constantly changing code, or a physical security key.
   3. Something you have: A biometric scan, like your fingerprint or facial recognition.
   4. Google Keychain: This is built into your Google Account, Chrome browser, and Android devices, securely storing and syncing your passwords and passkeys across all your signed-in devices for easy access and autofill.
   5. iCloud Keychain: securely stores and syncs your passwords, passkeys, credit card info, and Wi-Fi passwords across all your Apple devices.

4. Limit Access: For bookkeepers using software like QuickBooks, provide temporary access with limited permissions. Revoke access once their work is complete.
5. Monitor: Regularly check accounts for unusual activity. Set up bank alerts for transactions over $500 to spot issues early. We will help you do this with your business accounts, you need to do this for your personal accounts -  and don’t forget your kids if they have savings accounts!

Questioning Data Security Practices

If you are working with a service provider who does not use a safe method of storing and transmitting data and does not ask you to do so, you should question if your data is secure. 

Warning Signs and Easy Actions: 

• Lack of encryption:
  
  • Example: Your bookkeeper, tax preparer or CPA e-mails you financial reports and asks you to email tax documents to their personal e-mail account instead of using a secure portal like ShareFile.
  • Easy Action: Verify the email with your bookkeeper, tax preparer or CPA. Ask “Do you have a secure client portal for sharing files?” If they say no or suggest email, request a secure alternative or consider a different provider.
  • FarmLink Clients: We use Dropbox for this. 
• Requesting excessive data: 
  
  • Example: Your bookkeeper asks for your full bank account numbers to process payroll, even though they only need payment totals.
  • Easy Action: Ask, “Why do you need this specific data?” If their reason isn’t clear or necessary, redact sensitive details before sharing.
• Suspicious behavior or urgency: 
  
  • Example: A bookkeeper or tax preparer emails from a new address, pressuring you to send tax data urgently without verifying their identity, or asks you for more banking account information than they need. (They need to view your bank accounts, they do not need to have access to your accounts.) 
  • Easy Actions: Call their known phone number to confirm the request. If the contact is unfamiliar or unverified, don’t share data and report the suspicious activity. Do not provide anyone with direct access to your bank account unless you know you are working through a secure portal such as a payment gateway. 
  • California FarmLink Clients: we will only email you from an email ending in @cafarmlink.org and you can always give us a call to confirm it is a relevant FarmLink staff person requesting information

No legitimate business, government agency or other non-profit organization will ever ask for your personal financial information or other sensitive data via text, phone call, or e-mail. If you get any phone call test or e-mail demanding payment (or offering to pay you!) and requesting access to your financial accounts, it is a scam. A legitimate request will happen:

• In the context of a relationship you already have
• With a person you already know
• Using a secure platform - but even then verify with the person you are working with so you are certain that you are being directed to the correct platform

If you get a text, e-mail, or phone call and you are not sure, do not respond to what you received. Instead find the last legitimate communication you had with that person or organization and initiate contact with that person or organization and ask if the communication you just received is legitimate. If they say it is legitimate, be sure that you understand what they are asking for and why. 

Note: The IRS will only contact you via the US Postal Service.

Many businesses use cash for some transactions. There is nothing wrong with this, but it does cause some problems with recordkeeping and can make it difficult for a bookkeeper to ensure that all transactions are completely and accurately recorded – which is the fundamental goal of a bookkeeping system. 

Some businesses operate entirely with cash. This greatly limits ability to do business, because it limits access to larger accounts, limits ability to access credit, and makes it very difficult to have a system that ensures a complete and accurate record of all business financial transactions. 

If you have cash income and you want to make sure it is recorded, the best practice is to deposit it to your bank account. 

Best Practice: You get cash and credit card payments each week at the farmers’ market. Deposit the cash to your bank account each Thursday and let your bookkeeper know that all Thursday cash deposits should be recorded as farmers market receipts.  

Okay Practice: You get cash and credit card payments each week at the farmers’ market. You use that cash to pay business expenses and you give the bookkeeper the receipts for the business expenses. Your books will under-state your income but will record your expenses accurately. This will make it look like you are less profitable than you really are. It will make it harder for you to budget next year, or to get a loan, or to file accurate tax returns. 

Bad Practice: You get cash and credit card payments each week at the farmers’ market. You take the cash home to pay personal expenses and you do not give the bookkeeper this information. Your books will under-state your income. This will make it harder for you to budget next year, or to get a loan, or to file accurate tax returns. 

If you pay expenses with cash, your bookkeeper will not know about these expenses unless you give them the receipts. 

Best Practice: You use your credit card to buy gas and you lose the receipt. Your bookkeeper will see the transaction on your credit card statement and will record it even though you do not have a receipt. 

Okay Practice: You use cash to buy gas and keep the receipt. You give the receipt to the bookkeeper. The bookkeeper will not be able to match it to any transaction on your bank account or credit card statement, so they will record it as cash you put into the business and as a business expense. This is fine as long as it was actually personal cash. If it is the same cash that was income from the farmers’ market, then your books will start to show sales less than actual and expenses greater than what the business can afford - in other words they will not make sense, and that could make it hard to file accurate tax returns or to get a loan. 

Bad Practice: You use cash to buy gas and lose the receipt. Your bookkeeper will never know the transaction happened. You will forget it happened. Your gas expense will be lower than actual. This will make it harder for you to budget next year. 

The Bottom Line: Using cash makes it easy to miss income or expenses. The best habit is to deposit cash income into the bank and keep receipts for cash expenses.

Learn more about opening a savings or checking account using the National Credit Union Administration’s Money Basics Guide to Savings and Checking Accounts. 

Good bookkeeping requires a business bank account that is used only for business transactions. This means that business owners really need to have at least two bank accounts, one used for personal transactions, and the other used for business transactions. 

If you use a credit card in your business be sure it is a dedicated credit card and you do not use it for any personal transactions and do not pay it directly from your personal bank account. 

Accidents happen though, and sometimes you will use the wrong card. If you accidentally use personal money for a business expense, that is recorded as an owner’s investment. If you accidentally take money from the business for a personal use, that is recorded as an owner’s draw. 

Owner’s Investments and Draws

When a business owner puts their own money into the business that is called a capital contribution of an owner’s investment. When the owner takes money out of the business that is called an owner’s draw. 

Best Practice: The business never pays directly for the personal expenses of the owner, and the owner never pays directly for the expenses of the business. 

The only transactions between a business owner’s personal bank account and their business bank account are contributions and draws. If the business is short on cash the owner makes a transfer from their personal account to the business account and records it on the books of the business as a capital contribution. If the business owner wants to take money from the business they make a transfer from the business account to the personal account and record it on the books of the business as an owner’s draw.

OK Practice: Sometimes the owner forgets, and accidentally uses personal money to pay a business expense or uses business money to pay a personal expense. They record the accidental personal payment of a business expense as a business expense and a capital contribution. They record the accidental business payment of a personal expense as an owner’s draw. 

Bad Practices: 

• There is only one bank account and it is used for business and personal transactions.
• There are business and personal bank accounts but the owner frequently deposits business receipts directly into their personal account and frequently pays personal expenses directly from the business account, and sometimes pays business expenses directly from the personal account, or using cash. 

If a business owner needs to take If you already have one bank account open a second for your business

• It does not need to be a “business” bank account, just a second bank account 
• Why? 
  
  • Helps with good / accurate records
  • You may need to grant access to your business accounts for purposes such as applying for credit, working with a bookkeeper, or complying with an audit of your business. If you put business and personal transactions in both accounts then you can not limit the access to just your business accounts, and others may be able to see your personal transactions. If you keep your business and personal transactions separate you will be able to maintain more privacy around your personal transactions.

You do need at least two bank accounts, one for personal and one for business, but you do not necessarily need to pay extra for a business account. Check the fees your bank charges for regular checking accounts and for business checking accounts. Usually the fees are based on how many transactions go through the account each month. If you have a lot of transactions each month you probably will need to pay the extra fees for a business account, but if you have very few business transactions, no more than in your personal account, it is fine to just open a second personal type account - just be sure you do not get confused about which account is business and which is personal. 

When it is ok to just open another account (not a business account).

• Any time your business does not have very many transactions each month.

When you actually need a true business account.

• If you have more transactions than are allowed with a basic checking account;
• To receive some types of payments, usually from school districts or government contracts.

Don’t pay more bank fees than you need to. 

• Shop around for different rates at different banks or local credit unions. 
• Compare the terms offered to these national standards for good bank accounts developed by national not for profit organizations dedicated to financial education and access. You can also learn more about savings and checking accounts using the National Credit Union Administration’s Money Basics Guide to Savings and Checking Accounts. 

The IRS requires you to have written evidence to demonstrate that the statements on your income tax returns are true and accurate.

The rules for what kind of evidence you need to have include general rules and special rules for certain types of transactions. 

You must keep business records related to all items of income and expense for any business or rental income reported on your federal income tax return. 

You must be able to show evidence that: 1. The transaction actually occurred, 2. It was for the amount claimed, and 3. That it was for the business purpose claimed. 

Income Records

You are required to report all income related to your business. Income records serve to prove that you have not over- or under-reported your income. 

The following are examples of minimum required documents to prove income items: 

• Checking and savings account statements
• Receipts from sales showing if the sale was paid in cash or “on account” (meaning the customer will pay later)
• Records showing amounts received from sales made “on account” 
• Records of bad debts or amounts sold on account but never paid

Expense Records

You may, and in fact you must deduct expenses that are ordinary and necessary and reasonable for your business. Ordinary expenses are defined as “customary or usual” and  “common or frequent” in the taxpayer’s business and businesses like the taxpayer’s. Necessary expenses are defined as being “appropriate and helpful for development of the business.” 

To prove expense items you must be able to show evidence that: 1. The transaction actually occurred, 2. It was for the amount claimed, and 3. It was for the business purpose claimed. Some expense items have additional special requirements. Examples of expense items with additional special requirements are: asset purchases, vehicle use, travel, meals, gifts, and events. Materials on each of these items are below. 

At a minimum your supporting documents for business expenses should identify the payee, the amount paid, proof of payment, the date incurred, and if needed, include a description of the item purchased or service received that shows the amount was for a business expense.

You may need a combination of records to do this, including: 

• Checking and savings account statements
• Credit card account statements 
• Physical receipts
• Additional notations made on the receipts to explain how the purchase relates to the business 

It is a good practice to make a note on a receipt as soon as you can, but most receipts fade out within a few months. The best practice is to take a picture of the receipt - with the note on it - or make a copy of the receipt.  

Exceptions to General Records Requirements: 

You have the right to take deductions based on a "reasonable reconstruction of expenditures” if your original records are lost due to circumstances beyond your control such as theft, fire or flood.

If records are incomplete due to the taxpayer’s own negligence but the taxpayer can demonstrate that some expenses were actually incurred the taxpayer is entitled to some amount of deduction, but the amount will be limited to the smallest amount reasonable.

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

If you just keep bank and credit card statements and receipts, you will not have a system for organizing that information in a way that is required to report meaningful summary information on your tax return, so you also need a system for organizing your individual transactions into meaningful categories of income and expense for each year. 

You are required to use a method that clearly and accurately reflects your gross income and expenses and allows you to report asset purchase and sales separately from other business transactions.

There is no specific requirement to use a particular method to keep your records, and summarize your individual transactions into the groupings required on the IRS forms, but the method you use must be appropriate for the size of your operation.

Minimal organization is ok for a very small operation in its first year of operations. Here are two common methods for small businesses in their first year of operations: 

• Keep sales and purchase receipts, sort them into groups corresponding to categories on the tax return. You can give these receipts to a tax preparer or, total each grouping and report that number if you prepare your own return or use a computer program to help you prepare your own return. Note that if you give receipts to a tax preparer to total they may make mistakes and they will charge you extra. 
• Use paper or a spreadsheet program to create a register showing date, payee or payor, amount and purpose of each transaction, and code each transaction to an appropriate category on the tax return. You can total each grouping yourself if you prepare your own return.

Note that these methods are slow and will not be clear and accurate if there are lots of transactions. If you do not have a receipt for something you will not include it and your returns will be inaccurate.There is no built-in way for you to verify that you have correctly recorded each transaction even if you use your bank statement or credit card statement to guide you.

The standard best practice is to use a double-entry bookkeeping system. Double-entry bookkeeping is not required for very small businesses, but it is required for larger and more complex businesses, and it is the only way to ensure that your records are complete and accurate and easily produce usable reports. Double-entry bookkeeping means that each transaction is recorded according to well-established (literally centuries old) rules, and there are standard methods for verifying completeness and accuracy. 

To implement a double-entry bookkeeping system for your business you can: 

• Use an online software program such as Quickbooks and learn as you go
• Hire a trained bookkeeper to do all of your bookkeeping
• Use an online software program such as Quickbooks and hire a trained bookkeeper to help you set it up and help you learn the best ways to use the program and manage your documents 

For more help setting up a double-entry bookkeeping system see the resources of the FarmLink Bookkeeping Toolshed, particularly the FarmLink Model Chart of Accounts. 

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

You have several options for systems to support your bookkeeping, and it can be difficult to understand the differences. We discuss different options below. 

Free templates on Google Sheets. There are free templates on Google Sheets to help you record your transactions. This is a better option than simply leaving your receipts in physical folders and only organizing them at year-end for tax purposes. 

This option works best for: 

• New operations that may not continue for more than two years
• Very small operations with no infrastructure, little equipment, and few transactions 

It makes sense to keep costs down while you are still deciding if you are going to continue farming.This can be a great option for people who are in a farm-incubator for a short period of time. 

You will know it is time to upgrade when: As your operation grows and you have more transactions and more assets and liabilities it will be increasingly time-consuming to manage all of your bookkeeping needs on Google Sheets. There are various options to add functionality to Google Sheets bookkeeping templates, but by the time you are incorporating these, you are probably not saving money because you are probably spending too much of your own time managing basic bookkeeping functions instead of using the data from your bookkeeping system to manage your business. 

Free bookkeeping software. There are many options for free bookkeeping software - but they all have limited functionality. 

This option works best for: 

• New operations that may not continue for more than two years
• Very small operations with no infrastructure, little equipment, and few transactions 

You will know it is time to upgrade when: Don’t worry, they will tell you. The free options are all designed with limited functionality. As your operation grows and you have more transactions and more assets and liabilities you will simply outgrow the free options. This is by design! 

Standard bookkeeping software with full balance sheet functionality. Quickbooks, Sage and Xero are the best established accounting software services. 

Beware of cheaper competitors with lesser functionality. You want a bookkeeping system that allows full balance sheet functionality. Some programs offer very limited balance sheet functionality - only allowing you to track accounts receivable and accounts payable for example, but not allowing you to track equipment, loans, and owner’s equity. 

This option works best for: 

• Everyone.

You will know it is time to hire a bookkeeper when: You realize you are spending too much of your own time managing basic bookkeeping functions instead of using the data from your bookkeeping system to manage your business. 

A paid bookkeeper. A good bookkeeper is an invaluable asset to any business. A bad bookkeeper can bring a business down. Hire carefully and supervise closely. See the materials on month end procedures for ways to supervise your bookkeeper and ensure they are doing their job correctly. 

This option works best for: 

• Everyone. 

Unless: 

• You have the wrong bookkeeper. 

What to expect from a bookkeeper:

• Timely and accurate entry of  your financial transactions into a double entry bookkeeping system.
  
  • Timely means generally within ten working days of receiving the information. 
  • Accurately means two things: all financial activity is recorded and transactions are recorded to accounting categories that accurately reflect the substance of the transaction. 
• Monthly reconciliations of all business bank accounts and credit card accounts.
• Monthly balance sheet and income statement reports and a monthly list of questions or observations regarding the transactions they have recorded. 

A Bookkeeper keeps your day-to-day and month-to-month records accurate and up to date. They may also be tax-preparers. 

A tax preparer is usually not also a bookkeeper. A tax preparer uses your records at the end of the year to file taxes. They usually don’t manage your books year-round. You need a new bookkeeper if you thought your tax preparer was your bookkeeper but the only thing you ever get from them is your tax return. 

What to expect from a tax preparer:

• They should take the summary reports for the year, prepared by your bookkeeper, and enter them accurately onto the correct forms required to file state and federal income tax returns. 
• They should ask enough questions to understand your business, but as long as the reports prepared by your bookkeeper appear reasonable, they should not question the underlying accuracy of those reports.
• They should bring it to your attention if they have reason to believe that the bookkeeper's reports are not complete and accurate and do not make sense. 
• They should particularly ask you questions about any purchase or sale of business machinery and equipment. 
• They should have a conversation with you about how to report business use of your personal automobile and business use of any vehicles owned by the business. 
• They should ask you questions about your non-business activities so they can complete the parts of your state and federal tax returns that are not related to your business. 
• They should communicate promptly and ensure that your tax return is timely filed, or you file a timely request for an extension of time in which to file. 

What to expect from a bookkeeper:

• Timely and accurate entry of  your financial transactions into a double-entry bookkeeping system.
  
  • Timely means generally within ten working days of receiving the information. 
  • Accurately means two things: all financial activity is recorded and transactions are recorded to accounting categories that accurately reflect the substance of the transaction. 
• Monthly reconciliations of all business bank accounts and credit card accounts.
• Monthly balance sheet and income statement reports and a monthly list of questions or observations regarding the transactions they have recorded. 

Warning signs your bookkeeper is not doing their job:

• They have not established a clear and routine process for you to send them the information they need each week, or each month, or more frequently. 
• Your bookkeeper does not regularly ask you for clarifying information to help them accurately record transactions. 
• You do not receive a monthly balance sheet and profit and loss report.
• You do not receive monthly bank and credit card reconciliation reports.
• If you receive a profit and loss report there are many items in a category called “Uncategorized Transactions.”
• They refuse to give you access to your own QuickBooks or accounting records.
• They delay or fail to send records to others after you have requested in writing that they do so.

If you're planning to end services with your current bookkeeper or tax preparer, use this checklist to make sure you leave with everything you need for a smooth transition. 

Be sure to get a copy of your data or ownership transferred before ending the relationship. 

There are three categories of data and source documents to address: 

A. Bookkeeping Data and Source Documents

1. For online programs: 
   
   1. Set up your own online account for the same bookkeeping program so you have an account that can receive the data.
   2. Request ownership of the account be transferred to you.
   3. Ask for a list of any logins or accounts they created on your behalf.
   4. For QuickBooks Online (QBO), receipt images are saved in the account, so when the account is transferred to you, the images of the receipts will also be transferred. Check if the same is true for other programs. If the images are not transferred, you will need to be sure to get the physical copies of any receipts or other source documents you gave to your bookkeeper. 
2. For desktop programs: 
   
   1. Ask the bookkeeper to convert your file to the online version and then transfer ownership (may incur extra charges). OR - 
   2. Request a backup file of your accounting data (may incur fees). Customer support can guide you through this process.
   3. If your bookkeeper has retained your physical copies of receipts and other source documents, be sure these are all returned to you. 
3. If you do NOT own your bookkeeping software, your bookkeeper uses different software, or does not agree to give you the file with your bookkeeping ask for the following documents:

• A brief summary of how they managed your books or taxes

• Chart of Accounts and Class List

• Trial Balance as of December 31 for any year for which they have also prepared income tax returns for you and as of the end of the last month for which they completed services 

• Balance Sheet as of the end of the last month for which they completed services

• Profit & Loss (P&L) Statement for the current year through the end of the last month for which they completed services

• General Ledger (shows all transactions)  as of December 31 for any year for which they have also prepared income tax returns for you and as of the end of the last month for which they completed services  for the current year through the end of the last month for which they completed services

• Any bank or credit card reconciliations as of December 31 for any year for which they have also prepared income tax returns for you and as of the end of the last month for which they completed services 

• Any original invoices and receipts in their possession 

• Any adjusting journal entries (usually done at year-end)

• Payroll reports (if they managed payroll)

B. Income Tax Documents - for a tax preparer or a bookkeeper who also prepared income taxes 

• Full copies of your tax returns (PDFs – not just transcripts) including any supplemental schedules not required to be filed with the IRS. In particular be sure to get a full copy of any depreciation detail showing assets.

• Copies of any extensions of time for federal or state income tax returns.

• Copies of any correspondence with the IRS or state tax authorities they handled for you

• Copies of vouchers for estimated tax payments made

C. Payroll Tax Information - for a bookkeeper who did payroll, or for a payroll service 

• Copies of all payroll tax filings (Forms 940, 941, DE9, etc.)

• W-2s for employees and 1099s for contractors and W-9s

• Any quarterly or year-end payroll summaries

Final To-Dos

• Ask for a final invoice and confirm your last day of service

• Request a list of any unfinished tasks or open items

• Confirm if any tax extensions or filings are still pending

• Change any passwords for any accounts to which the bookkeeper had access

Tip: Save all files digitally in a secure place you can access easily, and share with your new provider to help them get up-to-speed faster.

Keep most records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return. 

Keep employment records for four years.

Keep records for 7 years if you file a claim for a loss from a bad debt.

Keep records related to depreciable assets as long as you keep the assets. 

Keep records related to asset sales for three years after the sale.

Keep records related to land for as long as you own the land and seven years after the sale of land. 

For general matters the IRS must audit within 3 years.

If there has been a substantial (25% or more) understatement of income the IRS has 6 years to audit.

If you do not file a tax return, or have filed but willfully failed to report income, the IRS can go back as far as they want!

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

If a business pays self-employed individuals and small businesses more than $600 in a calendar year the business is required to report the payments to the Internal Revenue Service on Form 1099. 

Generally a business does not need to file a Form 1099 to report payments to corporations, but you are required to report all payments to attorneys. 

You do not need to report payments for merchandise, storage, and rent.

If you fail to file Forms 1099 as required, the IRS may disallow any deductions for the expenses that should have been reported on the Forms 1099. Also, the IRS will charge penalties for failure to file Form 1099. 

Penalties are adjusted annually. In 2026 they are:

• $60/form for filled within 30 days of the due date
• $130/form filed by August 1
• $340/form filed after August 1
• $680/form if failure to file was not accidental

For information about how to file Forms 1099 and when they are due see the IRS website. 

The only way to have accurate records of your business activities is to have a system to keep receipts and notes as you go, and to regularly organize that information and get it to a bookkeeper or enter it into a bookkeeping system yourself. 

The foundation is in your daily practice of keeping receipts and making notes on the receipts or in an app you use to take pictures of the receipts. 

We recommend picking one of two methods and sticking with it: 

A phone-based app 

Take a picture of every receipt and upload it to the app. Add notes as often as you can to include extra information. If you do not get a receipt write out on a piece of paper what would have been on the receipt: date, amount, person or business, and the specific purpose of the transaction, and take a picture of the piece of paper as if it were a receipt and upload it to the app. 

 An envelope and folder system: 

You will need: 

• At home: Four folders or large manila envelopes labeled: 1. Income, 2. Farm Expenses, 3. Equipment, 4. Other Expenses. 
• With you in your truck: A few pens, a large manila envelope labeled “Daily Receipts” and a pad of note paper.
• During the day: Every time you get a receipt, put it in the “Daily Receipts” envelope. Unless it is completely obvious what the receipt was for, write a note on the receipt (front or back) with a bit of additional information. If you do not get a receipt write out on a piece of paper what would have been on the receipt: date, amount, person or business, and the specific purpose of the transaction. 
• Each night, or at least once a week: Take all of the receipts out of the “Daily Receipts: envelope and organize them into the four manila envelopes or folders labeled 1. Income, 2. Farm Expenses, 3. Equipment, 4. Other Expenses. See R.9 Keeping receipts - Special Rules for Property Used in A Business for more information about what to put in the envelope labeled “Equipment.”

Once a month, or at least once a year, you will need to give the information on your phone app, or the envelopes you keep at home, to a bookkeeper or a tax preparer. See R.18 Organizing and Transmitting Receipts on a Monthly Basis  for specific instructions on how to transmit your information to a bookkeeper. 

Some receipts are more important than others!

Receipts for property you purchase that is expected to last for more than one year are more important than receipts for things you buy which you will use up within a month or within a year. 

Seeds and soil inputs are things you use up within a year, they are part of the crop you produce each year. Oil and gas for your vehicles are also things you use up as you go. 

When you spend money on things that are used up during the year, those things are called expenses. 

Property such as machinery and equipment is usually expected to last more than a year. It is especially important to keep receipts for these types of purchases because they are special rules for how they are reported in your books and on your tax return.

In the language of taxes and bookkeeping, property used in a business, and expected to serve the business for more than a year is called assets. 

• Machinery is an asset. The fuel you put in the machinery is an expense. 
• Equipment is an asset. The amount you pay someone to repair a piece of equipment is usually an expense - but if they essentially re-build the equipment and give it a whole new useful life, then the amount you pay the person would be treated as if you bought a new piece of equipment. 

When in doubt, keep the receipt and write a detailed note so you can discuss what it is for with your bookkeeper or tax preparer. 

You should keep a detailed list of all the depreciable assets used in your business. Show:

1. Description
2. Purchase date
3. Purchase amount
4. Depreciation deduction taken each year
5. Date sold or taken out of service

In addition to your asset list you need supporting documentation showing evidence of: 

• When and how you acquired the assets
• Purchase price
• Cost of any improvements 
• Depreciation deductions taken
• Deductions taken for casualty losses, such as losses resulting from fires or storms
• How you used the asset in your business
• Sales price of asset if sold and terms of sale if sold on contract or in partial exchange for another asset.

Examples of supporting documents include: purchase and sales invoices, real estate closing statements, canceled checks or other documents that identify payee, amount, and proof of payment, prior year tax returns with depreciation schedules. 

Special requirements for transactions involving assets

When you sell an asset the income is not part of your business income, it is reported separately as Capital Gains Income. 

Capital Gains are taxed at a lower rate than self-employment income. 

Capital Gains Income is: 

Gross sales price

Less your basis in the asset 

Less costs of the sale

___________________________________________________

Equals: Capital Gains Income (or Loss) 

Basis is: 

a) cost basis which is your purchase price or cost to build

b) gift basis or the donor's basis when they gave it to you or 

c) for inherited assets you have a special “stepped-up basis.” 

A stepped-up basis is the fair market value of the asset on the date of death of the person from whom you inherited it.

You may increase your basis in an asset if you incur costs by making improvements to it.  

Your basis in an asset decreases by the amount of the depreciation that would be allowed on your tax return - and it decreases by this amount even if you don’t take the deduction on your tax return! 

You need records to show your basis in any asset you sell. 

If you can not prove the amount you claim as basis the IRS will assume the basis is zero and you will owe tax on the full sales price of the item. 

Records to show basis include: 

• purchase records
• tax returns showing depreciation
• gift letters and the tax returns of the person who made you the gift (if you want to show that you have more than zero basis in the gift because they had more than zero basis in the gift)
• estate tax returns or probate documents for inherited assets 
• receipts for any improvements you made. 

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

You may take deductions for vehicle expenses using the mileage method or the actual method. 

If you use the mileage method you record the business miles you drive and multiply the total miles by the IRS published rate to calculate the total deduction. 

If you use the actual method you keep all of your receipts for gas and  maintenance. 

In both cases you need to record your business miles. 

Typically a vehicle that is owned by the business and used exclusively for the business uses the actual method, and the owner also uses the mileage method for occasional business use of a personal vehicle. If there is only one vehicle for personal use and farm business use you need to choose which method to use. You can have different methods for different vehicles, but you can not change methods year to year on the same vehicle. 

The record must be written and must include:

1. Date
2. Destination
3. Round trip miles driven 
4. Business purpose of the trip - a short note that explains why or how the trip relates to the business. 

You can use any type of calendar to keep records of your business trips -  paper calendar, an app on your phone, a diary or a day planner. The important thing is that you have a written record of the date, destination and business purpose of the trip. 

Examples of business trips are: 

• To and from your farm to town to buy supplies
• To and from your farm to another town to look at equipment
• To and from your farm to another farm to talk with the other farmer
• Trips to sell at a market
• Trips to visit possible buyers 

Trips from your house to your farm and from your farm to your house are considered “commuting” and are not allowed as business deductions. 

There are two methods for calculating vehicle-related deductions: Actual and Mileage. 

1. The Actual Method allows you to take a depreciation deduction to recover the cost of the vehicle and to deduct all fuel and maintenance expenses - but you have to keep records of all the miles driven showing the business purpose of the trip AND you must also keep all of the receipts for fuel and maintenance. 
2. The Mileage Method allows you to calculate your deduction by multiplying the IRS mileage rate (published at least annually) by the business miles driven. 

Under either method you need a written record of the miles you drove showing date, miles driven, where you went, and most importantly WHY it was a business-related trip.  

You can switch from Mileage to Actual but you can not switch from Actual to Mileage. 

You may deduct tolls and parking separately in addition to vehicle expenses.  

You can have a situation where you use both methods, but for different vehicles:

• You use the Actual Method for a vehicle that is owned by the Farm/Ranch and used primarily in that operation (but perhaps sometimes for personal use) 
• You use the Mileage Method for a vehicle that is owned by you personally (and sometimes used for business). 

The Actual Method farm/ranch vehicle is treated as a farm/ranch asset and depreciated along with other farm/ranch equipment and all fuel and maintenance expenses are reported with other equipment fuel and maintenance expenses.

If the vehicle is occasionally used for non-business purposes the owner is supposed to keep a record of the non-business mileage and calculate the percent of business to non-business use and reduce their total business deduction by the value of the personal use.

For a personal vehicle that is sometimes used for business (for example, driving to town to visit with your CPA and buy office supplies) people typically use the Mileage Method. The owner must keep a record of the business miles driven and may take a deduction for those miles using the Mileage Method

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

The IRS allows a deduction for meals and incidental expenses while traveling for a full workday or longer, outside of the taxpayer’s regular area of business for a business purpose. You do not need to keep receipts in order to take this deduction. Instead, you may simply keep a record of the days you traveled away from your regular place of business, and use the published “GSA Per Diem Rate” tables to find the amount you are allowed to deduct for each trip. 

The per diem deduction covers a basic amount for meals, and a small amount for incidentals. Incidentals are things like buying aspirin or sunscreen. 

The per diem deduction is useful for farmers who travel to distant farmers markets or to attend a class. Instead of keeping receipts for the meals you eat on your trip, you can use the per diem expense tables and use the published amounts. 

You find the per diem amount by looking up the destination location at:  https://www.gsa.gov/travel/plan-book/per-diem-rates  The amounts are usually more than $60 per day, however since the per diem deduction is mostly for meals and since all meals deductions are limited to 50%, you only get 50% of the per diem amount as a deduction on your tax return. For people who regularly travel to a farmers’ market in a high-cost city more than an hour from their farm, the amount can still add up to a large deduction. 

You can also use the per diem method to reimburse employees for their out of pocket meals and incidentals on travel days. If you reimburse employees this way you do not need to include the amount in their taxable wages.This means you do not pay payroll taxes on the amounts and they do not pay income taxes on the amounts. 

 To claim the per diem deduction you must keep a written record of the business trip. 

The record must be written and must include:

1. Date
2. Destination
3. Business purpose of the trip

You can use any type of calendar to keep records of your business trips -  a paper calendar, an app on your phone, a diary or a day planner. The important thing is that you have a written record of the date, destination and business purpose of the trip. .What is a business purpose for a trip? Anything that is “ordinary and necessary” to conducting your business. 

Examples of business purposes for a trips are: 

• Buy supplies or equipment
• Meet with a bookkeeper or tax preparer
• Meet with an insurance agent about business insurance
• Meet with a lender about a business loan
• Look at equipment you might buy to use in your business
• Meet with another farmer or an agricultural adviser to discuss ways to manage your production or your business
• Meet with a potential supplier to discuss buying from them
• Meet with a potential buyer to discuss selling your products to them

In order to qualify for the per diem deduction a trip must take you away from your "tax home" for more than 8 hours.

What is your "tax home"?  Draw a circle around your farm going out as far north, south, east, and west as you would travel in a typical work day. Everything inside of the circle is your tax home.  Everything outside of the circle is outside of your tax home. If you make trips outside of the circle, you may take a per diem deduction for your meals and incidental expenses for the day. 

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

You may deduct travel expenses that relate to conducting your business including ordinary and necessary expenses associated with traveling to do the ordinary and necessary activities of your business. 

The key documentation you need, in addition to receipts, is something to substantiate the business purpose of the trip. 

You may deduct travel expenses related to purchasing equipment, supplies, livestock, accessing veterinary, legal, accounting, and educational services, developing marketing relationships, and  delivering your product to market. 

Travel expenses include: vehicle expenses as discussed above, rental vehicle expenses and related fuel, ferry, airfare, taxi or ride service, hotel, and meals and incidentals. 

For meals to be deductible you must be on a trip away from your regular "tax home" for 8 hours or longer. Your "tax home" is the general area in which you regularly conduct business activities - the radius around your farm you typically travel on a typical work day.

Many farmers/ranchers live fairly far from services and may travel several hours to the nearest town or city. That nearest town or city may be part of the area you consider your "tax home" if you regularly travel there and back within a regular work day. The next farthest town or city may be outside of your tax home. In order to be able to take a deduction for your own meals and incidentals for a travel day you have to be outside of your "tax home" for a full 8 hours or longer.

For many farmers the day they travel to a farmers market is a 12-14 hour day and they are outside of their tax home for most of the day - they can take a meals and incidentals deduction for those farmers market days. Draw a circle around your farm as far out north, south, east and west as you go in a typical day - that is your "tax home" everything else is "away."

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

You may take a deduction for a business meal if the primary purpose of the meal is to conduct business or further some purpose of the business. 

You may take a deduction for meals eaten while traveling away from your “tax home.”

You must be able to substantiate the business purpose of the meal.

You may compensate your employees for their meals and incidental expenses when they are away from your tax home, traveling for you on work. 

Provided you have written documentation showing the business purpose of the trip and the date and place of the trip, you do not need to include the value of the payment to the employee in their taxable W-2 wages or pay payroll taxes on that amount.

Business meals deductions are limited to 50% of the actual amount or the amount on the GSA table. 

For your own meals and incidental while traveling away from home you have a choice similar to the one for vehicle expense: Actual or Per Diem Rates from the GSA Table.

To use the Actual Method you must have your actual receipt along with a notation explaining the business purpose of the trip. 

To use the Per Diem Method you do not need to keep any receipts, but you do need to maintain written records explaining the business purpose of the trip. You calculate the amount of the deduction using the Per Diem Rates Table published at least annually by the General Services Administration (GSA) of the federal government. Look up the city that is your destination. If the city is not listed, use the amount listed for the county. 

Business meals deductions are limited to 50% - if you look on the IRS form you see the line you enter 100% and then you subtract 50% to arrive at your actual deduction.

Note that the GSA tables include hotel expenses. A self employed person may not use the GSA tables for hotel expenses; you have to have actual hotel receipts. Use the "Meals and Incidentals" part of the table only. 

"Incidentals" is for things like buying aspirin or sunscreen you may have forgotten to take with you but later realize you need. 

Special requirements to substantiate business meals that are 100% deductible

If you provide meals to employees for YOUR convenience (yours not theirs) then those meals are 100% deductible (not subject to the 50% limitation).

Further, the value of the meals provided to your employees is not included in their taxable wages. 

You must be able to document that the meals were provided for your convenience. 

An example of appropriate documentation would be including in your employee policy manual the requirement that employees eat meals with the farm/ranch crew so they can be close-by for emergencies, or because town is too far away, or in some cases as part of them understanding how the food grown or raised in the farm is prepared and served and how it tastes.

Examples of when the meal is for your convenience if: It is provided at your place of business, it enables the employees to work overtime, you are far from a place where your employees could reasonably leave, go buy a meal and return within the time allotted for a lunch or dinner break, you provide the meals to enable the employees to be close by for emergencies. 

Examples of when the meal is not for your convenience: You provide meals in order to increase overall employee compensation, the meals are provided when the employees are not working.

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

As long as you can make the connection between the person receiving the thank you gift and a legitimate business purpose (including promoting your business to potential customers) you may deduct business gifts of up to $25.00 per recipient.

Consider the people who might receive a business gift. Who are people who help you in your business by functioning as informal advisers? Do you have a friend or family member who is self-employed or has particular expertise in farming, ranching, marketing or accounting and taxation? A thank-you gift can be a nice way to acknowledge that you appreciate their continued mentorship. 

For more information see IRS Publication 463, Travel, Gift, and Car Expenses

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

Entertainment expenses are not deductible.

There are two important examples of ordinary and necessary business expenses that are fully deductible, but may look like entertainment: 

1. Promotional events for customers
2. Recreational, team-building, or appreciation events for employees

Promotional events such as a harvest festival are events to bring customers to your farm. They may have entertainment elements such as children's games and rides and music and dancing. These are ordinary marketing activities and the expenses are necessary so they are fully deductible as long as you can document the business purpose of the event. 

Recreational events for employees such as expenses for a summer outing to the local water park are designed to help you maintain or improve employee morale, performance, retention, etc. These expenses are fully deductible as long as you can document that the purpose was related to enhancing employee performance and retention. 

If you go to see music or a movie with someone who markets your products you cannot deduct the cost of the ticket - that would be considered entertainment because rather than being in a meeting with each other discussing business, you were both being entertained by something non-business-related.

You may deduct the cost of parking at a hotel and renting a hotel conference room for a business meeting. Or, you may deduct admission and parking costs if you go to a local park and have a walking meeting with someone rather than having a business meeting in a hotel conference room. The important point is that the primary purpose and activity is the business meeting. 

You will need some written notes about what you talked about that make a clear connection between the meeting and your business. 

How do you show that the primary activity and purpose was the business meeting? The best way is with notes from the meeting, or notes you write after the meeting. A follow up e-mail to the person saying "That was a great meeting! To summarize, we talked about x, y, and z and agreed to do 1, 2 and 3” would be another way to document the business purpose of the meeting. 

These are examples of non-financial records that validate financial records, and situations where the receipt alone will not justify the deduction, but the receipt plus other documentation will.

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others. 

The most efficient way for your bookkeeper to work is one month at a time. If you give them receipts in random order they will charge you for the time it takes them to organize your receipts. If you organize the receipts yourself then you will save money on bookkeeping. It also gives you a chance to review your receipts and make sure that none are missing and that any that need notes have notes. 

To organize your receipts for one or more prior months: 

1. Get receipts for all of your business transactions back to the first day of the current year
2. Get seven envelopes of folders and label them with the following names: 
   
   1. Income
   2. Production Expenses
   3. Sales Expenses 
   4. Equipment Purchases 
   5. Vehicle Expenses
   6. Office Expenses
   7. Other Expenses 
3. First, organize receipts into each of the categories
4. Then, look at each receipt and if it needs any additional explanation, write a note to clarify what the receipt is for and then 
5. Sort receipts by month within the category 
   
   1. You can use a piece of scrap paper to separate each month
   2. You do not need to put the receipts in order by day within the month

To transmit your receipts for one or more prior months:

Option A: 

1. Take a picture of each receipt and upload each receipt to your bookkeeping system
2. Write a big “T” for “Transmitted” on the back of a receipt when you have transmitted it to your bookkeeper.

This option is slow, but you can do it all from your home, and you do not risk losing your records. You will end up with an electronic record of each of your receipts which is a good idea because the ink on the receipts may fade, or the receipts could be lost. 

Option B: 

1. Go to a copy shop or use an app on your phone and scan your receipts - you can usually lay your receipts out so that you can fit three or more receipts on one page to be scanned
2. You will get an electronic file of all of your scans - you can have this file e-mailed to you or you can have it saved on a flash drive (you will have to buy a flash drive or bring your own)
3. Upload the file of scanned documents to your bookkeeping system

This option may be faster if you have a lot of transactions, but there will be a fee of around ten cents a page at a copy shop. You will end up with an electronic record of each of your receipts which is a good idea because the ink on the receipts may fade, or the receipts could be lost. 

Option C: 

1. Deliver your folders to your bookkeeper, or deliver them in person. 

This option may be cheapest and easiest, but it may not result in you having digital copies of your records, and it is possible that your records could be lost, and the ink on most of the receipts will fade. Your bookkeeper may scan your receipts for you, but they will charge you for their time to do this. 

The default assumption is that anyone who works for you is considered an employee. 

• Employees are those who work for the benefit of another. 
• Employers are those who receive the benefits of the labor of another.

This is true even if the people involved do not believe they are in an employee/employer relationship. 

Employers must pay employees according to California (or other state) law following rules for:

• Minimum wage, overtime pay, breaks 
• Frequency and manner of payment
• Payroll tax withholding and employer’s share of payroll taxes
• Providing worker’s compensation insurance 
• Providing appropriate sanitation, drinking water, and heat and illness protection

The best way to ensure that you are paying employees correctly and also paying all of the associated payroll taxes correctly and on time is to have payroll prepared by a payroll service provider. 

One of the other ways that farmers make sure that they are in compliance with all of the requirements of California (or other state) labor law is by hiring workers through a labor contractor. The labor contractor becomes the employer and is responsible for having all of the workers on payroll, and protected by workers compensation insurance and other protections. However, if you hire a labor contractor and they do not follow all the rules to protect workers, you are responsible. 

There two important exceptions to who must be considered an employee: 

1. Owners, their legally married spouses, their children, and their parents may work for the owner’s company without being considered employees. But note that minors have additional protections under the law
2. People who are independently self-employed or running their own business do not need to be on payroll. These people are called “independent contractors.” Common examples include bookkeepers, food safety consultants, pest control advisors, crop advisors, and custom hire when they bring and operate their own equipment. California law is clear that people doing most farm work are never considered independent contractors. Workers who are planting, weeding, harvesting, washing or packing are never considered independent contractors, they must always be paid on payroll and protected with workers compensation insurance and other protections. This is not the same as people employed by a labor contractor (these people are on the contractor's payroll - not yours).

Who enforces this? 

The State of California ensures that employers pay employees on payroll. One method is drive-by enforcement. The State employees drive to different farm fields and ask workers if they are paid with paychecks (taxed withheld) or as independent contractors (no taxes withheld). Another way that the State enforces is if a worker is injured, there is an automatic inquiry into their employment status. Also, if an employee applies for unemployment benefits it will trigger an inquiry into employment status. 

What are the consequences of not having someone on payroll? 

If you are paying someone as an independent contractor when they should be on payroll and it is discovered, the State of California will fine you for back payroll taxes owed and charge you interest on late payment of the fines. The State of California will also ask to see your records of hours worked and breaks given and may fine you for failing to have those records and may force you to pay back wages and back payroll taxes for breaks not given.  In addition, they will contact the IRS about failure to pay federal payroll taxes. You will also be fined for failing to carry workers compensation insurance.

This document will help you understand what a payroll service does, the different types of payroll services available, and the key considerations for each, so you can choose the best option for your needs. 

What a Payroll Service Provider Does

A payroll service provider calculates the net paycheck for an employee based on the hours worked (and piece rate information you provide). They also calculate the amount of payroll tax you must pay to federal and state tax authorities for each paycheck you write, and they create the correct payroll tax return forms that you are required to send to the state and federal payroll tax authorities. For most people this is not something they can do themselves. Payroll service providers specialize in payroll so they are very good at being accurate and up to date with current laws. 

Larger payroll providers also offer access to workers compensation insurance coverage. 

Options and Considerations

Full service payroll provider

These providers handle all aspects of payroll. You connect your bank account to their payroll system, approve the payroll, and they withdraw the necessary funds to pay employees and all state and federal taxes directly. 

Examples: Gusto, ADP and Paychex 

Things to Consider:

• You must connect your bank account to their system.
• You will need to approve each payroll for withdrawal.
• This method ensures payments for employees and all state and federal taxes are made directly from your account.

Recommendation: Highly recommended for accuracy and convenience, as the service ensures correct and timely payments. 

In-house preparation with software assistance 

This option allows you to calculate payroll checks and associated withholdings and taxes. You are responsible for manually cutting checks or initiating electronic transfers. 

Examples: Quickbooks Payroll

Things to Consider:

• You are responsible for calculating payroll checks and associated withholdings/taxes due.
• You must manually cut checks or initiate electronic transfers for payments.
• This method comes with the risk of errors and potential wage violations or payroll tax underpayments if payments are not made as instructed.

Recommendation: Not recommended, but may be a good option if you need to make calculations of piece-rate payments. Be aware of the risk of errors in calculations and payment dates. 

Local bookkeeper or accountant: 

Bookkeeper uses full service software- Same as full service but the bookkeeper is the intermediary and helps the farmer access the full-service option—all the farmer has to do is give the hours and the piece rate to the bookkeeper 

Recommendation: Use this method if you would like support working with a payroll service, for example, because of a language or tech barrier, or because you would like the convenience of working with a bookkeeper on this. 

Bookkeeper processes manually / independently This option is similar to self-service, computer assisted. A bookkeeper or accountant will prepare all the payroll checks and documents detailing gross, net and deductions. However you are still responsible for distributing the checks.

Things to Consider:

• The bookkeeper prepares all payroll checks and gross/net/deduction documents.
• You are responsible for manually distributing checks.
• There is a risk that payments may not be made even if records show they should have been.

Recommendation: This method comes with risks, but it may be recommended if you need to distribute checks manually because workers do not have bank accounts, or if you are paying piece rate. 

The purpose of an estate or succession plan is to ensure your wishes are carried out during your life and after you pass away. An estate plan includes legally binding documents and may also include non-binding instructions. A simple plan includes these key documents:

1. Will: A formal legal document providing written instructions for how your estate will pass after you die, and who will care for minor or dependent children. Writing a will that directs all of your assets to a trust is a way to ensure your estate will be administered with the least fees and administrative burdens.  
2. Trust: A special legal document that can be used during your life or after. It is a legal way that property is owned and includes written instructions on how that property is to be used. When a will leaves everything to your trust it simplifies the administration of the estate, avoids unnecessary fees, and keeps your information private.  
3. Medical Power of Attorney: A formal legal document authorizing someone to make medical decisions on your behalf if you cannot.
4. Financial Power of Attorney: A formal legal document authorizing someone to make financial decisions on your behalf. A power of attorney may be temporary, for example during an illness, or may be made permanent if you become permanently incapacitated.
5. Contractual Agreements: Contracts are legally binding agreements for things like asset sales, land leases, or services.  
6. Non-binding Instructions and Agreements: Instructions and informal agreements can be invaluable in helping your family and key employees act on your wishes.

Next Steps and How to Get Help

1. Work with a Mediator: A mediator is a trained impartial facilitator who can help you hold family meetings and ensure everyone is aligned around a shared vision for you and your business. Most states have an agricultural mediation program that receives federal funding and may provide some services free of charge to qualified farm or ranch families. In California the program is called the California Agricultural Mediation Program (CALAMP). Residents of other states can find a program through their local USDA Farm Service Agency office.
2. Consult an Attorney: You should consult an attorney to create formal legal documents (Will, Trust, Medical Power of Attorney, Financial Power of Attorney, contracts intended to survive your death). The attorney should be licensed in the state where you live and do business and should specialize in general practice or estate planning. The agricultural mediation program in your state may be able to help you find an attorney. 
3. Create Written Agreements: Work with your family and your attorney or mediator to create written agreements about what you want for yourself personally (medical, end of life, and final instructions) and what everyone has agreed on for the land and business. 
4. Write Detailed Operating Instructions for Your Business: Create a complete operating manual with clear instructions for all the relevant operating information for your business. Ensure that someone has the training to accomplish every critical task in the event of your absence, and ensure that someone has the legal authority to act on your behalf if needed.