Want a better handle on your finances? Separate the business from personal
Separate your farm business and other finances to better understand your operation’s performance and remove unnecessary headaches from the tax season.
“It’s good business practice, and it’s good personal finance practice,” says Vanessa Stockbrugger, founder of Womencents. Mingling finances only complicates things and misses getting a clear picture of how your farm and household are running, she says.
Keep finances and assets separate
One of the best ways to keep your business and personal finances separate is to have separate bank accounts and credit cards, says Erich Weber, business finance specialist with Ontario Agriculture, Food and Rural Affairs.
He also recommends separating assets, ensuring farm assets are under the farm name, while personal assets are kept in your personal name.
Separate off-farm income
Financial mingling can also be an issue for those generating outside income.
When working off-farm, tax deductions are taken off every cheque, with the net amount ideally going into your personal account, Stockbrugger says. But if it winds up in the farm account, you can’t know where you’re drawing money from, she adds.
Issues also could arise during tax season when you’ll need clarity on how revenue will be taxed, adds Manitoba Agriculture farm management specialist Sharon Ardron.
Understand the tax risks
It’s important to have separate bank accounts, especially if the farm is incorporated, as there’s a corporate tax for the business and a separate personal income tax, Stockbrugger says.
Weber says including a personal expense or asset on your farm income tax return can lead to your income tax returns being filed incorrectly, resulting in higher tax owing and possible penalties, with perhaps added accounting costs.
Another danger of not separating finances is causing a shortfall in farm working capital that might have been needed to cover business obligations, Ardron says.
Digitize your records
One way to navigate these waters is to use farm accounting software that allows users to separate their books. Separate accounts can help in determining if the farm is truly self-sustaining, notes Laurier Poirier, FCC AgExpert product specialist.
COVID-19 financial support for farmers has heightened the importance of accurate bookkeeping as governments seek specific figures.
“The better your bookkeeping, the easier it is to apply or qualify for different programs,” Poirier says.
The pandemic has also factored into the growing popularity of AgExpert’s web-based subscription, he notes. With the challenges of in-person meetings, it makes accounts more accessible and easier to share.
Remember these tips:
- Keep your farm finances and assets separate
- Separate books benefit farm and household analysis
- Don’t overpay taxes by mingling revenues and expenses
- AgExpert simplifies bookkeeping while enhancing accessibility and sharing
From an AgriSuccess article by Richard Kamchen.