Equine Accounting: Tax Return Review

When there are SO many more interesting subjects, WHY AM I WRITING ABOUT TAX RETURNS IN THE SUMMER? Some time ago, I had written an article on reviewing your tax return - intending to include it in a newsletter in March or April of next year. But based on several tax returns that I have reviewed recently upon taking on new clients, I've decided to publish the article ASAP. Lately, I've seen some returns that are just plain wrong. Ultimately, it is the responsibility of the taxpayer to review their tax return. Some of the consequences of errors on a return can be overpayment of tax or interest and penalty upon audit.
So please, dig out your 2009 tax return and run an eye over it after having read this month's newsletter. Anything really out of line will jump right off the page at you. It's worth the effort.

Your tax return -most of us have to submit one each year. You either do it yourself or you pay someone to do it for you. For some people, it may be the only form of financial statements that are prepared for their business each year. You want to be sure that it's been prepared correctly BEFORE you get a notice from the IRS that they "are proposing changes to your tax return". Ultimately, YOU are responsible for what is on that return. So take some time and look it over before giving the OK for it to be sent off to the IRS. I know this sounds painful but read this article (average reading time 4 minutes), print this page and set it aside until your tax return is ready. Better be safe than sorry.

Here is a brief guide to what should be entered where.

There are basically four sections where financial information is entered into your Form 1040 U.S. Individual Income Tax Return. The 1040 Form itself is just one page, front and back. All the other schedules and forms provide information which is entered (directly or indirectly) onto the 1040. On the front of the 1040, after the spaces for your name, etc., filing status and exemptions is the Income section of the form. You have 17 lines to enter every type of income you received for the tax year: wages, interest, dividends, business income, Social Security benefits, capital gains and the catch-all "Other Income".
If your business is a sole proprietorship, Schedule F (Farm Income) will be completed, or in some cases Schedule C. The "bottom line" from those schedules will be entered either on Line 18 for Schedule F or Line 12 for Schedule C. If your business is a partnership or S corporation, Schedule E will be completed and that result will be entered on Line 17.
You may feel a little unsure about reviewing other parts of your tax return but no one knows your business better than you. If the schedule doesn't look right to you, it probably isn't. No matter how fancy the tax software program, returns are ultimately prepared by people and people make mistakes.
Reviewing the return also might give you information about some aspect of your business of which you weren't really aware. (Did we really spend $10,000 on farrier bills this year?)
The bottom half of the front page addresses Adjustments to Income. There are only a few lines that are generally of interest to owners of horse-related businesses. Lines 27 through 29 are related to self-employment tax, retirement plans and health insurance and Line 35 would be of interest to breeders.
The top two sections of Page 2 cover Taxes and Credits. On Line 40a, either the Standard deduction or an itemized deduction is entered. The itemized deduction is calculated on Schedule A and consists of personal expenses such as medical, real estate tax, charitable contributions, interest, casualty and theft losses and other miscellaneous deductions. Once the itemized deduction is calculated, subject to certain limits, it is compared to the standard deduction and generally the larger of the two is entered onto the 1040 Form. Your exemptions are also deducted (generally $3650 for 2009/person for you, your spouse and each of your dependents).
Your preliminary tax is then calculated but you may be eligible for certain tax credits - which are deducted from your tax, rather than deductions, which are deducted from your taxable income. Two credits which may affect many owners of horse businesses are the Credit for Child Care Expenses on Line 48 and the Child Tax Credit (for dependent children under the age of 17) on Line 51.
You may also be subject to other taxes such as Self Employment Tax (Line 56). Finally, all of your taxes are totaled on Line 60.
Finally, the lower section of Page 2 calculates the Payments that you have made toward your tax liability in the form of estimated taxes, taxes withheld from your paycheck and/or checks from customers. Several other credits are thrown in for good measure and a final calculation is made of what you owe (final tax liability) or what is owed to you (refund).

The good news is this only happens once a year.