If your farm or ranch is a sole proprietorship, how do you handle personal transactions, business transactions, and split transactions? This is a common question so I thought I’d address it.
First and foremost, please consider getting a separate business bank account for your farm and ranch transactions. Keeping a separate personal and business account might seem like an extra hassle but it looks better to potential suppliers and customers as well as the IRS. It will also make it easier for you to find your business checks and deposits when you only have to look through other business transactions and not all of your trips to the grocery store too.
You can set up all of your bank accounts in the same QuickBooks company file. Do not make separate company files for each bank account.
Next, read my post about setting up a good chart of accounts for your farm or ranch using QuickBooks. Actually, the principles would work in most real accounting software.
Using that basic chart of accounts framework, you’ll have accounts for business income, personal income, business expenses and personal expenses. Because it is one chart of accounts that is available to all the bank accounts, you can divide your transactions between personal and business in a single transaction. This happens a lot in agriculture and is often provided as an excuse for not having separate accounts – it’s not a good excuse because the fact that you won’t have perfect compliance is not a reason to not do the right thing.
Let’s say you are at the grocery store and you buy non-deductible food and other items for yourself but you also buy a bag of cat food for the barn’s rodent police and you buy other items for the barn. You can write a check out of either checking account (I’d use personal for this) and code the check using both a personal expense for the groceries and household items and a business expense for the cat food and barn supplies amount.
Let’s say you forget your business checkbook at home and need to write a check in town for a business expense. While not ideal, you can always just go ahead and write the check out of your personal account and code it to the appropriate business expense. In those circumstances, transferring the exact amount from the business account to the personal account is ideal – especially if you need to use operating loan funds. Check out this article about transferring funds between bank accounts.
This article only covers handling these transactions in a sole proprietorship or a Schedule F taxpayer. None of this discussion addresses the question of whether or not you should be operating as a sole proprietor. That’s way beyond our scope. Everyone should make an informed decision about what type of business structure is best in their circumstances and that decision is best made with the advice of a professional lawyer or tax accountant.