Farm and Finance

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

One provision of the 2017 Tax Cuts and Jobs Act (TCJA) that has generated considerable concern among business owners is the new limitation on deductions for business interest expenses.

Prior to the provision, interest paid on business loans or credit lines could be deducted as an ordinary business expense. One section of the Internal Revenue Code — Section 163(j) —limited the deductions for certain types of interest expense that some C corporations paid, but most businesses were able to fully deduct business interest expense in the year it was accrued or paid.

The TCJA significantly changed that. The act expanded Section 163(j) to apply to all types of business interest expense, and it broadened the section’s scope to encompass all businesses, including pass-through entities such as partnerships, S corporations, and sole proprietorships.

Fortunately, many businesses — particularly small businesses — are still exempt from the Section 163(j) limitation.… Continue reading

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

As the 2019 calendar draws to a close, thoughts of charitable giving may be on your mind. With recent new tax law changes enacted under the Tax Cut & Jobs Act, itemizing deductions (which includes charitable contributions) on individual tax returns, has resulted in higher standard deduction thresholds. Married filing jointly couples need more than $24,000 ($12,000 for a single taxpayer) in itemized deductions to take advantage of additional deductions against adjusted gross income.

For farmers that are below the thresholds (less than $24,0000 for itemized deductions of medical, state and local taxes, mortgage interest and charitable giving), charitable gifting in the form of grain may be more appealing than cash donations. The gifting of the grain is a reduction of farm income, while still taking advantage of the $24,000 of itemized deductions.

Here is what you will need to know as a farmer who wants to make a charitable gift before the end of 2019:

• The farmer can exclude the sale of the cash crop from income and deduct cost of growing the crop.

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

Regardless of your opinion about cryptocurrencies like Bitcoin, one thing is for certain — they are here to stay. Since their beginnings a decade ago, much mystery has surrounded cryptocurrencies regarding their origins, value and purposes. As cryptocurrencies have become more established and accepted as payment, it is more important to understand what the treatment and consequences of purchasing, selling, paying with and accepting as payment cryptocurrencies from a tax perspective.

Per IRS Notice 2014-21, cryptocurrencies are not legal tender, but are generally regarded as property comparable to that of a stock, bond or other investments. Treating cryptocurrencies in this manner means whenever a cryptocurrency is purchased as an investment, the basis in the cryptocurrency is the purchase price plus any permitted transaction fees just like other stock that is traded on an exchange. This also means that whenever the cryptocurrency is sold, a capital gain or loss will result from its sale.… Continue reading

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

As you prepare for the upcoming tax season, now is a good time to review the lessons learned from last year’s first exposure to the provisions of the Tax Cuts and Jobs Act (TCJA). Here are seven end-of-year steps that agricultural owners in closely held businesses should take now to prepare.

1. Maximize pass through deductions

One of the most significant provisions of tax reform for sole proprietorships, partnerships, and S corporations is the qualified business income (QBI) deduction, also known as the section 199A deduction. This allows business owners to deduct up to 20% of pass-through business income, and it also provides for a 20% reduction of certain types of rental income.

But, as many taxpayers discovered last year, the deduction is subject to some complex limitations. If you have not done so already, you should review how your business is structured and how profits are distributed to see if there are changes you could make that would apply this deduction more effectively.… Continue reading

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

For decades, worker classification has been a controversial topic between the IRS and taxpayers. According to the IRS, millions of workers are misclassified as independent contractors each year. The distinction is important because it determines if an employer must withhold income taxes and pay employer payroll taxes such as social security, Medicare, and unemployment. As the tax laws continue to change, we expect for the problem to continue to grow as businesses look for ways to reduce their tax bills. With an understanding of the worker classification rules, your business can develop policies and procedures to ensure that workers are properly treated as employees or independent contractors.

To determine how to classify a worker, the IRS provides three tests:

1. Behavioral Control: A worker is considered to be an employee when the business has the right to direct and control the work performed by the worker.

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

Most of us have heard the quote from Benjamin Franklin, “In this world, nothing is certain except death and taxes.”

It would be safe to say that no one enjoys paying taxes and not many really want to think about death either. But both require planning and thought.

Thank back to the beginning of the year. Maybe you made some resolutions and then promptly forget them. The end of January rolled around and you received mail marked “Important Tax Document Enclosed” and realized that you needed to get some documents together for your taxes to be prepared — that’s worse than going to the dentist! And, while we should see our dentist regularly, we should also be proactive with our tax planning. It is always a good idea to follow up with your tax preparer if your tax situation changes; you have a move, a new baby, a different, job, an inheritance, or other life altering event.… Continue reading

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

As I have stated in other articles, weather here in Ohio can be quite fickle and the 2019 planting has taken the cake. While certain areas may still flourish, other areas will have poor (or no) production or be deemed disaster areas. Those not so lucky may be receiving crop insurance proceeds later in 2019. If you believe you may receive crop insurance proceeds this year , before you file your tax return, you might want to consider the following.

Deferral of certain crop insurance and disaster income proceeds

Typically, most farmers are cash basis taxpayers and proceeds from the destruction or damage of crops is included in income in the year of receipt; however, federal law allows certain insurance proceeds to be deferred one year, if certain requirement are met.

Under a special provision, a farmer may elect to include crop insurance and disaster in income in the taxable year after the year of the crop loss if it’s the farmer’s practice to report income from the sale of the crop in a later year.  … Continue reading

By Brian E. Ravencraft

The Tax Cuts and Jobs Act passed in late 2017 amended code section 1031 by superseding the word “property” and replacing it with “real property.” This means that like-kind exchange treatment is still alive and well for real property, but personal property will no longer qualify for a like-kind exchanges and, therefore, will result in a taxable event.

With no code section1031 treatment available to personal property after 2017, equipment or livestock “trades” will be treated as taxable events, with taxpayers computing gain or loss

based upon the difference between the amount realized on the sale of the relinquished asset and the party’s adjusted basis in the asset. As a result, no tax deferrals are available for §1231 gains or §1245 depreciation recapture.

Increased expensing and bonus depreciation options must now be considered in assessing the overall impact of the loss of the 1031 exchange for personal property.… Continue reading

By Brian E. Ravencraft

Timely audits are important for organizations. Timely financial statements can help an organization plan for the coming year. Timely financial statements will also allow organizations to make smarter budget and financial decisions. Second, timely internal control reports and management letter comments can help organizations correct issues before they create bigger problems. Auditors often have very helpful recommendations on how to correct various issues and save the organization time, money, and resources in the process.

How does an organization receive a timely audit report?

First, it is important to have everything reconciled and ready for the auditor as soon as possible after year end. Auditors, like many others, schedule out their work or audits a few months out at a time. If you are not ready when you are scheduled to be, this can cause scheduling problems and make it hard for the auditor to complete your audit.… Continue reading

By Brian E. Ravencraft

As we all know too well, farming incomes can fluctuate from year to year depending on yields, market conditions, and of course the Ohio weather. In certain years a farmer could have large profits subject to higher tax rates, while in the following year have a loss or little profit that results in a minimal tax liability. Due to the uncertain variables that affect farming, farmers should consider using farm income averaging.

What is farm Income Averaging (FIA)?

Farm income averaging (FIA) is a tax management tool that can be elected after the end of the tax year. In simple terms, farm income averaging allows you to spread a certain amount of your farm income over three years. If you are in a higher tax bracket in the current year and the three preceding years in a lower tax bracket, you will be able to reduce this year’s federal tax liability.… Continue reading

By Brian E. Ravencraft

If you have ever purchased a farm, a house, a tractor, or any other item that required financing, you know that there are many documents that must be signed when financing a purchase. Chances are you have signed documents with all kinds of terms related to principal amounts, interest rates, due dates and penalties. Although reading these documents can be somewhat terrifying, especially when reading the penalty provisions, these documents serve a purpose.

For farming businesses that make loans to other family member or customers, these documents are the legal proof that establishes that they are entitled to money and how they are to be repaid. When a business goes to court to get a judgment against someone who has not paid them, they are expected to produce those documents to prove that they are owed money from a specific person. And the truth is we would not have it any other way.… Continue reading

By Brian E. Ravencraft

“Benchmarking” is a concept that is used to analyze and better understand the farm as a business. Diagnosing performance means understanding business concepts such as profitability and efficiency, identifying the problems that prevent the farm from achieving its potential and formulating strategies and actions to improve its business performance.

Many organizations talk about benchmarking but few actually do it. It is important for you to understand the basics of benchmarking and how you can take advantage of the process.

What is benchmarking? Robert Camp defines benchmarking as the “search for industry best practices that lead to superior performance.” Put simply it is the process of identifying, understanding and adapting outstanding best practices and high performance from organizations anywhere in the world and then measuring actual business processes against your organization to help it improve it’s performance.

When using benchmarking in farming, it involves gathering data about the best performing farms and comparing them with other farms.… Continue reading

By Brian E. Ravencraft

A method to address the reduction of unnecessary costs is to first establish which activity of the farm operation generates those costs.

Step 1: Identify activities which generate costs and provide no added value.

Step 2: Decide if changes to that activity will affect business turnover

Answer: NO? Then is the activity necessary or adding value?

Answer: YES? Cost reduction techniques may have adverse effect on business profitability.

Beware: cost cutting can have a long-term negative impact. For some farmers, failure to invest in people, marketing and technology can leave you falling behind your competitors. You are increasingly likely to provide a product and service of inferior quality. You will also be likely to experience above-average team turnover. And ultimately, your customers have a choice, and you will cease to be it.

Deferring payments to suppliers and service providers helps you keep the cash in your pocket longer.… Continue reading

By Brian E. Ravencraft

Cash is king! For farmers, evaluating cash flow needs and budgeting are essential factors in the ongoing health of a business. Some of the key objectives of creating a cash flow plan are:

• Cash flow must be positive, timely and available
• Measure and monitor your plan on an ongoing basis
• Use the plan to manage the business proactively and reduce business surprises
• Prevent problems before they arise and develop strategies to prevent problems
• Budgets are forward looking documents — they force you to think about the future
• It’s the crystal ball. If you don’t like what you see, you have the opportunity to change
• Significantly improves your chances to be successful .

Cash flow is an essential factor in the ongoing health of a business. Cash flow must be positive, timely, and available. The best way to ensure this, is to have a Cash Flow forecast. In order to stay in control, this plan needs to be measured and monitored on an ongoing basis so that you can manage the business proactively.… Continue reading

By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs

Businesses can immediately expense more under the new law. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new tax law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.

The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

• Qualified improvement property, which means any improvement to a building’s interior. Improvements do not qualify if they are attributable to: the enlargement of the building, any elevator or escalator or the internal structural framework of the building.
• Roofs, HVAC, fire protection systems, alarm systems and security systems are now subject to 179 expense.

By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs

Your farming business is constantly evolving; and with that comes changes to business practices, along with laws & regulations. Maybe it’s starting and budgeting for a new product or service, a change in ownership/succession, or an employee with an unusual payroll withholding item.

You are busy, and may decide to handle the situation the best you can to get by for now. “I’ll make a note and then ask my accountant about it at tax time. I don’t want to spend the time or money on it right now.”

Without realizing it, a year or more could pass between the time of the event in question, and meeting with us to prepare your return. In that time frame, you may have been consistently mis-handling the issue for quite a long period. Meanwhile, tax law may have changed or important deadlines may have passed which could cause penalties or prevent you from qualifying for certain opportunities.… Continue reading

By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs

While it’s hard to believe harvest season is upon us, we all know year-end tax planning is also just around the corner. If you are an individual business owner or have ownership in a pass-through entity, you should consider revising your 4th quarter tax estimates. In addition to your individual specific situations, taxpayers also need to consider the 2017 Tax Cuts and Jobs Act. This legislation drastically overhauled the tax code for the first time in decades. Many of the changes will directly impact your tax situation for 2018. Some of the highlights are:

1. New income tax rates and brackets: While the total number of brackets remains at 7, the top rate will fall from 39.6% to 37%, and the amount of income covered by the lower brackets has been adjusted upward.
2. Standard deduction increased: The standard deduction for individuals increases to $12,000 for single filers and $24,000 for joint filers.

By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs

In a constantly changing business environment, what works for your business today may not necessarily work tomorrow. To ensure that your business continues to grow and thrive for years to come, you need to be monitoring and measuring your business in order to manage it. One way to monitor and measure the health of the business is through Key Performance Indicators (KPIs).

KPIs are financial and non-financial measures of activity outcomes that indicate how a business, or a process within a business, is performing. The first step is to determine and develop KPIs that are vital to the growth and success of your business. In agribusiness, there are a number of KPI categories that your business may want to measure. For example, here are some categories of KPIs and some specific examples of ratios to track within each category:

• Productivity: Estimated production potential, fertilizers per output, chemicals per output, yield per acre.

By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs

Petty cash is defined by Wikipedia as a small amount of discretionary cash funds used for expenditures where it is not sensible to write a check because of convenience and the cost of writing, signing and cashing the check. So, while petty cash is a small amount of money, it can also be stolen or abused, so it is best to have some rules to handle it.

• Set a reasonable amount for petty cash. Estimate how much you would need to cover small office expenses for about a month. You want the amount to be as small as possible, without having to replenish too often.
• Have a set of rules on how petty cash can be spent. Put the policy in writing and give some good examples of what petty cash can be used for — making change, small office supplies, postage, etc. 

By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs

It is not uncommon for business owners to find themselves knee-deep in the daunting task of “catching up on the books.” At our firm, we often see clients spending more time than is required doing so because they are not aware of some very handy features of the accounting software. There are several tips and functions within QuickBooks — a popular choice for many business owners — that can save hours when preparing financials and performing bookkeeping functions. Some of the most common and most time saving functions are listed below.

Memorized transactions

For transactions that occur every month and are the same amount, QuickBooks can memorize these transactions and book them automatically on a certain day of the week, month, or year, saving a significant amount of time entering the same information over and over.… Continue reading