Farm and Finance

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

A family office isn’t what you might think it is. It is not the office you use at home to take care of family matters. It isn’t the office the you use to run your family business. A family office is essentially a private team of professionals dedicated to managing the finances of a wealthier family and high net-worth individuals. These wealth management entities help steer a family’s investments in the right direction and, in the United States, they are rapidly growing in popularity.

Family offices are typically classified into three different classes depending on which services they offer:

• Class A: Comprehensive financial oversight, estate management and objective fiscal consulting for a flat monthly fee.
• Class B: Investment advice and consulting for an as-needed fee, but does not directly manage illiquid assets.
• Class C: Basic estate and administrative (bookkeeping, mail sorting, etc.)

The new Tax Cuts and Jobs Act will present tight limits on deductions pertaining to business meals and entertainment. Before this new tax reform, taxpayers generally could deduct at least 50% of expenses for business-related meals and entertainment. However under the new law, entertainment expenses incurred or paid after Dec. 31, 2017 will be classified as non-deductible unless they fall under the specifications listed in Code Section 274(e). Let’s take a closer look at the different types of expenses and the deduction rules moving forward.

Meals provided by employer for convenience purposes

This was a 100% deductible expense in 2017. The keyword here is was. In 2018, the new rules will make this a 50% deduction. Look for this to be nondeductible after 2025.

Business meals/employee travel meals

This was a 50% deduction and it will stay that way under the new law.

Office holiday parties

We won’t see change here either.… Continue reading

We are all guilty of it- we don’t take the time to review all of our important records on a regular basis. Before we know it we have file folders stuffed to the brim with documents from many years ago. Piles cover our desks and filing cabinets comprised of papers we are hanging onto because we aren’t sure how long we should keep them. When it comes to business and personal accounting records, there is a method to the madness.  I will lay out some general guidelines below to hopefully help you keep legal and tax problems at bay.

Type of record                                                               Retention period

Accounts payable ledgers and schedules                         7 years

Accounts receivable ledgers and schedules                    7 years

Auditors’ report                                                                 Permanently

Bank reconciliations/statements                                   2-3 years

Cash disbursements                                                          Permanently

Cash receipts journal                                                        Permanently

Financial statements                                                        Permanently

Fixed asset records                                                           Permanently

Employment applications                                               3 years

Insurance policies (expired)                                            3 years

Insurance records, current accident reports               Permanently

Inventory listings and tags                                              7 years

Invoices (to customers, from vendors)                         7 years

Payroll records and summaries                                         7 years

Personnel files (terminated)                                          7 years

Stocks and bonds certificates (canceled)                         7 years

Tax returns and worksheets, revenue agents’

reports, other documents relating to

determination of income tax liability                          Permanently

Time books/cards                                                              7 years

Training manuals                                                               Permanently

Brian E.… Continue reading

On Dec. 22, President Donald Trump signed HR 1 into law. This new law implements the most significant changes to our tax code in more than 30 years. This article provides a general overview of some of the provisions that most impact farmers.

• Tax Bracket Changes: Most farm businesses are taxed as sole proprietorships, partnerships or S corporations. This means business income is passed through to the owners, who pay taxes based upon individual income tax rates. HR 1 lowers individual income tax rates across the board, starting in 2018. The total number of brackets remains at seven, but the top rate will fall from 39.6% to 37%, and the amount of income covered by the lower brackets has been adjusted upward. The new law leaves the maximum rates on net capital gains and qualified dividends unchanged.

• Standard deductions: HR 1 increases the standard deduction from $12,000 to $24,000 for married filing jointly taxpayers and from $6,500 to $12,000 for single taxpayers.… Continue reading

The accountants my firm are invested in all aspects of our clients’ businesses, including the ways their success and security could be threatened. Our team is very focused on cybersecurity measures and we spend a great deal of time studying the methods and motivations of hackers. Most people are only opaquely aware of the threats that are around them continuously. We see examples frequently that are both fascinating and terrifying at the same time.

Our firm invests in top line firewalls, antivirus, SPAM filters, and of course, training, as do many other companies. These tools are vital and do mitigate some threats, but the truth is it’s the human users that are often the weak link in the defense chain. For this reason, we continuously stress that the absolute best defense a company can mount is by being vigilant, proactive, and educated. This goes for any type of company, whether it be an accounting firm, a feed supply business, or a family farm — no one is safe from these threats.… Continue reading

Taxes come into play with more expenses — including healthcare. This month, let’s talk Medicare. Medicare is health insurance for people 65 or older, people under 65 with certain disabilities, and people

of any age with End-Stage Renal Disease (ESRD) but it works like no other insurance you have known.

Medicare is not a one-size-fits all system. Rather, it is made up of several parts with each part covering different aspects of health care costs. There are many decisions to be made and much to understand with regards to deciding if and/or when to sign up for the various parts of Medicare. There are also various deadlines for enrollment for the various parts with potentially expensive and permanent penalties for failing to meet them.

A good place to start is an overview of the various parts and what they cover.

Medicare Part A (Hospital Insurance) helps cover:

• Inpatient care in hospitals and certain limited skilled nursing facility care including services of professional nurses, semiprivate room, meals, other services provided directly by the hospital or nursing facility including lab test, prescription drugs, medical appliances and supplies and rehabilitation therapy
• Hospice care
• Home health care.

Let’s switch gears a bit this month and talk about Qualified Charitable Distributions. QCDs are cash donations that can be made by IRA owners and beneficiaries age 70.5 and over to IRS-approved public charities. These donations must come directly out of an IRA account to qualify as a QCD. They are federal income, tax free, but cannot be treated as an itemized write-off on your Form 1040 tax form. However, the tax free element presents an immediate 100% deduction without the concern of restrictions that can simply slow itemized deductions down.

QCDs must come from you or your IRA trustee and go directly to a qualified public charity. Or, the IRA trustee can provide you with a check made out to the charity that you then must deliver. There can be no middle man action where the funds go into another account before being turned over to the charity. Looking to donate to a private foundation? … Continue reading

Farm businesses that acquired constructed or made substantial improvements to a building — or did so in previous years — should consider a cost segregation study. Also referred to as a “Cost Seg,” these studies combine accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. This may allow you to accelerate depreciation deductions, which can mean reduced taxes and increased cash flow.

IRS rules generally allow you to depreciate farm buildings, such as equipment sheds and barns over 20 years. Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, plumbing and wiring — along with the building. Personal property — such as equipment, machinery and furniture are eligible for accelerated depreciation, usually over five or seven years. And land improvements such as fences, outdoor lighting and parking lots are depreciable over 15 years.

Many times farmers allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements.… Continue reading

Good financial practices are key to the success of your farming business, but many businesses fail to

implement them. Most farm owners know that poor financial management is a major cause of poor business performance and growth, but still fail to carry out the financial tasks that are necessary to keep things running smoothly and successfully. If all goes well, the close is a routine process that does not attract much attention from management or business owners. But it’s a completely different story if the numbers are late — or wrong. We will look at some of the best practices to assist with keeping your bookkeeping and financial statements current.

Begin by creating a month end close process with your accountant. This is done to prevent lost revenue, poor tax planning and missed financial opportunities. Beware…waiting until the end of the year to close out everything is often an overwhelming process.… Continue reading

If you own a business, you have hopefully established a buy-sell agreement in case you or a co-owner voluntarily or involuntarily leaves the company. The creation of the document is just one step in a larger process. You simply can’t draft the agreement and lock it away for safekeeping. The document should be a fluid one, you need to review and perhaps revise the document periodically.

The primary purpose of a buy-sell agreement is to legally confer on the owners of a business or the business itself the right or obligation to buy a departing owner’s interest. But a well-crafted agreement can also help ensure that control of your business is restricted to specified individuals, such as current owners, select family members or upper-level managers.

Another purpose of a buy-sell agreement is to establish a price for the ownership interests. You should engage a qualified appraiser to estimate the value of those interests when first making a buy-sell agreement, and periodically thereafter to ensure the price keeps up with the growing (or shrinking) value of your company.… Continue reading

Many farmers and agribusiness owners want to grow their operations. Growth represents progress, and it can result in financial rewards and new opportunities for owners and employees. But with growth often comes a new set of challenges. This makes it critical to plan your growth initiatives carefully so that growth doesn’t lead to cash flow and other financial problems that can jeopardize your company’s future.

The first step in planning for business growth is to draft a strategic growth plan. This plan should detail not only the products, services and markets that will fuel your company’s growth, but also how growth will be financed. Growth financing can come from either owner’s equity that has been retained in the business or an outside source of funding.

Outside financing takes two different forms: debt and equity. Debt is simply a business loan, usually from a bank, that must be repaid over a set period of time.… Continue reading

Farmers and agribusiness owners have many choices available to them in regard to accounting software. I have talked about a variety of them in previous articles. One of the options available is cloud-based software. Let’s talk about the basics of this software option in this article.

Many people are curious about the cloud and what it means. The cloud is an Internet platform that allows you access data anytime from anywhere. The most appealing part of cloud-based software for many business owners is the peace of mind in knowing that they always have access to current financial information. When your software is cloud based, all of your information is literally at your fingertips, presented in real-time figures.

Imagine links to your bank accounts, your credit cards, right there through the software. All you must do is code your business transactions to the proper account to keep your financials current. Users of cloud-based software generally live without the prompts to update their accounting software because a glitch is found or a newer version is available because cloud-based accounting software takes care of these things automatically.… Continue reading

As we approach the tax filing deadline, I thought this reminder checklist from the IRS may be useful. If you have already filed your return, you may want to double check to be sure these items were considered as part of your return you filed. If you earn money managing, working on, or owning a farm, you are in the farming business. Here are 10 things about farm income and expenses you should know as outlined in IRS notification IRS Tax Tip 2013-41.

1. Crop insurance proceeds

Insurance payments from crop damage count as income. They should generally be reported the year they are received. However, if you use the cash method of accounting and receive crop insurance proceeds in the same tax year in which the crops are damaged, you can choose to postpone reporting the proceeds as income until the following tax year. You can make this choice if you can show you would have included income from the damaged crops in any tax year following the year the damage occurred.… Continue reading

Self-employment is a real option in today’s working world for many farmers. But many that choose to work for themselves are often surprised by the distinctive challenges they face when it comes to taxes. Knowing how to navigate those challenges is important and working with an experienced CPA is your best bet in order to avoid issues along the way. Here some consider for any self-employed farmers.

Material participation

The Internal Revenue Code imposes self-employment tax on the net income from a taxpayer’s trade or business or from a partnership in which the farmer is a member. Rent received from personal property (machinery and equipment) is also subject to the tax if the farmer is in the business of renting personal property.

Focus on liability. Self-employed individuals are liable for self-employment tax, which means they must pay both the employee and employer portions of FICA taxes. The good news is that you may deduct the employer portion of these taxes.… Continue reading

With crop prices projected to remain low in the foreseeable future and with the high cost of agricultural inputs making farmers less productive, crop-producing farmers should be looking at ways to be more efficient and profitable.

Today’s farms are complex operations with workers and machines interacting over large areas under tremendous time pressure dictated by unpredictable weather events. The right mix of capital investment, labor and technology is critical to success, yet most of these decisions are made based on gut instinct, experience or tradition. Industry specific analytical tools to support these decisions are lacking.

There is great opportunity for these costs to be better understood, measured, and managed. In addition, crop yields are dependent upon timely field operations in often narrow, weather dependent time frames. Yield losses due to late planting or harvest can be as high as 30%, resulting in lost revenues of $200 per acre or more. Farmers need software tools to support their decisions as they work to optimize their resources for timely, cost-effective field operations. … Continue reading

A business valuation is an investment most business owners should consider making. A business valuation is a procedure that is performed in order to evaluate your operation and then determine its estimated economic value. This service is carried out by a certified public accountant that holds the credential that positions them to gage the value of businesses based on a number of factors.

Many professionals believe that selling your business is really the only reason to have a business valuation performed. However, here are several scenarios that call for a thorough review of the worth of your business. Our firm has been performing this service for clients for many years, for many different reasons. Yes, if you are preparing to sell your business, a valuation will provide you with the numbers you need to a secure a deal that benefits both you and the new owner. But that is just one reason.… Continue reading

If a relative needs financial help, offering an intrafamily loan might seem like the most gracious route to take. But, if not handled properly, such loans can carry substantial negative tax consequences — such as unexpected taxable income, gift tax or both. Here are some things to ponder before lending a helping hand:

1.      Everything should be documented. To avoid undesirable tax consequences, one thing you’ll need to do is show that the loan was bona fide. Doing so should include documenting evidence of:

•   the amount and terms of the debt,
•   interest charged,
•   fixed repayment schedules,
•   collateral,
•   demands for repayment, and
•   the borrower’s solvency at the time of the loan and payments made.

Be sure to make your intentions clear. Help avoid loan-related misunderstandings by documenting the loan and all payments received.

2.      Plan to collect repayment. Even if you think you may end up forgiving the loan, ensure the borrower makes at least a few payments.… Continue reading

Farmers typically pay for seed, fertilizer, and other inputs in one year and use the items in the subsequent year. There are many reasons to do so, such as: obtaining a lower purchase price, guarantee the availability of the particular item, and of course for tax planning purposes. Typically larger farmers can spend tens of thousands of dollars on year-end prepaid expenses in order to adjust taxable income to a desired level; therefore, it is extremely important that farmers adhere to the IRS rules regarding prepaid expenses.

The IRS allows farm-related taxpayers to deduct costs of farm supplies in the year the purchase is made versus the year in which such purchases are used; however, the prepaid purchases of farm supplies are limited generally to 50% of other deductible farm expenses (all deductions except supplies) for the year.

A “Farm related taxpayer” is someone who meets any of the following tests: (1) The main home is on the farm, (2) The principal business is farming or (3 ) a member of your family meets (1) or (2).… Continue reading

A business valuation is an investment most business owners should consider making. A business valuation is a procedure that is performed in order to evaluate your operation and then determine its estimated economic value. This service is carried out by a certified public accountant that holds the credential that positions them to gage the value of businesses based on a number of factors.

Many professionals believe that selling your business is really the only reason to have a business valuation performed. However, here are several scenarios that call for a thorough review of your business’ worth. Our firm has been performing this service for clients for many years, for many different reasons. Yes, if you are preparing to sell your business, a valuation will provide you with the numbers you need to a secure a deal that benefits both you and the new owner. But that is just one reason.

You will need to know the fair-market value of your operation in the event that you consider merging with another entity.… Continue reading

Payroll… it is a task that sneaks up on you, and as soon as you take care of it, it seems like it is time to do it all over again. No matter what the industry or how large the operation, many business owners find it advantageous to rely on an outsourced accountant to cut their payroll. From accounting firms to payroll companies, many options are available to you so you can spend more time working in your business, instead of crunching numbers and cutting checks. This month, we look at the top five reasons to give an outsourced payroll solution a shot:

1. Reliability and security of your finances

The last thing you want, as a business owner, is to be penalized by the IRS. Alleviate those penalty pains and worries by picking up a reliable, fully-trained accountant to handle your small business finances. An outside professional is contractually obligated to be completely liable for the entire undertaking, that way, in the off-chance that something goes awry, the outsourced team will pick up the foul, not you.… Continue reading