Farm and Finance

To this day the old adage “….nothing in this world can said to be certain, except death and taxes” is quite true. However, many decades after Benjamin Franklin made the quote, estate planning was formed to proactively solve and minimize the “tax certainty” part of the quotation.

Farmers are basically businessman who own and operate a specialized type of business. They face basically the same estate planning problems that confront all businesses that operate as either sole proprietorships, a partnership or a corporation. The farmer and the estate planner must implement some unique strategies and techniques that will solve the estate planning problems, which particularly affect a farm business.

For example, farming frequently involves a substantial investment in farm assets (land, buildings, equipment, etc.), large borrowings carrying heavy interest charges, fluctuating income (or loss) from year to year because of diverse weather and market conditions, and rising land values. These factors require use of estate planning strategies that will minimize death taxes and estate administration costs, preserve liquidity of the estate and provide for a systematic and economic disposition (or continuance) of the farm business on the death of the farm owner.… Continue reading

Outside help of any type can be hard for any business owner to weave into day-to-day operations. The thought of sharing business practices and financial information with outside service providers is an unsettling one to many. However, the day usually arrives when partnering with others to lighten your load is the right thing to do. In regards to accounting, the reasons to form a relationship with an accountant are varied. Let’s take a look at some of the signs that indicate you need to give this move serious consideration.

1.) Numbers are not your thing (no matter how hard you try)

Many business owners try and handle the books by themselves, at least early on. Some succeed. For others, the frustration brought about by handling the accounting tasks is enough to make them think about throwing in the towel all together. The financial tasks associated with keeping afloat are many — from handling payroll and receivables, to closing the books and tax reporting.… Continue reading

Often, farmers and other landowners enter into crop-share arrangements for the rental of their land. The rent landlords receive in this kind of arrangement is based on a share of the crop or livestock produced on the land.

Rental income derived from real estate is generally not subject to self-employment (SE) tax. However, an exception to this rule causes farm landlords to be subject to SE tax on real estate rental income, including crop-share rents if the following criteria are met:

1. The rental income is derived from an arrangement under which the lessee shall produce agricultural commodities on the land.
2. The arrangement calls for the material participation of the owner in the production or management of the production of the agricultural commodity.
3. The owner does in fact materially participate in the activity.

The IRS regulations provide guidance for determining whether the landlord materially participates. Factors to consider include making management decisions about (1) when and what to plant, (2) rotation of crops, and (3) the kinds of machinery to be used.… Continue reading

The team at our firm sees it often — farmers and business owners using Excel to track the finances related to their operation. While it’s true that Excel is very sophisticated and most users know enough to be dangerous while maneuvering through the software, you simply can’t erase the chance for human error. Spreadsheets are just prone to errors taking place due to the amount of manual data entry that is required. For example, a formula can be set up correctly, but the copy and paste feature may not pull through the correct cells and if one cell is modified, it can throw off the entire spreadsheet. When these things happen, it causes unnecessary headaches for the business owner, which we hate to see happen.

To avoid these types of headaches all together, we encourage those we work with to make the switch to accounting software such as QuickBooks (but there are many options out there).… Continue reading

This article is a follow up to last month’s Crop Insurance Deferral  Considerations as we now turn our attention to options available should farmers find themselves in the unfortunate situation of having to sell livestock due to extreme weather conditions.

Livestock sold due to weather related conditions

Farmers forced to sell livestock early to floods, drought, or other adverse weather conditions have two options:

1.They may elect to include income from the sale of the additional livestock in the following tax year, or 2. Deem the forced sale as an involuntary conversion.

For option one, as prescribed by Internal Revenue Code Section 451, the following conditions are required:

1. The farmer uses cash method of accounting,
2. The farmer can establish that the sale would have occurred but for the weather-related event, and
3. The weather event resulted in designation of that area (where the livestock resided or where the feed is normally obtained) as eligible for federal assistance.

As I have stated in other articles, weather here in Ohio can be quite fickle. While certain areas flourish, other areas can have poor production or be deemed disaster areas. Those not so lucky may have received crop insurance proceeds in 2015. If you did receive crop insurance proceeds, before you file your 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

As we all know too well, farming incomes can fluctuate from year to year depending on yields, market conditions, and of course in Ohio, the weather. In certain years a farmer could have large profits subject to higher tax rates and 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

Tax planning is proving to be a bit more challenging than normal this year. Unless Congress acts, a number of popular deductions and credits expired at the end of 2014 and may not be available for 2015. The most popular deductions not available this year include, for example, generous bonus depreciation and expensing allowances for business property.

As I write this in early December, Congress is working on and is expected revive some or all the favorable tax rules that have expired. We are hoping Congress will renew the “extenders package” for at least two years and not just for 2015.  However, which actions Congress will take remains to be seen.

Here are two important considerations to keep in mind for all farmers:

1.   Effective tax planning requires considering both the current year and next year — at least. Without a multi-year outlook, you can’t be sure maneuvers intended to save taxes on your 2015 return won’t backfire and potentially cost additional money in the future.… Continue reading

We generally dedicate our monthly article to covering financial topics that could, or already do effect business for farmers and agribusiness professionals. From tax issues to succession planning — we’ve covered everything you might expect from an accounting firm. But now, with tax season upon us, we want to shine a light on something more personal-tax identity theft. Read on for sound advice and vital tips on how to protect yourself from becoming a target, and what to do in the event that your identity is compromised.

Cases of tax identity theft continue to rise. The Federal Trade Commission (FTC) estimates as many as nine million Americans have their identities stolen each year. Now, more than ever, the IRS is focused on preventing, detecting and resolving tax identity theft cases, but the threat is still very real for taxpayers.

How will I know if I am a victim?

According to the Internal Revenue Service’s online guide to identity theft, the following raise red flags and most likely signal your identity has been tampered with:

• Multiple tax returns being filed on your behalf.

An integral part of managing a farm operation or a business of any type is making sure the financial software being used best fits your needs. There are many options available in today’s marketplace, Peachtree and Xero are two we see often and are proficient in here at Holbrook & Manter, CPAs, but Intuit QuickBooks still remains one of the most heavily used programs. This month, we take a look at this particular accounting software and its many offerings and benefits.

QuickBooks has various editions available to best suit the needs of your type of business. Features are tailored with terminology familiar to your industry. During QuickBooks setup, by selecting the Agriculture, Ranching or Farming industry, it will create a preset Chart of Accounts that provides a set of income and expense accounts that match the Schedule F filed on your tax return. With QuickBooks you can process payroll, manage accounts payable, produce customer billing, track inventory, and perform many other functions needed on a daily basis.… Continue reading

Ag Credit/Country Mortgages, an agricultural lending cooperative serving farmers and rural residents and agribusinesses in northern Ohio, has moved their Mt. Gilead branch to 5362 US Hwy. 42 in Mt. Gilead. The move was made official with a ribbon cutting ceremony and open house on September 16, 2015.

“We’re looking forward to serving our community in the new ag service center,” said Joseph Erb, “We will continue to provide the same superior customer service in our new facility.”  The building currently houses five Ag Credit team members:  Branch Manager, Joseph Erb; Account Officer, Andrea Bayles; Mortgage Loan Originator, Michael Kleinknecht; and Operations Support Specialists, Kristen Redmond and Brandy McKinney.

The cooperative purchased the property in March 2014.  Jim Brucker of Mt. Gilead designed the new 11,700 square foot building and 2K General Company, Inc. was the lead contractor.  The new Ag Credit offices opened on Sept. 9, 2015. The initial tenants will also include:  Morrow Soil and Water Conservation District, OSU Extension, Community Tax Service LLC, and Community Bookkeeping LLC.… Continue reading

Is your farm operation a bona fide business or more of a hobby? There is a difference in the eyes of the IRS and knowing how to classify your entity is crucial when it comes to your taxes. It affects the way taxes are filed and what can be deducted.

Determining if an activity is engaged in for profit is based on the facts and circumstances of each case. However, IRS regulations provide nine factors to consider. These factors are frequently applied in relevant case law. Although certain activities are more susceptible to the hobby loss taint, no activities are immune.

Section 183 of the tax code governs “hobby losses.” This section of the tax code was passed so Congress could close down what it perceived as inappropriate farm and horse shelters. The “Safe Harbor” law sets up a presumption that if an activity shows a profit in three out of five tax years, then the taxpayer is engaged in it to make a profit.… Continue reading

Construction is all around us. Expansion projects, improvement efforts, new buildings taking shape — these types of things have become the norm. While we all want better infrastructure, the inconvenience of orange barrels can be dreadful. Bring on some additional dread when projects have a more personal impact and they come at the expense of your land.

Let’s take closer look at eminent domain, which is affecting more and more land owners. The Fifth Amendment states “… nor shall private property be taken for public use, without just compensation.” The usual process of obtaining land through eminent domain includes passage of a resolution by the acquiring agency to take the property (condemnation), including a declaration of public need, followed by an appraisal and an offer, generally with some opportunity for negotiation. If the offer is not accepted, the agency may then file a petition in court to acquire the property by eminent domain.… Continue reading

Another article about succession planning — you probably feel like you’ve read them all. Although always presented with the best of intentions, you may feel as though many of the pieces you come across are littered with warnings about what may or may not happen if you don’t have all of your financial affairs in order. While you should be aware of all the scenarios that could play out in the event of lack of succession planning, for the purposes of this article, let’s assume you have already decided it’s time to put your planning in motion. But where do you start?

The best starting point is to contact the person you hold in the highest regard when it comes to the finances of your farm operation. A CPA with experience in agribusiness and wealth planning may be a great starting point. Not only will they be able to address your needs from financial statements to family matters, but you should discover that a CPA’s experience and background creates a special level of caring and investment in your needs and the future needs and success of your operation.… Continue reading

It’s no secret that a spotlight has been on our country’s healthcare system for some time now — and a bright one at that. Health insurance options and expenditures are a real concern for agribusiness owners and it’s hard to know what options will best fit the needs of your operation. Rest assured there are options; some that can even put money back your pocket.

Health Reimbursement Arrangements (HRAs) are based upon Section 105 of the Internal Revenue Code. These particular arraignments allow farmers who qualify to deduct 100% of family medical cost against the farm income. In turn, the taxpayer saves federal, state and FICA taxes for family medical costs (typically a 35% savings).

This is done by declaring medical expenses as business expenses, not as Schedule A itemized personal deductions, which are often limited or lost. What’s the catch here you ask? Whether they file as sole proprietor or an LLC, farmers must have a spouse who is employed by their business, at least on a part-time basis.… Continue reading

Equipment is the lifeblood of any farming operation. Luckily, there are many different ways for farmers to obtain the machinery they need, with an operating lease and purchasing being two of the most popular options. But which option is right for you? There are pros and cons associated with each route and here we take a look at just a few of them.

Pros for operating leases

Less cost. You can acquire the equipment you need with little to no initial investment. Once the lease begins, your payments will most likely be lower than they would be if you were purchasing the equipment. These are positive things if cash flow is a current concern.

Balance sheet bonus: an operating equipment lease does not show up on your balance sheet and consequent leases do not impact your balance sheet ratio.

Flexibility: you enter into the lease, typically for three to five years, and when it ends, you can upgrade and have access to the most current technology.… Continue reading

As everyone involved in agribusiness knows, this industry is ever-changing. Whether you are a farmer or a supplier, the cyclical ups and downs of this business are unavoidable. It’s important to know how to adapt to changes in the economy, markets, customers, competition, technology, regulations, taxes…the list goes on and on. Adapting is easier to do when you partner with the right people, a good accountant being one of them.

An accounting professional with extensive experiences in the agribusiness space will end up being a pleasant surprise and a trusted advisor to your business. That trust will grow as you watch them handle not only the tasks you would expect, such as your taxes, but also as they guide you towards making sound decisions that will help your operation reach the next level.

For example, an accountant can help you in regards to growth, expansion, and even best industry practices. One Holbrook & Manter client explains this a bit further sharing, “we might be thinking about buying another farm and trying to understand the financial ramifications so we’ll get a hold of Holbrook & Manter and have a what if discussion.… Continue reading

Buy low, sell high. That is always the ideal scenario. Traditionally that is what your investment advisors and accountants tell you. But, if you’re dealing with grain, things operate a little differently. In fact, in the case of grain elevators, ethanol plants, feed grinders, and more it’s not all about the purchase price. Rather, it’s about managing basis.

Many agribusiness professionals are familiar with basis. It’s what we refer to as the difference between the quoted market price on the Chicago Mercantile Exchange (Chicago) and the local market price. In taking a closer look at grain, it’s rare that you will sell grain at your local elevator for the same price quoted in Chicago. Often you will be paid less, but, possibly more. It all depends on local supply and demand. The whole process can cause some head scratching — how is it that you can buy high, sell low, and still make money?… Continue reading

A new tax as a part of the Affordable Care Act may mean you will owe more in taxes, and with tax season in full swing, now is the time to figure out just how much more you could be made to pay.

The Health Care and Education Reconciliation Act has presented us the Net Investment Income Tax, referred to by many as NIIT or the super Medicare tax. This tax exposes the net investment income of individuals, estates and trusts to a 3.8% tax when their modified adjusted gross income exceeds certain threshold levels.

These levels are: $250,000 for married individuals filing a joint return, $125,000 per each for married individuals filing separate returns and $200,000 for unmarried individuals and other cases. Trusts and estates have a much lower threshold for when this tax applies. This new tax is creeping up on many and there could be unpleasant consequences for those that don’t comply.… Continue reading

It’s no secret that there are many fiscal concerns of an agricultural professional. With 2015 in full-swing, there are certain areas that deserve attention from you and your trusted financial professional. All of this information might seem a bit daunting, but it doesn’t have to be. Working with an experienced CPA is really a breath of fresh air. They can guide you through all the challenges and financial victories that these topics can bring. Here are a few important topics to consider to help ensure a successful year.

Tangible Property Regulations

Tangible Property Regulations (TPRs) should be at the top the list of regulations to review. Treasury personnel have indicated that the IRS expects all taxpayers with tangible real and/or personal property to file one or more Form(s) 3115 in their 2014 tax year to properly comply with new rules. This applies even if there is no adjustment necessary to properly reflect the change in method in your taxable income.… Continue reading