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Farm and Finance



The importance of documenting loan receivables from a tax perspective

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.

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Using benchmarking concepts on the farm

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.

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Methods to improve cash flow

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.

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Why create a business budget?

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.

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New depreciation rules for 2018

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.
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Building a trusted advisor relationship

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.

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Should you adjust your estimated tax payments?

harvest10

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.
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Monitor and measure farm success through KPIs

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.
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Best practices when it comes to petty cash

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. 
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QuickBooks tips and tricks to cut your bookkeeping time in half

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.

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Is a family office right for you?

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.) and is run directly by the family.
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Employee meals/entertainment: These deductions are about to change

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.

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How long should you keep important records and documents?

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.

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Summary of the new tax law and its impact on Ohio agriculture

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.

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Don’t fall victim to cybersecurity attacks

one-of-the-computers-hooked-up-to-robotic-milker

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.

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Maneuvering though the Medicare maze

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.
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Are you aware of qualified charitable distributions?

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? 

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Cost segregation studies and depreciation deductions

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.

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Tips for keeping your books straight and business running smoothly

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.

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Drafting and reviewing your buy-sell agreement

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.

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