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Understanding worker classification

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.
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Death and taxes

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.

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Crop insurance deferral considerations

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.  

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Ramifications of 1031 exchanges of personal property under the new tax law

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.

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Audits in agriculture

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.

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Farm income averaging can be a useful planning tool

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.

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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?

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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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