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Farm and Finance



Top 10 things to know about farm income and deductions

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.

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Self-employment tax considerations for farmers

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.

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Analytical software can assist farmers in maximizing profits

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. 

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The many reasons to invest in a business valuation

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.

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Navigating intrafamily loans

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.

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Prepaying farm expenses as a tax planning tool

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).

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The many reasons to invest in a business valuation

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.

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The top five reasons to outsource your payroll

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.

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Estate planning for farmers: Providing for liquidity concerns

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.

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When to call an accountant: Know the signs

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.

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Crop-share rental arrangements and self-employment considerations

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.

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Good-bye spreadsheets, hello accounting software

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).

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Options on how to treat livestock sales due to adverse weather conditions

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.
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Crop insurance deferral considerations

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.

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Farm income averaging can be a useful planning tool

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.

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Planning reminders for preparing 2015 tax returns

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.

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Protect yourself: The important facts about identity theft

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.
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QuickBooks: A powerful tool for your financial farm reporting and managing needs

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.

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Ag Credit/Country Mortgages opens new Mt. Gilead facility

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.

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Business or hobby? It matters for farm taxes

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.

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