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Farm and Finance



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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Steps to take when expanding your business

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.

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The basics of Cloud-based accounting software

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.

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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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