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January 2011 Archive for The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Returns Revert Back to the Mean

Jan 27, 2011
The first presentation at the Top Producer seminar today was done by Sterling Liddel, a vice president of economics at Rabo AgriFinance.  The slide that stood out to me the most was the long-term mean price for corn over the last 80 or so years.
For about the 40 years before the Russia price shocks of the mid 1970′s, the long-term price trend was around $1.00 to $1.50.  Over time, as yields and efficiencies increase, the long-term price tends to trend down slightly.  From the mid-1970′s until a couple of years ago, the long-term trend price was about $2.50 to $3.00 with much more volatility around the mean price. 
We may now be in a new long-term trend at higher prices.  We probably do not know what these new trend price might be, but we must remember that the market will efficienty strive to bring that price back down to provide a normal mean return to the farmer.  The market will generally allow an excess return for only a few years, but eventually this market will get those prices back to this long-term trend.
We were discussing this with some farmers around the dinner table tonight and this worries them that most pricing assumptions made by newer or younger farmers is building in the "new normal" returns and that they will continue for a long time.  If you are making land purchase decisions based upon an average of $5 corn and $11 beans, you need to also run your numbers at $3 corn and $8 beans.  If you can fund those prices without stressing your operation, then it may be OK to make the purchase.  However, if those prices stress the rest of your operation, it will probably make more sense to hold off and build up your working capital to allow a purchase later on.

Believe or not, more farmers go broke when prices are high than when they are low.  They try to leverage up to get those additional acres and lose out when the margins they built into their assumptions evaporate.  Be careful in your assumptions. 

Tomorrow's Top Producer

Jan 26, 2011

I am in Chicago this week attending both the Top Producer conference and yesterday I attended the Tomorrow's Top Producer and also gave a brief talk on income tax changes for 2011.  There appears to be about 100 of tomorrow's best farmers attending the conference and at lunch time, my wife and I were talking with 4 college senior man from Northwest Missouri University who all live in Southwestern Iowa and will be going back to the family farm soon.

As my wife said, what outstanding young men and I think that American farmers will be well represented by these young men (plus they also laughed at my jokes).

There were several good presentations on what it takes to be an efficient manager of a farm operation both as a young producer and laying the groundwork for when they are no longer young.  If you are a young farmer, I would highly recommend attending this conference next year.

I will try to provide a daily update of the conference over the next few days.

Those Pesky Form 1099s.

Jan 24, 2011

We had a reader send in the following question:

"I really got my-self confused by reading to much.  I need some clarification on the new upcoming requirement on filing 1099’s.  I know that it goes into effect for tax years after 12-31-2011.  Where I am confused is CCH say it is for amounts paid after 12-31-2011 so the 1099’s will be filed in 2013.  I just read a article in the Kiplinger Tax Letter that say this new law effects 1099’s filed in 2012, so that means for amounts paid in 2011 .  Is this correct or is it for amounts actually paid in 2012."

 

The new law passed early in 2010 requires businesses to start filing form 1099s for all transactions where the total purchases to one vendor during the year reaches or exceeds $600.  This law is effective for purchases made after December 31, 2011 or the calendar year 2012.  This means that the form 1099 will need to be sent to the vendors in January 2013 and reported to the IRS usually by February 28, 2013.

So the bottom line answer that this new rule is for purchases made in 2012, and filed in 2013.

There is much speculation that this law will be repealed this  year.

Home Energy Credits on Existing Homes Only!

Jan 23, 2011

We had a reader ask the following question:

"My wife and I built a new home in 2010. We moved in on June 24,2010. Can we take the residential energy credit for insulation, windows, & doors on form 5695 for this house on our 2010 tax return? Thanks, Dave"

 

I am afraid that we do not have good news for Dave.  The nonbusiness energy credit that he is asking about is normally claimed on form 5695 as he states, however, the type of costs that Dave is describing are restricted to existing homes.  The credit is designed to help offset the cost of retrofitting an existing home with energy saving devices.

However, if Dave and his wife had put in any of the following devices:

  • Qualified solar electric
  • Qualified solar water heating
  • Qualified small wind power
  • Qualified geothermal heat pump
  • Qualified fuel cells

 

Then Dave would claim those credits on form 5695, but it does not appear that these costs were incurred in their new house.  These type of costs are allowed as a credit on both new homes and existing homes.

So, the bottom line is that the credits for the typical insulation, windows, doors, etc. must be on an existing home, not on a new home.

Farmer's Health Insurance Reduces Self-Employment Taxes!

Jan 21, 2011

We had a reader ask the following question:

"Is it true that for 2010 we can reduce our net self-employed income on Schedule SE line 3, by deducting the amount of our self-employed health insurance from line 29 of Form 1040? My husband and I farm side by side so will only his half of the self-employed health insurance qualify for this deduction as his name is the one listed on the top of Schedule SE or can we deduct the total amount that we have listed on line 29 of Form 1040?"

 

There are several questions from the reader.

First, for 2010 only (unless Congress extends the law), a farmer is now allowed to deduct the self-employed health insurance deduction shown on line 29 of form 1040 in arriving at net self-employment income for self -employment tax purposes.  This means that for most farmers who have health insurance premiums ranging around $10,000 for them and their family, the self-employment tax savings would be around $1,500.

On the second question, the amount allowed as a deduction against SE income is the amount shown on line 29 of form 1040.  If the health insurance premiums are in his name and covers him, his spouse and the family, then normally the whole amount would be allowed as a deduction against SE income.  However, if the premium is only for him and there is a separate premium for the spouse and the spouse is not employed by the farm, then her premium MAY not be deductible against his SE income.  It is hard to tell from the question which fact pattern is correct, however, our discussion would cover most of the options.

A way to correct this is for the farmer to pay wages to the spouse and then the premiums for her would be deductible as an employee benefit on the farm's schedule F.  If the net income of the farm is under the wage base of $106,800 for 2010, then the only extra payroll tax would be the possible FUTA tax on her wages.  To take advantage of this, the spouse must be performing actual services for the farm and a bona fide arrangement.  The IRS has challenged several of these arrangements, losing some cases and winning others.

These situations must be discussed with your tax advisor since the interplay of tax rules can be complex.

New New - Not New to You!

Jan 21, 2011

We had a reader ask the following question:

"I'm thinking of purchasing a farm acreage with 3 newer farm equipment buildings and some old grain storage buildings. Could I take advantage 100% depreciation since they are new buildings to me and will be used for my farm in 2011?"

 

On the bonus depreciation rules for farm equipment and buildings, the rule is that the property must be new as in the first time that this property is put into use.  For example, when a farmer buys a new tractor, if it came directly from the dealer and had not been used in production ever before, then this is new property that qualifies for the 100% bonus depreciation.  However, if the farmer bought a "new" combine from the dealership that had been used for 20 hours by another farmer before being traded in, this is not new equipment.  Even though it is new to the farmer, it is not new to farming (since it had been used previously).

In the case of the question, even if the farm buildings were only two months old, since they were in use by the previous owner, they will not qualify for the bonus depreciation. 

One rule of thumb is that anytime you purchase farmland from another party, it is VERY unlikely that any of the property purchased will qualify for bonus depreciation.  Some will qualify for the Section 179 deduction, but none of it should qualify for 100% bonus depreciation.  As in all cases, you would need to review this with your tax advisor.

You Can Pick & Choose on Bonus Depreciation!

Jan 20, 2011

We had a reader ask the following question:

"I'm thinking of putting up a farm shop and storage building this year (2011). Can I take the bonus depreciation on only half of the cost of the building and depreciate the remaining amount over the 20 year period?"

Now based on my heading, you are probably assuming that this farmer can do this.  The answer, however, is no.  On all assets of the same asset type and class such as all new farm buildings put in service during the year, you must either take 100% bonus depreciation on ALL assets in this class type OR elect to take normal depreciation on all of the assets in that class.

However, the option that you can choose is to take bonus depreciation on one type of assets such as farm buildings and elect not to take it on another class such as farm equipment.  by making this election, you can more optimize your farm taxable income to reflect your best planning opportunities.

Here is an example of how this might work.  Let say the farmer puts in a new farm shop that costs $250,000 and buys new farm equipment that costs $300,000.  The farm normally makes about $350,000 from operations after other depreciation.  The farmer knows that if they take the full bonus depreciation on both assets, then the taxable income for the year will be a loss of around $150,000.  The farmer does not want to show that much loss, so they make the election to only take bonus depreciation on the farm shop of $250,000 and depreciate the farm equipment over 7 years.  This gets their net farm income down to about $50,000 which might be more preferable to them.

You have several options on how you take the bonus depreciation and remember that farm equipment is still available for the Section 179 deduction, so even if you elect out of bonus depreciation, you still may be able to optimize your farm income by using Section 179.

My normal preference would be to take bonus depreciation on all 20 year property such as farm buildings in 2011 since you can get an immediate deduction for these assets, however, every farm situation is different, so you must review this with your tax advisor.

Machine Sheds Qualify for 100% Bonus Depreciation Too!

Jan 19, 2011

We seem to be getting quite a few questions regarding what farm buildings qualify for the 100% bonus deprecation for 2011 (and the period after September 8, 2010).  Our latest question is as follows:

"Is there any bonus depreciation on machine sheds in the year 2011?"

For any new farm building placed in service during 2011, all of these buildings will qualify for 100% bonus depreciation since they are considered 20 year property or less for federal income tax purposes.  This includes a machine shed, mobile home for employees, hay shed, house owned by a C corporation, etc.

Therefore, any new building on a farm will qualify for 100% bonus depreciation.  However, only single purpose agricultural structures such as a hog confinement facility or greenhouse, etc. will also qualify for the Section 179 deduction which means it can be a used building in that case.

Remember, only new farm buildings placed in service between September 9, 2010 and December 31, 2011 qualify for the 100% bonus depreciation.

TEPAP - Final Conclusions

Jan 18, 2011

I spent all of last week attending the TEPAP conference in Austin, Texas.  This intensive 7 day conference is put on by Professor Danny Klinefelter of Texas A & M University.  Each day's session would normally have two different topics covered by some of the best presenters in the farm business.

I would highly recommend that any farm operation attend TEPAP in the future.  Even if you have a smaller operation, the information that you will receive should pay for itself many times over.  Each of the presentations give you many choices on how to improve your farm's operation and more importantly, the friendships that you will develop with other farmers from around the country can be even more important.

The only drawback from the conference is eating too much of the good food provided.

Again, I would highly recommend this conference for any farmer or farm related operation.

 

TEPAP - Final Day

Jan 15, 2011

After six great days of presentation, we have finally come to the last day of the TEPAP conference.  This is only a morning session and our presentation on public relations plans was giving by Moe Russell of the Russell Consulting Group.

Moe shared that we had 3 sets of good time in the last 100 years (1) during the 1910's, (2) during World War II and the period thereafter and (3) during the mid 1970's.  He believes that we might be headed for our fourth set of good times.  However, in each case after these good times, a period of bad times followed.

Public relation plans can add to your bottom line.  These plans should be proactive, not reactive.  A good public relation plan deals with:

  1. The neighbors
  2. The press
  3. Key influencers in the community
  4. Landlords

 

When something bad happens, you probably have only 60 seconds to respond correctly to the situation.

Farmers need to know that they need to get green, grow green and stay green.  This trend will only to accelerate.

Reactive plans may be needed in case something goes wrong such as a chemical spill, fire, tornado, equipment accidents, etc.  You need to know how you will react.

When dealing with the press, remember to be:

  • Honest
  • Straightforward
  • Brief, and
  • Positive

TEPAP - Day 6 Afternoon Session

Jan 14, 2011

Michael Mazzocco, Director at Verdant AgriBusiness Consultants, presented the afternoon session of day 6 of the TEPAP conference.  This session was on Market Growth Strategies for farmers.

To grow your farm revenues, you have seven degrees of freedom:

  1. Increase sales - same customers; same product mix
  2. Existing products; new customers
  3. New products - same or new customers
  4. Increase sales with better delivery / channel management
  5. Expand geography
  6. Change industry structure via acquisition/alliances
  7. Cross industry boundaries

 

You can focus on only one of these or decide to incorporate a couple into your farm structure.

If a farm decides to grow, then there are three horizons of growth:

  1. Horizon 1 - Extend and defend your core business first
  2. Horizon 2 - Build your emerging growth business
  3. Horizon 3 - Create viable options for that growth

 

Always be willing to shed your business of those operations that are running below your rate of capital.  By doing this, you free up resources to expand those operations that exceed your cost of capital.  This can be a double benefit.

When To Take Bonus Depreciation?!

Jan 14, 2011

We had a reader ask the following question:

"I ordered a new machine shed in December 2010, and put down a partial down payment. Can I take the bonus depreciation in 2010, or do I have to wait until tax year 2011 when the building will be erected?"

 

For new farmings buildings started in 2010, but not placed in service until 2011, the actual date when you can take the bonus depreciation is 2011.  Depreciation expense is allowed at the later of (1) the date bought or (2) the date available for service.  Even if you paid for all of the building costs in 2010, but did not finish the building until January, 2011, the bonus depreciation is taken in 2011 not 2010.

These date rules are true for equipment purchases as well.  If you buy a grain drill in 2010 that is unassembled and you assemble it in 2011, the depreciation is allowed in 2011, not 2010.

TEPAP - Day 6 Morning Session

Jan 14, 2011

The morning session of Day 6 of the TEPAP conference was presented by Allan Gray, professor at Purdue University. This session focused on strategic management for farmers.

Strategic management for farmers usually requires us to wear both hats – The General Hat (the leader) and The Troop Hat (getting the work done). We seem to spend too much time wearing the troop hat and not enough on the general hat. 

Strategy is all about change:

  • Anticipating the future 
  • Shaping the future  
  • Capitalizing on the future 

 

If you do not acquire the skills to anticipate the future, you will have a hard time either shaping or capitalizing on the future. It requires us to be proactive not reactive. Strategic thinking means looking outside our business to see how it affects our business. You must do your PEST analysis:

  • Political 
  • Economic  
  • Social 
  • Technology 

 

Strategic management requires hard work, but the effort will more than pay for itself if the process is taken seriously.

SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis will help assess the current situation of the farm. The TOWS matrix will then take this analysis match external opportunities and threats with the internal strengths and weaknesses. Just doing the SWOT analysis does not create a strategy. A farmer needs to implement their TOWS analysis to create the farm strategy.

 

 

 

 

 

 

 

 

 

 

 

TEPAP - Day 5 Afternoon Session

Jan 13, 2011

The afternoon session of day 5 of the TEPAP conference was presented by Brent Gloy of Purdue University on improving profitability through process improvement.

On process improvement, it is important to understand that it is difficult to manage output, whereas is very possible to manage inputs. Farmers need to determine and manage the factors that cause our expected output to deviate from the optimal.

Remember that you can not manage what you can not measure. There are two causes of variation. Common cause variation is naturally occurring variation inherent in systems. You will usually not be able to manage this totally. Special cause variation is caused by a specific event related to the process. This is what a farmer must manage. It is hard to understand the common cause variation without removing the special cause variation first.

Summary observations are as follows:

  • It can be easy to get overwhelmed or too far into the trees 
  • It is easy to pick too big of a project – keep it small 
  • Done right will take some time 
  • It is critical to have employee buy-in 
  • Don’t be afraid of the obvious 
  • Look for unintended consequences 
  • Find creative ways to incentivize performance

 

Almost every process on the farm can have both common and special variation and more than we can reduce and eliminate special variation, the better your farm operation will be.

TEPAP - Day 5 Morning Session

Jan 13, 2011

The morning session of day 5 of the TEPAP conference was performed by Bernie Erven, professor emeritus of agricultural economics at Ohio State University (of THE Ohio State University as one farmer told me this week). His discussion was on Human Resources Management dealing with:

 

     

  • Be a Better Boss
  •  

     

  • Organizational Structure
  •  

     

  • Dealing with Problem Employees
  •  

 

Highlights of each are as follows:

 

Being a better boss primarily requires us to communicate with our employees better than we are doing right now. There are many ways of achieving this, however, in all cases it requires us to communicate better, both verbal and in writing.

 

On your organizational structure, it is extremely important to know your span of control. If everyone of your employees report directly to you and you have more than 5 employees, you probably need to fix your span of control. In most organizations, about 5-6 people are all that should report to one person.

 

In disciplining problem employees, it needs to consistent and follows the same procedures or it will not be perceived correctly. If you have chronic under performers, there may be up to 14 possible reasons for this. Many of these reasons relate to you as the employer versus the employee. Make sure that you can correct these issues first and then see if the employee remains an under performer.

 

In dealing with under performers, make sure to DO SOMETHING about it. Refuse to allow the problem to fester. Stop the negative effects on the business, the worker’s happiness and the worker’s effectiveness.

 

As an employer, you want to be friendly and fair with all employees, but be a buddy of no employee.

100% Bonus Depreciation - No Income Limitation!

Jan 13, 2011

We had a reader send in the following question:

"I read a post from you a week ago or so about 100% bonus depreciation on farm buildings. Looking at putting up a machinery shop will I be able to deduct all of the cost my 2011 taxes if I put the building up this year and have the income to cover it."

 

Farmers sometimes get Section 179 and bonus depreciation rules mixed up.  Section 179 has an overall income limitation that applies to the actual deduction that might be allowed.  For example, if the farm generates $200,000 of net income before the allowable Section 179 deduction (including depreciation on all other assets), then the total amount of allowed Section 179 deduction for the year is $200,000.  This is true if the asset placed in service costs $500,000.  Remember that farm buildings are not available for the Section 179 deduction.

Now, in the case of bonus deprecation, as long as the building is a NEW building, the income limitation do not apply.  Let's take the case of the farm building costing $500,000 with net farm income after all other costs of $200,000.   In this case, the farmer is allowed to take a full bonus depreciation deduction of $500,000 and show a $300,000 farm loss.  If the farmer has no other income, they can carry the loss back two years to offset income in 2008 and 2009 and forward to 2011 and beyond until they use it up.

Remember on all new equipment, farm structures and farm buildings placed in service in 2011, the farmer can deduct 100% of the cost without worrying about the overall income of the farm operation.  Also, make sure to review this with your tax advisor to determine if your structure is set up properly to allow the full deduction.  If you are an S corporation and this bonus depreciation creates a loss greater than your available basis, you will not be allowed to deduct the full amount of bonus depreciation this year.

TEPAP - Day 4 Afternoon Session

Jan 12, 2011

The afternoon session of day 4 of the TEPAP convention was presented by Gary Maas on dealing with all of the different personality types associated with a farm operation (or in life).

 

The interesting part of the presentation is how your personality based upon your natural style may be completely different from the style you adapt during your work career. To effective managers may be able to determine which of their natural traits can be changed to be more effective, however, you must be careful not to change too much which can cause emotional issues.

 

As a farmer in hiring decisions, are we making the decision based on quantitative (experience & education) or on qualitative (attitude, chemistry & attributes). It would be much better to stress the qualitative over the quantitative.

 

It is important to understand the personality traits of who you are dealing with so you can determine what is important to them and adjust accordingly.

 

TEPAP - Day 4 Morning Session

Jan 12, 2011

David Kohl, noted speaker and professor from Virginia Tech University provided a morning session on Mega Trends for agriculture. Highlights are as follows:

 

     

  • 70% of North American farms will change hands by 2025. This is not just ownership, but who farms the land. This provides plenty of opportunities for American farmers.
  •  

     

  • Volatility will require an offense, defense and special teams. Offense will be your management of revenues, defense will be your management of farm input costs and special teams will be your interest rate management. These will need to be balanced. You can not spend too much time on one at the detriment of the other two.
  •  

     

  • We must be careful of the "New Normal" of agriculture. We have had several years of bullish trends for cropland farming, however, we must protect from expecting the "New Normal" to be normal.
  •  

     

  • If oil prices continue their trend above $90 and exceeds $100 per barrel, the shock to the system could easily send us back into a second recession.
  •  

     

  • Our employees coming into our system no longer are motivated by compensation, but are primarily motivated by lifestyle issues. We need to understand AND embrace it.
  •  

     

  • We will continue to automate out the marginal workforce in both business and farming.
  •  

TEPAP - Day 3 Afternoon Session

Jan 12, 2011

For the Tuesday afternoon session, we were privileged to have the last formal presentation done by Dr. William Carden, CEO of The Carden Group. Dr. Carden’s discussion was on effective delegation by farmers.

 

One thing that resonated with me was that as farmers, we need to delegate the expected results to our employees not the tasks. So many times, we tell our employees to get this task done, when we need to communicate to the employee in writing what our expected result is, not necessarily how to do it.

 

In summary, Dr. Carden stressed:

 

     

  • Get rid of the thought "I can do it better and quicker".
  •  

     

  • Delegate the results, not the method.
  •  

     

  • Delegate every decision down to the lowest-ranked employee capable of making the decision.
  •  

     

  • Acknowledge the work, no matter how trivial.
  •  

     

  • Once you have delegate a task, DO NOT EVER take it back unless there is truly an impending disaster.
  •  

TEPAP - Day 3 morning session

Jan 12, 2011

For the Tuesday morning session of the TEPAP conference, we had Dr. Ed Siefried, a noted economist to explain how the macro economic trends will affect farming in 2011. Highlights are as follows:

 

1. The economy in 2011 is expected to be recovering with growth possibly around 4% with low inflation. However, in all previous recessions, in order to have a healthy recovery, housing must participate. Right now, housing starts are running about 1 million behind normal trend line on an annualized basis. Until this gets closer to trend line, we will most likely not have a great recovery.

 

2. Manufacturing has been healthy and expanding for over a year now. Some of this relates to build up of inventories that were depleted during the recession, but it is still expanding, which is good.

 

3. The old normal for baseline unemployment was near 4%. This number is now expected to be closer to 6%. If this ends up being incorrect, then inflation may become more of a factor. However, while unemployment remains near 10%, it is difficult for inflation to be much of a factor.

 

4. Discussion was held among 75 farmers regarding whether we have a farm land bubble right now. The consensus seemed to be that as long as farm income remains high and interest rates remain low, we are not in a bubble. However, if one of these factors turns negative, then we will see some correction in prices. If both turn negative, the correction will be much greater.

Section 179 in multiple businesses

Jan 11, 2011

We got the following question from a reader:

 

This question actually has at least two items that need to be addressed.  First, Section 179 deduction is allowed to the extent of net income generated by the business before the deduction.  Assuming that this young farmer operates both of these business as a sole proprietorship, he will be able to combine the net income before Section 179 deduction of both businesses plus any wages that he has earned off farm to arrive at the total income that is available for the Section 179 deduction.  If the net income of the seed business is more that the net loss of the farm after the Section 179 deduction, then the deduction will fully allowed.

However, if both of these businesses are operated in a partnership or corporation, he will not be able to combine the income to help take the deduction on the farm.

Land improvements such as driveways are not allowed for the Section 179 deduction.  Tiling and fencing usually qualify for the Section 179 deduction. 

If the son had purchased the land first and then put in new fencing, tile and driveways, all of these costs would qualify for the 100% bonus depreciation which does not have an income limitation and land improvements qualify for this deduction.

These types of situations should always be reviewed with your tax advisor before the purchase to determine the optimal income tax situation and structure. 

"My son who is first time young farmer has just purchased a farm on December 31, 2010. He has another successful seeding business. Can he use section 179 for tile , fence and driveways against his other seeding business income? "

TEPAP - Day Two

Jan 10, 2011

Day two of the TEPAP conference was primarily focused on management accrual accounting for farmers.  The presentation was done by Dick Wittman of Wittman Consulting.  As a CPA, Dick was speaking to the choir (so to speak).

Some of the ideas that resonated with me were:

  • It is very important to implement full accrual accounting for your farm operation.  This means that all COSTS of production should be posted to the balance sheet as cost of growing crop (an asset) once the crop is harvested, then these costs are moved to crop inventory.  As these crops are sold, the total costs for the bushels sold are deducted against crop revenues.  By simply implementing this method of accounting, you will significantly remove the dramatic swings in monthly income and expense by using the cash method of accounting.  This also allows you to benchmark against YOU - not twenty different farmers using twenty different methods of accounting.
  • Another item that is even more critical today is your repayment capacity.  This is calculated by taking your net farm income adding non-farm income plus depreciation and interest expense on long-term debt and capital leases.  From this total, we subtract long-term debt and capital lease payments, net cash incurred for equipment purchases required annually and family living expenses.  What is important about this calculation is this tells you how liquid you are for this year and the upcoming year.  If this ratio is less than 1, you will have liquidity problems.  It should be greater than 1.5 to 1 to be comfortable and above 2 will give the liquidity to expand, etc.
  • The trend analysis done by Dick Wittman for the last ten years indicate that farmers have had the best overall profitability over the last three years and 2011 appears to be just as good.
  • By simply getting a good handle on your cost of production will enable you to make marketing decisions tied to profit margin objectives instead of seat of pants guesses.

 

That is a summary of day two of TEPAP.  I will keep you posted on tomorrow.

TEPAP - Day 1

Jan 09, 2011

All this week I am at the The Executive Program for Agricultural Producers (TEPAP) in Austin, Texas.  This is an all week intensive program put on by the Texas A & M University and hosted by Danny Klinefelter.  I am very excited to attend the program and will try to post at least one blog post each day on what I have learned or felt our farmers should be aware of.

Sunday, (today) was the first day and Dick Wittman of Wittman Consulting did a great job of providing an overview of why farmers "must" use accrual farm accounting to have an accurate view of their profitability and other pertinent financial ratios.  There were a couple of bankers attending the program and I was talking to one later in the day and I asked him how many farmers are using accrual accounting.  His guess was about 1% of his clients were.  I then asked if using accrual accounting was important and he indicated it was very important.

Another thing that Dick stated that I thought was informative was that most of our farm bankers are already taking your cash basis income tax returns or financial statements and converting them to an accrual basis.  If you have been with the same banker for many years, the banker will generally have these statements for each year and they will readily give this information to you.  This could save you many hours of research and give you a good start on setting up your accrual statements.

Management succession consultant Dr. Donald Jonovic (you probably have read many of his articles or books already) provided a very humorous presentation on the interaction of farm families and the issues associated with farm succession.

One important nugget was to understand that their are three major components to a farm business:

  1. Investment
  2. Management
  3. Directorship

 

Each of these roles interact with the others to some degree and when they do interact, this can be the time when the most conflict may occur.  All of these components may involve all of the parents and children associated with farm, but it is important to keep the communication on these subjects timely and separate.  The meetings may happen on the same day, but the agendas and discussions must be separate from the other.  Also, what happens in the past stays in the past.  What is important is to focus on the current and what you can do to make the future better.

What is a Farm Building?

Jan 07, 2011

We had a reader ask the following question:

"WHICH BUILDINGS ON A FARM QUALIFY AS AG SPECIFIC BUILDINGS OR STRUCTURES FOR THE BONUS DEPRECIATION, IS THERE A LIST SOMEWHERE."

The law basically says that all farm buildings other than single purpose agricultural or horticultural structures are 20-year property and available for the 100% bonus depreciation.  This would include hay sheds, machine shops, etc. 

There is not a list, however, since single purpose structures automatically qualify for 100% bonus depreciation, all farm buildings will qualify for bonus depreciation (other than your house, etc.)

Therefore, the bottom line is that any NEW farm related building on your farm will be available for 100% write off during 2011.

Make An Tax Estimate Payment Now?

Jan 05, 2011

Most farmers know that if they file their income tax return by March 1 of each year and pay the tax with that filing, there is no estimated tax penalty associated with not paying any estimated taxes through out the year.

What many farmers may not know is that filing this early might be creating a record keeping problem for them.  These days, many of the form 1099's needed to file an income tax return are not received until late in February and in many cases, several corrected form 1099s are mailed during March.  By filing on March 1, the farmer may end having to file an amended tax return and may get in such a hurry to get the return done, that many deductions might be missed.

One option is to pay their required income tax estimate due January 15, 2011.  If their income for 2009 was much smaller than 2010 or they expect their income for 2010 to be fairly minor, the required estimated tax payment is normally the lessor of:

  • 100% of the 2009 tax (if your income is high, this percentage may be higher), or
  • 90% of the estimated 2010 tax

 

By making this tax payment, the farmer is allowed until April 15, 2011 to file and pay the remaining tax that might be owed without incurring any estimated tax penalties.  With today's low interest rates, the amount of foregone interest might be very minor in return for the extra time to get the return filed correctly.

Please check with your tax advisor to see if this would work for you.  You have 10 days to check it out.

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