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November 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.

Check Your Beneficiary!

Nov 30, 2011

I think we may have written a post on this a couple of years ago, but I got reminded of the issue a couple of days ago with another sad situation that was relayed to me.

I was talking with one of my CPA friends and he had a client whose husband had just passed away.  This was the second marriage for both and there was a substantial life insurance policy on his life.  He told his wife that when he passed away, the proceeds would go to her and she would have a very comfortable retirement.  Well, as you can probably guess, when he passed away and she went to the life insurance agent who reviewed the policy, they found out that the husband had never changed the beneficiary from the first wife.  There is now a substantial chance that all of these proceeds will go to the first wife, not the current wife.
 
Most farmers assume that all of their assets will pass at their death as per the instructions of their will.  However, many assets including life insurance, IRAs, retirement plans, investment accounts in joint tenants, etc. will pass by rule of law which is normally the beneficiary designation in the case of life insurance.
 
This potential catastrophe could have been very easily fixed by reviewing the life insurance policy on an annual basis to make sure it is properly owned and the proper beneficiaries identified.  This wife may never get the funds that both her and her husband thought would be going to her.
 
On a personal note, I am flying to Chicago today for the Women in Agriculture conference for Top Producer.  I will be speaking at two breakout sessions Friday morning and if any of our readers see me wandering the hallways, please stop me and say hi.

New Tax Education Program for Farmers

Nov 29, 2011

The USDA-Risk Management Agency (RMA) in conjunction with several universities has just announced a new site for financial and tax information for farmers. The site is located at www.ruraltax.org.

The site comprises:
 
  • Tax Topics
  • Sample Farm Tax Return
  • Small Farm Tax Guide
  • Links
 
There is also some information on who has contributed to the site and the history of the program.
 
I have briefly reviewed the Small Farm Tax Guide and it has very useful information on not just taxes, but budgeting and how financial statements work, etc. Having this site in conjunction with the Farmer's Tax Guide at the IRS website will answer many of the common questions that farmers might have.
 
However, this information is of a fairly general nature and this blog is designed to help our farmers with more complex tax and accounting needs. Make sure to review these two useful publications, but we look forward to helping you with your other tax and accounting needs.

Should You Switch Your LIBOR Debt?

Nov 28, 2011

With the eurozone upheaval in the financial markets, farmers may want to consider changing any LIBOR-based debt that they currently have or anticipate having in the future.

Almost all loans these days are based upon some type of index. The most common ones are the prime rate, LIBOR and some type of U.S. Government loan index. For the last few years, loans tied to LIBOR have perhaps seen lower rates than loans tied to the prime rate or other indexes. 

However, now that issues with the eurozone are getting more dire every day it seems, farmers may want to switch any LIBOR loans over to a more stable and possibly much cheaper index. To do this, you would need to check with your banker, but all farmers who have LIBOR-indexed loans should at least check this out.

Have a Happy Thanksgiving!

Nov 22, 2011

With Thanksgiving coming up in a couple of days, I wanted to take the time to say what I am thankful for:

  • My wife of 29 years, Patty Neiffer, for putting up with me for all of these years and for some reason still in love with me.
  • My four sons, Garrett - 24, Grant -23, Gannon - 20 and Gage - 18 for thinking their dad is still fairly smart.  Three of my sons plan on being CPAs like their old man and I look forward to discussing taxes with them (most likely on the golf course).
  • My CPA career.  I am voracious reader and this career has allowed me to enjoy keeping my mind active and involved.  Many people ask me how can you enjoy doing taxes and I try to tell them it is like putting a puzzle together.  If I can take the pieces of their income tax situation for the year and properly put it together in their favor, we create a nice finished product.
  • Our readers on this blog.  We started this blog almost three years ago and I am estimating that well over 100 of our readers have sent us emails with tax and other farm related questions and it has been a pleasure reading and replying to those questions.  Also, many of the readers I have met over this time and I have really enjoyed this part of the blog.  I especially enjoyed getting teased about "driving a combine".

 

Again, I want to wish everybody a very Happy Thanksgiving and we are looking forward to the holiday season.

 

Tri State Grain Growers Convention

Nov 17, 2011

We have a booth at the Tri State Grain Convention in Spokane, through Friday of this week.  We set up the booth yesterday afternoon and had several people stop by.

If any of our readers from Washington, Idaho and Oregon are attending the convention, please stop by and say Hi.

Sustainability Test - Part 3

Nov 16, 2011

Today's post is our last part of the sustainability test.  Although this is designed for all businesses, most of all of these items apply to farms too.

If a key manager or administrator suddenly became incapacitated, someone other than the owner/CEO could assume his or her duties within a week.

  • Have you done a good job of cross-training your employees to be able to step in and do another employee's job in case of illness or extended vacation?

 

The president or chief operating officer can take a 10-day vacation without checking into the office by phone or email, and business conditions continue to be made.

  • I believe that if the farmer has done a great job of training their employees, that the farmer can be gone for several weeks and the everybody is ready to get the job done and done well.  I have observed many business operations where the owner feels like they have to be there to have it run well, when the opposite is true.  The company actually runs better without the owner there since the employees are able to get their job done without interference from the owner.  A farmer wants his farm to run well when he is not there, but he should also have the employees enjoy having him around.

 

A potential buyer would find the company an attractive acquisition because the company can be successful without the current owner(s) (and the current owner(s) have a viable exit strategy).

  • Remember, you may never have any plans on selling the farm, but if you want the next generation to be involved and take over the farm, you are "selling" the farm.  The better you can make the operation, the easier it will be for them to pay you and them.

 

This is the last part of the test.  How well did you do.  I would expect hardly any farms to answer true to all nine questions.  However, if you are above six, you are a sustainable farm, below four, you need to work on the ones you answered false to.

Sustainability Test - Part 2

Nov 15, 2011

We continue our sustainability test from yesterday.

Our company can withstand the financial impact of a "bad" job or lower than anticipated revenue and still comfortably absorb overhead expenses.

  • Do you stress test your budget each year to see what your break-even point is?  Have you locked in enough revenues to cover overhead costs including a reasonable wage for your services?

 

Our company has effective and consistent management tools as demonstrated by systems and procedures that provide financial controls and reliable information regardless of the personnel involved, size of job, or type of work.

  • Notice words effective AND consistent.  Some farmers are effective but not consistent.  Others are the opposite.  Do you view a budget as the necessary evil for the bank, or do you view it and a great management tool to be shared with all employees to get their emotional buy-in?

 

Our company is creating the next generation of management and leadership as demonstrated by an annual performance evaluation process that considers individual roles, opportunities for improvement, and career planning.

  • Do you have formal feedback with your employees?  Today's generation needs more consistent timely feedback that our generation probably got (although we probably needed it to).  Are you providing training opportunities for your employees.  As a CPA, I have to get at least 40 hours of education each year.  How much do you provide to your employees.

 

Tomorrow, we will finish up the last three traits of a sustainable business organization including a farm.  How have you done on the first six traits.

Sustainability Test - Part 1

Nov 14, 2011

A reader gave me a 10 part questionaire regarding how sustainable your business is.  This questionaire applies as much to farming as to any other business.  During this week, I will list the questions here with my comments.  If you can get a true response on at least 7 questions, I would say your farm is in very good shape, 4-7 to is probably around average and below 4, you will need some work.

There are all true/false questions.

1.  Our farm's revenue (top line) and net income (bottom line) are predictable and repeatable as demonstrated by our annual budgeting process.

  • Notice the question references your budgeting process versus your income being predictable and repeatable.  We know that grain prices are rarely predictable, but do you use your budgeting process to come up with your expected gross income on the top line and net income on the bottom line.
  •  

2.  Our company has a sense of direction demonstrated by its formal (written) business plan that looks ahead at least two years.

  • The key to this question is do you have a WRITTEN business plan and does it go out at least two years.  Business plans do not need to be 25 pages in writing.  They can simply be a listing your goals for the farm and estimates of gross income and net income, but they need to be in WRITING and they need to be REVIEWED and USED.

 

3.  Our company has a disaster recovery plan in the event of fire, windstorm, flood, or loss of power that allows it to resume operations within a day of the event.

  • Besides crop insurance, what is your plan in case one of these events occur.  Would you be up and running the next day?

 

Tomorrow, we will post the next couple of sustainability questions.

Watch Out For Sales to Related Parties - Part 2

Nov 10, 2011

On the last post regarding sales between related parties, my example was not 100% correct, so I have updated the post to more accurately reflect what the rules for related party sales.  Thanks to the reader that pointed this out.

 

Watch Out For Sales to Related Parties!

Nov 09, 2011

Many times we have farmers come in to get their tax return prepared and tell us that they will probably not owe any tax since they sold some property at a large loss.  After reviewing the facts with them, we find out they sold the property to their son.  We then have to tell them that this loss is not deductible.  This is not a pleasant thing to do.

Remember, if you sell property to a related party, which are:

  • Brothers
  • Sisters
  • Parents and Grandparents
  • Children and grandchildren
  • A business that is more than 50% owned by you and your related relatives

 

If the person who you sell your asset to meets one of these definitions, then one of two things happen.  If you sell the asset at a gain, you recognize the gain.  However, if you sell the asset at a loss, the loss is not recognized.  Any loss not recognized is added to the basis in the hands of the buyer and used when they sell it.

For example, assume a farmer buys some land for $100,000 and sells it to his daughter for $75,000.  The $25,000 loss is not recognized, however, when the daughter sells it to an unrelated party for $90,000, she can take a $10,000 loss on the sale.  If she sells it for $115,000, she only recognizes $15,000 of gain.

Anytime you are planning on selling assets to a relative make sure to review this with your tax advisor.

Watch Out For Two Classes of Stock in an S Corporation!

Nov 07, 2011

Many farm operations use an S corporation.  These corporations legally are the same as any other regular corporation, however, for income tax purposes, the shareholders have made an election to be taxed similar to a partnership.

One of the requirements of an S corporation is that there can only be ONE class of stock.  You cannot have common and preferred stock in an S corporation.  You cannot pay dividends on a non-pro-rata basis.  This can trip up our farm clients.  Many times, there will be children that own shares in the S corporation and the corporation will pay a dividend to the parents and forget to pay a dividend to the children on a pro-rata basis.  If audited, the IRS can argue that this is a separate class of stock and disallow the S corporation.

The S corporation, however, is allowed to have both voting and non-voting stock.  This allows the parents to transferred non-voting shares to the children and grandchildren and keep control of the operation by retaining the voting shares.

If you have an S corporation, please make sure to follow the rules when it comes to not having a second class of stock.

Some IRA Guidance

Nov 03, 2011

I sometimes find it amazing how much misinformation can be in the mainstream news media on how working Americans can not contribute to an IRA if they are covered by a retirement plan at work.  This is simply not true.  Any farmer that has earnings in excess of $5,000 ($6,000 if over age 49 and want to take full advantage of the amount they can contribute) can contribute to an IRA no matter if they are covered by a retirement plan or how much their adjusted gross income is.

The potential drawback if covered by a retirement plan AND your income is too high, then the IRA contribution may not be fully deductible.

If you are not covered by a retirement plan, you can make a deductible IRA contribution no matter what your gross income is.  If one spouse is covered by a retirement plan, the other spouse can make and deduct an IRA if the total gross income is less than $173,000 (these are all 2012 numbers).

If both husband and wife is covered by a retirement plan, then you can still contribute to an IRA, but it is only 100% deductible if your adjusted gross income is less than $92,000.  It is phased out between $92,000 and $112,000.  For single taxpayers, the phaseout starts at $58,000 and ends at $68,000.

Remember, if y0u have earned income in excess of $6,000, you can make an IRA contribution, you just may not be able to deduct it.

 

How the Sale of a Part Interest in a Tractor is Handled?

Nov 02, 2011

We had a reader ask the following question:

"I am slowly turning my farm operation over to my son. Each year I rent to him more of my farmland and he buys more of my equipment. I purchased a tractor in 2008 for $159,000 on which I took Sect. 179 of $137,000 on it. Can I sell a 1/2 share of this tractor to my son in 2012 & 2013 ($75,000 each year). I assume I would recapture 1/2 of depreciation (including Sect. 179) each year. Is this acceptable?"

 

Farming is one of the businesses where it is very common to own a partial interest in farm equipment.  Many times, you will see a father/son, brother/brother and several unrelated third parties owning a partial interest in farm equipment that is used on each farm operation.

In this case, the sale of a tractor half-interest will result in ordinary gain based upon the sales price of $75,000 less his original cost of $79,500 and adding back all of the depreciation taken on the tractor including the Section 179 deduction of $68,500.  None of it will be taxed at capital gains rates since the sales price is less than original cost.

One risk to watch out for is documenting properly the sale of a tractor half interest.  If this is performed incorrectly, then tractor sale would be treated as an installment sale of 100% of the tractor and all depreciation recapture would be due in the year of sale even though the farmer only received half of his funds in that year.  This may result in the taxpayer's being in a higher tax bracket and owing more tax than actual cash received.

IRS Releases New Inflation Adjusted Tax Related Items

Nov 01, 2011

Revenue Procedure 2011-52 was recently released.  This revenue procedure outlines most if not all of the inflation adjusted tax items such as the personal exemption amount, standard deduction, etc..  Of items of interest to farmers are as follows:

  • For 2012, the 15% tax bracket ends at $70,700 of taxable income for married filing joint, $35,350 for singles,
  • The standard deduction for 2012 is $11,900 for married filing joint and $5,950 for singles,
  • For 2012, the personal exemption is $3,800,
  • The election to expense certain depreciable assets under Section 179 cannot exceed $139,000 (but as usual Congress may change this before we have to file our tax returns in 2013),
  • The Unified Credit against estate tax has increased from $5 million for 2011 to $5,120,000 for 2012.  Remember that in 2013, it is scheduled to revert back to $1 million.  Also, lifetime gifts of up to $5,120,000 can be made in 2012,
  • The annual exclusion for annual gifts remains at $13,000.  This is only adjusted in $1,000 increments and it is my estimate that this number will increase to $14,000 for 2013.

 

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