Apr 21, 2014
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April 2013 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.

How Does Delayed Plantings Affect Your Profit Margins?

Apr 25, 2013

My friend Chris Barron (Ask the Margins Expert) and I were discussing how delayed planting of corn this spring may affect farmer's net profit margins.  A reduction in yield and/or price can have a dramatic affect on overall profit margins since most of a farmer's costs are what we call fixed.  Cash rent, the seed that is in ground, the fertilizer that has been applied, etc. although normally viewed as a variable cost, once you plant the crop, these costs are now "fixed".

During very good years such as 2011 and most likely 2012 assuming adequate crop insurance, farmers obtain the benefits of these fixed costs.  Unlike variable costs that increase with revenues, these costs remain fairly constant, with each resulting dollar increase in revenues due to higher prices or yields drops mostly to the bottom line.

However, this year may be a completely different situation.  We are facing much lower prices this year than last, although if you locked in spring prices with 85% crop insurance levels, you most likely guaranteed yourself a minimum of $5 per bushel for corn and about $10.50 for beans.  However, the last few years with high prices have also resulted in what I call inverse basis for many farmers.  Unlike normal years when the farmer may receive 50 cents less than futures prices, the last couple of years many farmers have received higher than futures price.  This year if the carryover ends up closer to 2 million bushels than the current carryover, we will probably see basis levels return to more normal levels.  In that case, your guaranteed corn price of $5 may be closer to $4.5 or lower.

As the planting date gets delayed beyond May 15, yield loss may be in excess of 1% per DAY.  On 200 bushel corn, this is 2 bushels a day per acre or at least $10 per acre per day.  A week costs you $70 and two weeks might cost your $140 per acre.

Let's assume a corn farmer with 180 bushel yields projects revenues of $1,000 and costs of $800 for 2013.  This assumes that the farmer will receive a net $5.50 per bushel.  Instead of planting at the end of April, he does not get his corn into the ground until May 25.  This results in a 12% reduction in yields to 158 bushels and instead of getting an $5,50 average for his corn, basis goes against him and he ends up netting $4.75.  This results in total revenues of $750 with an average loss of $50 per acre.  Whereas in 2012, this same farmer may have ended up netting close to $300 or more per acre, this year, he may face a loss of $50 or more.

Have you run an analysis on your operation to see how a delayed planting may affect your margins. 

What About Those 1099s?!

Apr 24, 2013

Almost fully back from the rigors of Tax Season, it is now time to start posting on our more usual basis. We got the following question from one of our readers in response to our post on using deferred payment contracts.

"What about the 1099 that you would receive from the elevator that would show the income in the year the cash was received, not the year the crop was actually sold?"

As Congress and the IRS adds more and more items of income requiring form 1099s, it will not be to far in future where all of page 1 of Schedule F will be a reconciling schedule requiring farmers to list all of their income from each type of form 1099 and then provide an explanation of how their actual income from those items would be different. We are not there yet, but I predict it may not be too many years in the future.

For today, a farmer in this situation would make sure to list the gross amount of income from the form 1099 in the appropriate box on schedule F and then provide an adjustment on the other income line. This adjustment can be negative.

For example, assume a farmer sells all of her corn to the local cooperative for $1,000,000 for 2012 with $800,000 in cash received in 2012 and $200,000 received in 2013 on a deferred payment contract. She elects to report all $1,000,000 in 2012 and lets assume she has no other crop sales in 2013. The Coop will issue a 2013 form 1099 to her showing $200,000 of sales (assuming they show it as per unit retains). She will report this $200,000 on the appropriate line and then report a negative $200,000 in the other income box. Since this section will now show a negative number, we would normally attach a schedule letting the IRS know that this represents an adjustment for electing out of the installment sales on certain 2012 sales or similar wording.

Some practitioners may elect to report the $200,000 on a gross basis and then report the taxable amount as zero. We find that reporting it this way can lead to more letters from the IRS, but either way would result in the correct amount of income reporting.

Our Readers Catch Us!

Apr 17, 2013

In our post yesterday on the deferred payment contracts, we had indicated that there were six different combinations of income that could be reported using the three contracts shown.  A couple of very observant readers had indicated we had missed one.  The one missed was that all three contracts could be reported in 2013.  Therefore, to recap the amounts that could be reported as follows:

  • $50,000
  • $60,000
  • $70,000
  • $110,000
  • $120,000
  • $130,000
  • $180,000

 

These are the seven different amounts of income that could be reported.  For example, if you wanted to increase your income by $150,000, you would have to decide between $130,000 and $180,000.  You would not be able to pick exactly $150,000.

Many thanks to the observant readers out there for catching this.

Deferred Payments Contracts (Again)

Apr 16, 2013

We seem to get several questions during tax season regarding how deferred payment contracts work for tax purposes.  I thought we would do another post on the mechanics and show some examples.

With a deferred payment contract, the farmer has sold their grain, but elected to defer receipt of the payment until a future date, usually the next year.  Since the farmer is using the cash method of accounting, the income is usually reported when they receive the cash.  However, this transaction is technically an installment sale and one of the elections a farmer can make is to "elect" out of the installment method and report the sale when the transaction occurs, not when the cash is received.

This is a very simply election.  Simply report the sale on your return and you are done.  No statement is attached and no other indication to the IRS is required.  The key thing is to remember not to report the income when you collect the cash the next year.

This election is on a "contract by contract" basis.  It is an all or none election for each contract.

For example, lets assume we have a farmer that has sold 30,000 bushels of corn in 2012 using three deferred payment contracts with collection to occur in 2013.  Contract # 1 is for $50,000. Contract # 2 is for $60,000 and Contract # # is for $70,000.  Under is normal method of accounting, he would report these three contracts in 2013 for $180,000.  However, he has six alternatives available for the 2012 tax year.  He can elect to report either Contract #1, 2 or 3.  He can report 1 and 2, 1 and 3 or 2 and 3.  This allows him to report in 2012 the following amounts of income:

  • $50,000
  • $60,000
  • $70,000
  • $110,000
  • $120,000
  • $130,000

 

These are the only 6 options available to him.  He cannot report half of contract # 1, 2, or 3, but is limited to reporting one 0f these six options.  That is why we suggest having multiple deferred payment contracts and having a couple of small ones to allow the greatest flexibility.

On a personal note, we made it through another tax season.  I think today is my first day off in over 2 months and I am going to go hit the little white ball (or at least try) and wear shorts for the first time all year.

 

Here We Go Again!

Apr 10, 2013

It seems like it was only three months ago that we had a new law making the lifetime estate tax exemption $5.0 million indexed to inflation ($5.25 million in 2013). Wait! It was only three months ago.

President Obama today release a 2014 budget proposal calling for changes to this "permanent" law. Beginning in 2018, the budget would return the estate tax laws back to 2009 levels. This would result in a $3.5 million lifetime exemption (not indexed for inflation) and a 40% tax rate.

Based on assumed 3% inflation rate, we estimate that the current lifetime exemption would increase to $6 million in 2018. If the President's proposal goes into effect, about $2.5 million of additional estate value would be subject to a 40% estate tax.

The proposal also calls for certain "loopholes" to be closed. Most likely these relate to discounts for private entity gifts and estate values and other related items (these "loopholes" are always in these types of budget proposals, but rarely get passed).

On the direct farming side, the President's proposal, as expected, calls for the elimination of direct payments (saving about $3.3 billion per year ) and a reduction in crop insurance premium subsidies by about $500 million in 2014 rising to slightly more than $1.25 billion a couples years thereafter.

3% - 6% - 12%

Apr 07, 2013

One of our last posts indicated that the IRS had issued a notice indicating they might not assess the late payment penalty for returns that are extended and paid after April 15, 2013 if the return included certain forms that were delayed by the new tax law.

However, when you read the fine print, it appears that you still need to accurately estimate your tax and pay in at least 90% of this extra tax to escape the penalty.

In addition, if you are farmer who delayed their filing until after March 1, 2013 to avoid paying your taxes until April 15, 2013, remember that the underpayment penalty will now kick in if you wait until after April 15 to pay.  This now means that your interest rate will be the current 3% rate plus the underpayment rate of 3% plus if you are hit with the late payment penalty, that is another .5% per month or an annualized rate of 6%.

If you add all of these rates together, you now get a total annualized interest rate of 12% (again none of it is deductible).  We would suggest paying your tax by April 15 unless you really are certain you can earn more than 12% after-tax on your funds.

The Two Week Check List

Apr 01, 2013

There are officially two weeks until April 15 to get your taxes filed (unless you elect an extension). If you have not filed yet, here is a check list of things to do between now and then:

  • Fully fund IRAs for you and your spouse.
  • Fund your retirement plan (KEOGH, SEP, SIMPLE). Even if you have not set one up, there is time for some types of retirement plans to be created and funded by April 15 or October 15 if you do an extension.
  • Unlike prior years, you have a decision on whether you wish to pay in any amounts due with your extension. In past years, this would cost you the regular annual interest rate (currently 3%) plus .5% for each month that you are late. This late penalty is based on being one day late in a month so if you pay on the first day of the month, the IRS could assess the full .5% penalty. However, this year due to the delays in getting the forms released, the IRS will not charge this penalty. They will charge interest. If your borrowing costs are greater than 3%, you may want to consider taking advantage of this, however, the interest is non-deductible.
  • Review your farm income averaging options. Even if this does not save money for you this year, it may save money in 2013-15.
  • Make sure to determine if any state or federal credits apply to your tax situation. In many cases, these credits can easily add up to real money and we find that many times they are overlooked. In some states, if you are unable to use the credits, you may be able to sell them to others that can use them.

 

This is a quick check list for the last two weeks of tax season. The delay in the release of the tax forms has caused this tax season to bunch up even more than normal. We will be preparing many returns between now and April 15 and if yours is one of them, make sure to get is filed timely.

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