“The biggest mistake I’ve seen over and over is they (farmers) haven’t paid enough tax,” says Paul Neiffer, CPA with CliftonLarsonAllen and blogger for Top Producer Magazine. “They're happy to be down at that zero level, but you find out they've given up exemptions, they’ve given up credits that would also still bring their tax down to zero."
Keeping track of farm records ranges widely, but for Ohio State's Barry Ward, accurate records are the foundation for good farm financials. “The biggest mistake I see out there is just the lack of records: not generating a balance sheet, not generating an income statement,” explains Ward.
Neiffer says when trying to beef up accounting on the farm, start small. “I mean a lot of farmers, they want to have everything tied down, the key is to find out what is the most important,” he suggests. “Are they really concerned about ‘What is my equipment cost per acre?' Well then, key on your equipment modeling for that management accounting."
There's often debate on whether a farmer should use cash or accrual methods of accounting.
“A large amount of farms are using cash accounting,” says Ward. “It just gives them so much more flexibility and allows them to move revenue to whatever calendar year they might need it for to manage taxes."
Neiffer says while he knows most farmers use cash accounting for the simplicity, switching from accrual to cash is easier than most think.
“The key is, especially with software right now, you can prepare your records using GAPP or accrual accounting, and almost with a flip of the switch, or the CPA making a couple journal entries, they can covert it over to cash method of accounting,” he says.
Watch the story here:
Ward says as many farmers took advantage of Section 179 and bonus depreciation the past few years, it's become a trap, with some using that to manage their tax bill and overspending on equipment and buildings. “The big issue with depreciation with producers is just following their tax depreciation records and not tracking some type of economic depreciation for their equipment, because that's a fair representation they need to include on both their balance sheet and income statement,” Ward explains.
While some of these mistakes seem small, such errors can add up when budgets are tight. “It's a different era,” Ward says. “We're looking at very low to negative margins in some cases, so it's going to be important for them to really sit down and scrutinize their balance sheet. Put it together, and work closely with their lender, but also evaluate that and the trends they're seeing on their own farm."
That’s why Neiffer suggests distancing yourself from spreadsheets. He says it may be easy to set up, but it also creates more mistakes.
“There's various software options out there that do a very good job," the accountant says.“There's the accounting side software, and then the management side software. As of yet, they're not quite totally talking together yet, but I would if you're really focused in on the management side, start with that. If you're focused more on the financial side, start with that."
Neiffer says as farmers move to more real-time profitability records with cloud based software, soon they can hone in on doing accounting not only by field, but by soil type. “That's really an important concept is this type of soil actually produces better than that type of soil,” he says. “And with the technology available today, farmers are going to be able to dig all the way down to the soil level and know how much they make based on each of their soil types."