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Having a Budget Can Increase Your Farm Profitability

lousianafarmersIn farming, some farmers are more profitable than others. Expenses, scale, weather, markets and efficiency all play a role in the overall profitability of a farm business which is why even farmers who grow the same crop can experience a wide range in profitability. So how does a farmer increase their profitability? They start by creating a budget that’s monitored and managed throughout the year; making adjustments where needed.

A budget serves many purposes. First and foremost it forces a farmer to put everything down on paper and view it as a complete operating business with many moving parts. It allows the farmer to see how each part affects the other. With a slight change in one of the parts, the farmer can see how it changes another part and what kind of impact it will have on the overall business as a whole.

A budget is a plan of action that should be adhered to as closely as possible. By doing this, rash decisions won’t be made. The plan will be followed and when and if something unexpected comes up, it can be placed into the budget and the farmer can quickly see how it affects the overall plan. They will know in an instant if it will have a negative or positive impact on the profitability of their farm business.

Budgets should be compared to farming industry standards including the industry standard farming budgets. These can typically be found on the website of an Agricultural College within the local University. Many things can be learned when comparing a farmer’s budget to the local industry standards. With a quick glance, a farmer will know if their bottom line is in line with the other farmers in his/her region. If not, the farmer can look line item be line item to find the inconsistencies. He/she will be able see if he/she is paying too much for items such as; fertilizer, seed, payroll. Or maybe, the farmer is using more water than the other farmers in his/her region.  In a quick glance the farmer will see any inconsistencies there are between his/her budget and the region’s industry average. This allows the farmer to then quickly and efficiently make changes he/she needs to make that he/she may otherwise not have known about prior to creating a budget.

In addition to being a way to see everything at a glance and making comparisons to the industry standards, a budget can also be used to set goals. A budget allows a farmer to see year to year changes in expenses and sales which can then be compiled and averaged. Once there is an average for all expenses and sales, goals can be set and placed within the budget spreadsheet. The farmer can monitor this throughout the year to see if they are on track and if they aren’t, they can make the changes necessary to get on track. By doing this, the farmer isn’t waiting until after the season is over to see how well he/she did. By then, it is too late to make the changes needed to correct the problem. With a budget, the farmer will know exactly how they are doing throughout the season.

The most profitable farmers create a budget and manage issues that take them off track as they arise. There are more out of our control variables when it comes to a farming business than other types of businesses. Things like weather and water shortages all play a role in throwing a wrench into a farmer’s profitability. This is why it is even more important to have control where you can with a farming business.

Farm Income Averaging – Agriculture Tax Tips

steve in front of cotton

If you are engaged in a farming business, you may be able to average all or some of your current year’s farm income by shifting it to the 3 prior years (base years). The term “farming business” is defined in the instructions for Schedule J (Form 1040) (PDF).

Who Can Use Farm Income Averaging

You can elect to use farm income averaging if, in the year of the election, you are engaged in a farming business as an individual, a partner in a partnership, or a shareholder in an S corporation. You do not need to have been engaged in a farming business in any base year.

Who Cannot Use Farm Income Averaging

Corporations, partnerships, S corporations, estates, and trusts cannot use farm income averaging.

Farmers Need a Marketing Plan

lousianafarmland3A marketing plan is a comprehensive blueprint which outlines an organization’s overall marketing efforts. As a farmer, the idea of having a marketing plan may seem like one of those things that would be nice to implement if only you had the time. Find the time.

Having a marketing plan in place before planting is imperative to your success as a farmer. In the marketing plan, the sale of the crop will be planned out ahead of time. Many farmers make the mistake of doing the same thing year after year because that is what they’ve always done. Sometimes they win and sometimes they lose.

With a marketing plan in place, all decisions on when to sell will be based on the marketing plan and not on emotion at the end of the season. It is important to do the research ahead of time, know your numbers and decide before planting what you’re going to do, when you’re going to sell. Meet with a commodity broker and find out when the historically high times to sell in a season are. A plan that has worked well throughout the years is the 1/3 rule plan.

The 1/3 Rule – A tried and true plan:

– Sell 1/3 of your crop at the beginning of the season
Lock up the price so you know what you are getting ahead of time. You will know 1/3 of your total income before the season even starts. As with all farming, it is important to purchase crop insurance just in case you have problems with your crop.

– Sell 1/3 of your crop in the middle of the season
Pick a point ahead of time, a historically high priced time in the season. Don’t change it based on emotion as the season starts! Stick to this date you chose before the season started. Do your research then, choose wisely and then stick to it.

– Sell 1/3 of your crop at the end of the season
Sell after harvest. At this time, the market could be higher than it has been all season or lower. Either way, it is 1/3 of your total income.

Why does this work? Because you are spreading your risk throughout the entire season. If your commodity price goes up and down throughout the season, your risk is reduced because 1/3 will be sold at different times throughout the season. Many farmers wait to “see where the market goes”. This is not a good plan. This is like gambling in Las Vegas but with your entire income. This is an emotional plan that will have its highs and lows. It won’t be steady and in the long run, it usually does not outperform the 1/3 rule. Using the 1/3 rule will help spread your market risk.

Farming Co-Op Dividends

cottonfieldupcloseA cooperative (Co-op) farming effort is defined as a system in which individual farmers pool their resources (excluding land) to buy commodities such as seeds and fertilizers, and services such as marketing. Co-ops have been around for many years and continue to evolve as farmers and consumers needs change. There are many advantages to joining a co-op as a farmer. From the leveraged buying power to the marketing and increased selling opportunities, a farmer’s business receives many benefits when joining a co-op.
As a co-op member, you are an owner of the co-op and therefore responsible for the decisions and actions of your co-op. For enhanced benefits, it is important to be active and involved in your co-op. Decisions are made democratically and your participation will reflect the outcome and whether it benefits your business.

How surplus money is distributed to Co-op members
Not only is it important to be involved in your co-op to ensure it is a better operation and has a positive impact on your business, it is important also for distributions. If there is a surplus of money, the board will decide what to do with it. Sometimes they choose to keep the money in a reserve or to distribute it to the members in the form of patronage dividends. Co-ops aren’t like regular corporations in regards to distributions. The surplus is not distributed based on ownership in a Co-op. It is distributed based on patronage. For example, in a producer Co-op, if one member delivered 30 pounds of a commodity to be marketed through the Co-op and another member delivered 10 pounds of that same commodity during the same period, the first member would receive three times as much of the surplus as the second member.

Reporting patronage dividends/income
The cooperative will report the income to you on Form 1099PATR or a similar form and send a copy to the IRS. Generally patronage dividends should be reported as income on Schedule F, lines 3a and 3b, for the tax year you receive them.

Patronage dividends include the following items:
• Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative).
• The stated dollar value of qualified written notices of allocation.
• The fair market value of other property.

You should not report as income on line 3b any patron¬age dividends you receive from expenditures that were not deductible, such as buying per¬sonal or family items, capital assets, or depreci¬able property. The cost or other basis of these items should be reduced by the amount of such patronage dividends received. Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls.

Understanding how Co-ops function and their impact on your taxes and your farming business is crucial to the overall success you have as a member of a Co-op.

Where’s My Refund?

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April 15, 2015 Filing Icon Using a mobile device? Download the IRS2Go app to check your refund status.

What you need to check the status of your refund:

Items needed for Where's My Refund  Social Security Number or ITIN, Filing Status, and Exact Refund Amount

JAWS Users Session Expiration Warning

If this application remains idle for 15 minutes, it displays a session expiration warning message in a popup or new browser window, allowing you to extend your session. The message gains focus and JAWS reads both the URL and the session expiration message. You have the option to tab to OK or Cancel once the message appears. If you tab to the OK button, you will hear, click here if you want to renew session for 15 minutes button. If you tab to the Cancel button, you will hear, do not renew session button. If you select the OK button, the application extends your session for an additional 15 minutes and JAWS focus returns to the main page. If you select the Cancel button or the session remains idle for 5 minutes, the application displays the session expired page and JAWS reads it.

Wheres My Refund button


Where’s My Refund? is updated no more than once every 24 hours, usually overnight.


When to check status of your refund:

    • Within 24 hours after we’ve received your e-filed tax return; or
    • 4 weeks after mailing your paper return.

When the IRS processes your tax return and approves your refund, you can see your actual personalized refund date. Even though the IRS issues most refunds in less than 21 days after we receive your tax return, it’s possible your tax return may require additional review and take longer.

You should only call if it has been:

    • 21 days or more since you filed electronically;
    • More than 6 weeks since you mailed your paper return; or
    • The Where’s My Refund? tool directs you to contact us.

Why a Farmer Needs a Farm CPA or Farm Accountant

steve in front of cottonThe farming industry is a very different type of industry as far as businesses and taxes go. A farmer on a cash basis business is one of the few businesses that can prepay up to 50% of its expenses which allows it to use a future deduction on ‘”this” year’s tax return. The timing of deducting expenses and deferring income at the right time allows a cash basis farmer to smooth out their taxable income and effectively reduce their tax bill. If you’re a farmer and your CPA or Accountant isn’t familiar with farming and the tax laws surrounding your industry, you could be missing out on deductions and more.

A Farm CPA or Farm Accountant that really understands your industry will also know what the bank needs and how to assist you when applying for a credit line. For example, if a farmer’s books are cash basis, a Farming Accountant or CPA will know to give the banks accrual basis financial statements. They know accrual basis financial statements will show the bank a true financial picture of the farmer’s business. They will also be able to assist you in creating a useable budget that the bank will understand and trust. With the right CPA or Accountant working on your financials and budget for the bank, you will be more likely to be approved for your credit line.

Tax planning is another area in which a farmer will benefit by having an Accountant or CPA that really understands their industry. Tax planning involves both the timing of the selling of your crops and the purchasing of your farming inputs. Many dollars can be saved with tax planning. A Farming Accountant or CPA will be able to tell you when the best time is to sell and how much to defer until next year. When it comes to purchasing, it is important to know whether this deduction is better shown on this year’s or next year’s tax return. Sometimes thousands of tax dollars can be saved by prepaying expenses and using a future deduction on this year’s tax return. Below is a list as to what qualifies for prepaid farm expenses:

What is a Prepaid Farm Expense?
Prepaid farm supplies are amounts you paid during the tax year for the following items:

– Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year
– Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business that would be deductible in the following year if you had capitalized the cost and deducted it ratably (for example, monthly) over the lesser of 12 months or the useful life of the poultry
– Poultry bought for resale and not resold during the year

What is Not a Prepaid Farm Expense?
Prepaid farm supplies do not include any amount paid for farm supplies on hand at the end of the tax year that you would have consumed if not for a fire, storm, flood, other casualty, disease, or drought.

Deduction Limit
You can deduct an expense for prepaid farm supplies that does not exceed 50% of your other deductible farm expenses in the year of payment. You can deduct an expense for any excess prepaid farm supplies only for the tax year you use or consume the supplies.

The cost of poultry bought for use (or for both use and resale) in your farm business and not allowed in the year of payment is deductible in the following year. The cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry.

As in any business, it is important to let specialists handle the areas in the business that specialty is required and will save you money. A Farming business requires specialty when it comes to tax planning, budgeting, accounting, income taxes and estate taxes. Make sure to hire an Accountant or CPA that knows your industry. You will be glad you did.

2016 Standard Mileage Rates for Business, Medical and Moving Announced

IR-2015-137, Dec.17, 2015

companyfacebookprofileWASHINGTON — The Internal Revenue Service today issued the 2016 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 54 cents per mile for business miles driven, down from 57.5 cents for 2015
  • 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
  • 14 cents per mile driven in service of charitable organizations

The business mileage rate decreased 3.5 cents per mile and the medical, and moving expense rates decrease 4 cents per mile from the 2015 rates. The charitable rate is based on statute.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.  Notice 2016-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Drought-Stricken Farmers and Ranchers Have More Time to Replace Livestock; 48 States and Puerto Rico Affected

livestock1IRS-2015-110, Sept. 29, 2015

WASHINGTON — Farmers and ranchers who previously were forced to sell livestock due to drought, like the drought currently affecting much of the nation, have an extended period of time in which to replace the livestock and defer tax on any gains from the forced sales, the Internal Revenue Service announced today.

Farmers and ranchers who due to drought sell more livestock than they normally would may defer tax on the extra gains from those sales. To qualify, the livestock generally must be replaced within a four-year period. The IRS is authorized to extend this period if the drought continues.

The one-year extension of the replacement period announced today generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes due to drought. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, and poultry are not eligible.

The IRS is providing this relief to any farm located in a county, parish, city, borough, census area or district, listed as suffering exceptional, extreme or severe drought conditions by the National Drought Mitigation Center (NDMC), during any weekly period between Sept. 1, 2014, and Aug. 31, 2015. All or part of 48 states and Puerto Rico are listed. Any county contiguous to a county listed by the NDMC also qualifies for this relief.

As a result, farmers and ranchers in these areas whose drought sale replacement period was scheduled to expire at the end of this tax year, Dec. 31, 2015, in most cases, will now have until the end of their next tax year. Because the normal drought sale replacement period is four years, this extension immediately impacts drought sales that occurred during 2011. But because of previous drought-related extensions affecting some of these localities, the replacement periods for some drought sales before 2011 are also affected. Additional extensions will be granted if severe drought conditions persist.

Details on this relief, including a list of NDMC-designated counties, are available in Notice 2015-69, posted today on Details on reporting drought sales and other farm-related tax issues can be found in Publication 225, Farmer’s Tax Guide, also available on the IRS web site.

Patronage Dividends – Agriculture Tax Tips

steve in front of cottonIf you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends. If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative.

Form 1099-PATR

The cooperative will report the income to you on Form 1099-PATR (PDF) or a similar form and send a copy to the IRS. Form 1099-PATR may also show an alternative minimum tax adjustment that you must include if you are required to file Form 6251, Alternative Minimum Tax–Individuals (PDF). For information on the Alternative Minimum Tax, Refer to Publication 225.

Per-Unit Retain Certificates

A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. These allocations can be paid in money, other property, or qualified certificates.

Per-unit Retain Certificates issued by a cooperative generally receive the same tax treatment as Patronage Dividends, discussed earlier.

Soil and Water Conservation – Agriculture Tax Tips

lousianafarmland4If you are in the business of farming, you can choose to currently deduct your expenses for soil or water conservation or for the prevention of erosion of land used in farming. Otherwise, these are capital expenses that must be added to the basis of the land. Conservation expenses for land in a foreign country do not qualify for this special treatment. The deduction cannot be more than 25% of your gross income from farming.

Plan Certification

You can deduct your expenses for soil and water conservation only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency to be deductible. Keep a copy of the plan with your books and records as part of the support for your deductions.

Choosing To Deduct

You can choose to deduct soil and water conservation expenses on your tax return for the first year you pay or incur these expenses. If you choose to deduct them, you must deduct the total allowable amount in the year they are paid or incurred. If you do not deduct the expenses, you must capitalize them.

Note: If you receive cash rental for a farm you own that is not used in farm production, you can not claim soil and water conservation expenses for that farm. These costs must be capitalized into the land basis.


You own a farm in Iowa and live in California. You rent the farm for $125 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. You cannot deduct your soil conservation expenses for this farm. You must capitalize the expenses and add them to the basis of the land.