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

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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.

Fuel and Road Use Tax – Agriculture Tax Tips

IMG_3645You may be eligible to claim a credit or refund of excise taxes on fuel used on a farm for farming purposes. This applies if you are the owner, tenant, or operator of a farm. You can claim only a credit for the tax on gasoline used on a farm for farming purposes. You can claim either a credit or refund for the tax on aviation fuel used on a farm for farming purposes.

What Cannot be Claimed as a Credit or Refund

You cannot claim a credit or refund for the tax for the use of dyed diesel fuel or dyed kerosene used on a farm for farming purposes.

You may claim a credit or refund for the tax on undyed diesel fuel or undyed kerosene used on a farm for farming purposes as of 10/01/2005.

Note: Fuel is used on a farm for farming purposes only if used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes.

How To Buy Diesel Fuel and Kerosene Tax Free

You buy dyed diesel fuel and dyed kerosene excise tax free. You must use them only for a nontaxable use, including use on a farm for farming purposes. If you use the dyed fuel for a taxable use, you could be subject to the excise tax and a penalty. For example, if a truck used on a farm for farming purposes is also used on the highways (even though in connection with operating the farm), tax applies to the diesel fuel used (or sold for use) in operating the truck on the highways. The fuel was used off the farm for a taxable use.

Form 2290

If you use certain vehicles on public highways, such as a truck or truck tractor, registered or required to be registered in your name, file Form 2290, Heavy Highway Vehicle Use Tax Return (PDF), for the following purposes:

  • To figure and pay the tax due on heavy highway vehicles (taxable gross weight 55,000 pounds or more) used during the period from July 1 to June 30
  • To claim an exemption from the tax when the vehicle is expected to be used 5,000 miles or less (7,500 for agricultural vehicles) during the period.

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.

IRS Warns Consumers of Possible Scams Relating to South Carolina Flood Victim Relief

IR-2015-114, Oct. 9, 2015

companyfacebookprofileWASHINGTON ― The Internal Revenue Service today issued a consumer alert about possible fake charity scams emerging due to severe flooding this month in South Carolina and neighboring states.

“When making donations to assist flood victims in South Carolina and elsewhere, taxpayers should take steps to ensure their hard-earned money goes to legitimate and currently eligible charities,” said IRS Commissioner John Koskinen. “IRS.gov has the tools taxpayers need to check out the status of charitable organizations.”

Following major disasters, it is common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.

Such fraudulent schemes may involve contact by telephone, social media, email or in-person solicitations.

The IRS cautions people wishing to make disaster-related charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. The IRS website at IRS.gov has a search feature, Exempt Organizations Select Check, through which people may find legitimate, qualified charities; donations to these charities may be tax-deductible. Legitimate charities may also be found on the Federal Emergency Management Agency (FEMA) website at fema.gov.
  • Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.
  • If you plan to make a contribution for which you would like to claim a deduction, see IRS Publication 526, Charitable Contributions, to read about the kinds of organizations that can receive deductible contributions.

Bogus websites may solicit funds for disaster victims. Such fraudulent sites frequently mimic the sites of, or use names similar to, legitimate charities, or claim to be affiliated with legitimate charities in order to persuade members of the public to send money or provide personal financial information that can be used to steal identities or financial resources.

Additionally, scammers often send email that steers the recipient to bogus websites that appear to be affiliated with legitimate charitable causes.

Taxpayers suspecting disaster-related frauds by email should visit IRS.gov and search for the keywords “Report Phishing.”

More information about tax scams and schemes may be found at IRS.gov using the keywords “scams and schemes.”

IRS Provides Tax Relief to South Carolina Flood Victims; Oct. 15 Tax Deadline Extended to Feb. 16

Update Oct. 8, 2015 — Calhoun, Darlington, Florence, Kershaw and Lee Counties have been added to the list of South Carolina counties eligible for special tax relief.  

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Help for Disaster Victims: English | Spanish | ASL

IR-2015-112, Oct. 7, 2015

WASHINGTON –– South Carolina flood victims, including individuals and businesses that previously received a tax-filing extension to Oct. 15, will have until Feb. 16, 2016, to file their returns and pay any taxes due, the Internal Revenue Service announced today. All workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief.

Following this week’s disaster declaration for individual assistance issued by the Federal Emergency Management Agency (FEMA), the IRS said that affected taxpayers in Berkeley, Calhoun, Charleston, Clarendon, Darlington, Dorchester, Florence, Georgetown, Horry, Kershaw, Lee, Lexington, Orangeburg, Richland, Sumter and Williamsburg Counties will receive this and other special tax relief. Other locations may be added in coming days, based on damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Oct. 1, 2015. As a result, affected individuals and businesses will have until Feb. 16, 2016, to file these returns and pay any taxes due. Besides the Oct. 15 extension deadline, this also includes the Jan. 15, 2016, deadline for making quarterly estimated tax payments. A variety of business tax deadlines are also affected including the Nov. 2, 2015, and Feb. 1, 2016, deadlines for quarterly payroll and excise tax returns.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The agency automatically provides this relief to any taxpayer with an IRS address of record located in the disaster area. Taxpayers need not contact the IRS to get this relief.

Beyond Designated Disaster Areas

The IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either last year’s or this year’s return. Claiming these casualty loss deductions on either an original or amended 2014 return will get the taxpayer an earlier refund but waiting to claim them on a 2015 return could result in greater tax savings depending upon other income factors.

In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Oct. 1 and before Oct. 16 if the deposits are made by Oct. 16, 2015. Details on available relief can be found on the disaster relief page on IRS.gov.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

Disaster victims in other parts of the country also qualify for tax relief, based on federal disaster declarations issued earlier this year. Currently, individuals and businesses in parts of California, Kentucky, Texas and the Northern Mariana Islands may qualify for filing and payment relief. See the IRS Disaster Relief page for details.