Tax season can get a little complicated for farmers and ranchers, but it doesn't have to be. Jeff Bowman, Grimbleby Coleman CPAs Ag team leader, offers several of his best tax and financial management tips. To learn more, please give Jeff or any of the members of the Ag Team a call.
Understanding Crop Profitability
Your tax return will not disclose the profitability of your crop; in most cases it will only list your cash in and cash out over the course of the year. Your banker is going to want to know the profitability of your crop - oftentimes down to the acre.
People do their taxes based on the calendar year, and most farmers report on a cash basis. What you're missing is a "crop income and expense" report. To create this, you'll need a reasonable projection of crop income based on the estimate of current prices or future expectations. Any unpaid expenses that pertain to the current year crop should also be added to your report. When finished, the difference between current crop income and expenses will be the amount of profit or loss on this crop. While it may not be exact (
its tough to get perfect estimates!) it will certainly give you a better understanding of how your crop management decisions impacted net profit. It's tough to get this kind of info from a tax return by itself.
Take a Strategic Long-Term Look
Take a look at your long-term strategic planning. Has your orchard run its 25-year lifecycle? Is it time to pull out trees? Anticipating upcoming expenses isn't critical for your current-year tax return, but will save you money in the long run. Give our Ag team a call to talk about your plans as it pertains to cash needs.
If you've deferred crop income in the past, you might want to consider cashing some of it in now and paying down cash for capital investments. Most bankers will want to know your five-year plan, as well. And don't forget, it's not always a good thing to pay "zero" tax - it could mean that you're missing out on some of the lowest tax brackets. Again, a longer term cash and investment strategy can bring clarity to some of these decisions.
Paying the Teenagers
If your teenage kids work on the ranch, we recommend paying them a fair wage for the work they perform. You will receive a deduction and they can save the money for expenses such as education. You'll be eligible for a payroll tax exemption if the ag business is family-owned and the worker is younger than 18 years old but above legal working age. The beauty of this concept is that the kids can earn up to around $6,000 without having to pay federal income tax. Financial planning ideas such as putting the kids' "after-tax" funds in a Roth IRA can also be implemented.
Fuel Tax Credits
When it comes time to prepare tax returns, don't forget the fuel tax credit for fuel used in off-road work. When purchasing fuel, the price per gallon includes federal highway taxes. If the fuel is used off-road, then you can claim a rebate (in the form of a tax credit) for a portion of the fuel taxes paid. Keep track of your gallons used for off-road miles, and remember that fuel is tax exempt for tractors and other machinery used in the field. Here's a tip: Farmers can purchase red-dye diesel (at a lower price) for use in dedicated off-road machinery and avoid the hassle of keeping records to claim a credit at year-end.
Remember to contact your crop processor and handlers and request information about how much of the prior year's crop was exported. If you don't have an IC-DISC established, accessing export information will help your CPA evaluate if the IC-DISC is a good option for your business.
If you don't have healthcare coverage, you'll need to declare that and pay a penalty on your individual return. Be sure to check out the full Affordable Care Act articles on this website for more information.
If your New Year's resolution involves working on your family succession plan, let us know. Our team is ready to help you make that a reality. We can facilitate family meetings and provide business consulting and financial modeling.
Although you'd expect to see an accounting technician tucked away in a cubicle crunching numbers, that's not the case with Amanda. More often than not, she's offsite at the offices of her clients, helping them find easier, more efficient ways to keep track of the cash flow and giving them a better understanding of what the numbers represent. She joined Grimbleby Coleman in 2014 after serving as office manager and accounts receivable/payable with other organizations, bringing with her expertise in payroll, 1099s, QuickBooks, bookkeeping, financial statements, and more.
When not helping clients, Amanda enjoys spending time with her son. He's a huge motocross fan, and they both enjoy watching his favorite rider, Ryan Villopoto, race on weekends during the summer. They also love going to Monterey and Pacific Grove to visit family.
A little fun fact about Amanda, she studied ballet for nine years starting at the age of five (talk about dedication!). Although she no longer dances, Amanda is still a huge appreciator of the art, so don't be surprised if you bump into her at a Central West Ballet or San Francisco show during the Fall and Winter months.