Articles and Letters

New Case Study: An Ag Family Succession Story

February 4, 2016

AG CASE STUDY:  Succession & Business Planning 
"The facts vary such that no two situations are ever the same."  - Jeff Bowman, CPA, Partner and Ag Team Lead

SITUATION:
A first-generation farmer in Stanislaus County wanted to pass on his individually owned business to his adult children. The second generation planned to maintain and enlarge the operation, which included farming and ag processing. Important to note, not all of the farmer's children were employed on the ranch.
 
CHALLENGES:
  • The farmer wanted to ensure the children inherited equitably.
  • All parties wanted to limit the liability exposure posed to the farmer as an individual owner and operator.
  • The father and his children wanted to limit taxable income and estate taxexposure for the older generation.
  • The operation needed to be positioned for future growth.
CONSIDERATIONS & TACTICS:
  • Limiting tax impact on contributing operations to new S Corp and Limited Partnerships
  • Considering the benefits and burdens of an IC-DISC entity
  • Determining how and through which entity owners should be compensated
  • Cash-basis methods available for farm activities 
  • Important factors for tax planning:
    • Farm income averaging and qualifying types of income
    • Net investment income tax
    • Active versus passive investor treatment
    • Maximizing the domestic production activity deduction
    • Optimizing income for IC-DISC commission purpose
FINAL RECOMMENDATION & FINAL OUTCOME:
Along with the farmer's attorney, we recommended forming a new operating entity and a separate entity for holding the real estate, reducing risk and providing flexibility. The new operating entity is used to maintain the business services, equipment ownership, and labor for the farming operation. By forming the realty entity, the father was able to conveniently introduce ownership to the second generation. In the end, our Ag team developed a fair, strong succession plan for our client by working with his attorney and taking into account the current and future needs of the operation.
OTHER CONSIDERATIONS:
Forming entities and limiting liability exposure require a high level of legal counsel. We worked closely with the client's attorney while analyzing succession options. The attorney's estate tax expertise ensured the plans were consistent with future gifting and estate transfer intentions, while mitigating risk. 
 
*FYI: The attorney filed state articles of formation, obtained a federal ID number for each entity, drafted the crop share lease and farm management services agreement, formed the IC-DISC, and drafted the commission agreement. The attorney also created a deed for transferring the land.

2015 PATH Act Overview

December 21, 2015

The Protecting Americans from Tax Hikes Act of 2015, signed into law by the President on December 18, 2015, extends a number of important tax breaks, and makes many of them permanent. To see the Wolters Kluwer tax briefing, click here.

The law makes the following deductions, credits and other tax provisions permanent:

Business Provisions

  • The Research & Development credit
  • Sec. 179 expensing limitation of $500,000 and $2 million phase-out amounts retroactively extended and made permanent. Also includes qualified real property.  After 12/31/15, HVAC units will now be eligible for Sec. 179 expensing
  • The exclusion of 100% of gain on certain small business stock
  • Reduction in S corporation recognition period for built-in gains tax to 5 years
  • The charitable deduction for contributions of food inventory
  • The tax treatment of certain payments to controlling exempt organizations
  • Basis adjustment to stock of S corporations making charitable contributions of property
  • The employer wage credit for employees who are active duty members of the uniformed services
  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

Individual provisions

  • The enhanced Child Tax Credit - $1,000 tax credit for each qualifying child under age 17
  • The enhanced American Opportunity Tax Credit - $2,500 tax credit for four years of post-secondary education
  • The enhanced Earned Income Tax Credit
  • The deduction for certain expenses of elementary and secondary school teachers – above the line deduction for up to $250 per year
  • Parity for exclusion from income for employer-provided mass transit and parking benefits
  • The deduction of state and local general sales taxes
  • The special rule for contributions of capital gain real property made for conservation purposes
  • Tax-free distributions from IRA plans for charitable purposes – up to $100,000 per year

Summary of Changes and Reminders for 2016

  • Bonus depreciation, at 50% for 2015-2017 and phased down to 40% in 2018 and 30% in 2019
  • The Work Opportunity Tax Credit (WOTC), modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) to 40% of the first $6,000 of wages
  • Most energy property credits (for example: Energy efficient property, Alternative Fuels, Renewable Electricity Production) extended through 2016

 

2016 Payroll and 1099 Information

The year is coming to an end, and we want to provide information regarding changes for 2016. The 1099 information worksheet below is for your use in preparing 1099 forms, or for you to provide us with the information so that we are able to prepare these forms on your behalf. The summary sheet below is for your use as a quick reference guide.

Additional FUTA Tax Payable

  • California didn’t qualify for credit reduction since it still owed the Federal Government for borrowed unemployment funds. California employers must pay an additional FUTA tax of 1.5% per employee for a total of $147.00 per employee on their Form 940 report for 2015. Please be aware that some software programs may not automatically calculate the increase (Quickbooks will). Please contact our Core Accounting Services Department for assistance.

Sales Tax Increase

Summary of Changes and Reminders for 2016

  • Social Security: The limit remains the same at $118,500. The rate remains at 6.2% for both employee and employer.
  •  Medicare: The rate remains 1.45% with no limit. Employees who earn more than $200,000 will continue to pay an extra 0.9% Medicare tax in 2016. (Employers don’t pay a matching portion for this amount).
  • State Disability Insurance (SDI): The rate remains at 0.90% and the limit is raised to $106,742 for a total tax of $960.68 for 2016. (These changes should be installed with your payroll software update).
  • SUI: Verify and change your rate as necessary based on your notification received from EDD. You should have received your new “EDD State of California Notice of Contribution Rates and Statement of UI Reserve Account for the Year 2016” notice in the mail or you can find your new rate on the following website: UI Rate Search.
    If your SUI rate has changed from the rate used in 2015, you need to manually change it in your computer payroll module. Tax table updates do not include your new SUI and ETT rate. Make this change before you process a 2016 payroll.
  • EDD Report of Independent Contractors (Form DE542) needs to be filed for the new year.
  • Minimum wage increases on January 1, 2016 to $10.00 per hour. As a reminder, per California Labor Code section 2810.5, all employers must provide nonexempt employees with a wage notice upon hire and again within seven days after a change is made to either the employee’s rate of pay or pay allowances (such as in the case of a minimum wage change).
  • The 2016 mileage rates are as follows: 
    • 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

W-2 Reporting of Health Insurance Premiums

  • The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable. The value of the employer’s excludable contribution to health coverage continues to be excludable from an employee’s income, and is not taxable. This reporting is for informational purposes only and will provide employees with useful and comparable consumer information on the cost of their health care coverage. The value of the health care coverage will be reported in Box 12 of the Form W-2, with Code DD to identify the amount. There is no reporting on the Form W-3 of the total of these amounts for all the employer’s employees. In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee.
  • The Affordable Care Act requires employers with at least 50 full-time workers to offer employee health insurance. Each year, those employers must send a statement (Form 1095-C) to all employees eligible for coverage and also report to IRS. Form 1094-C acts as a cover sheet for the 1095-C reporting information to be sent only to the IRS. For more information

HSA Limits

  • The maximum individual annual contribution is increasing to $3,350 (over 55 may add $1,000 = $4,350).
  • The maximum family annual contribution is increasing to $6,750 (over 55 may add $1,000 = $7,750).

Pension Limits Increasing

  • The 401(k) annual contribution limit remains at $18,000 (individuals over 50 may contribute $24,000). For more information on various retirement plan limits click here.

 

If you are utilizing payroll software, you should receive a new tax table update, or it will be available for download. Updates will need to be installed after running 2015 year-end reports, and before processing any payroll for 2016. Be certain to update your tables and closely review your first payroll in 2016. Again, change the SUI and ETT rates in your software, if necessary. If you need to re-run any 2015 reports after changing rates, you must revert back to the 2015 information, re-run reporting, then update to 2016 information again.


If you have any questions regarding your software, payroll taxes, or 1099s, don’t hesitate to contact our office. Please ask for one of our qualified Core Accounting Services Department staff members to assist you.

link1Download our 1099 Information Worksheet (PDF)

link2Download our Summary Sheet (PDF)

Year End Planning Tips for Farmers

Farmers, here are a few important reminders as you turn your attention from harvest to settling your 2015 books.
 
Depreciation Update
Now is the time to make that year-end purchase if you're in need of equipment. Under the "half-year convention," you can secure a half-year's worth of depreciation deductions in 2015. Remember: Do not purchase equipment simply for the tax benefits - it's still cash out the door!

 

For tax years beginning in 2015 the expensing limit is $25,000, but there is a strong possibility that Congress will be extending the limit to $500,000. This may occur in December, so check with us for updates! It's important to note that the expense amount may phase out based on your purchases for the year.
 
Health Care Reporting
Is your payroll system ready to process end-of-year reporting? Applicable large employers (employing 50 full-time workers or more) need to report to both the IRS and their employees about required health care coverage by using Form 1095-c. All companies, including those with fewer than 50 full-time employees, are required to report the value of health insurance provided on W-2 forms.
 
IC-DISC Management
If your business already has an IC-DISC set up, you'll need to calculate how much you should pay into it. Typically, you'll pay a commission based on expected earnings related to foreign exports from harvest. In general, that commission will be either 4 percent of your gross receipts or 50 percent of the taxable income related to the exported crop. In most cases, this commission payment should be paid to the IC-DISC before December 31. Be sure to work with your accountant to complete analysis on your IC-DISC before year's end. If you do not have an IC-DISC yet - it's too late. Start planning to set it up next summer.
 
Did you plant a new orchard or vineyard? 
Be sure to gather cultural capital expenses such as nursery trees, maintenance, labor, and fertilizer if the orchard is not in production. To earn a write off, the crop must be deemed "marketable," which varies by the crop. If Congress extends the accelerated depreciation rules for another year, then an even larger portion of prior year cultural costs may be deducted if the orchard produces a marketable crop this year.
 
Bookkeeping
Finally - this is an obvious one - take the time to work with your bookkeeper to make sure your books are up to date to avoid unnecessary organizational legwork by your accountant the following year!

 
Please give us a call if you're looking for assistance wrapping up 2015 or planning for 2016!   

Plan Ahead for Year-End Tax Planning

Year-end tax planning is just around the corner, and here are tips to help you get ahead! If you have questions please give us a call right away.

For Individuals:
  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
For Businesses:
  • Businesses should buy machinery and equipment before year-end and, under the generally applicable "half-year convention," secure a half-year's worth of depreciation deductions in 2015.
  • Unless retroactively changed by legislation, property expensing is greatly reduced in 2015; making qualifying expenditures can still reap thousands of dollars in current deductions that you wouldn't otherwise receive. Beginning in 2015, the expensing limit is $25,000, and the investment-based reduction for the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.

Featured Article

Why Cloud Accounting Makes Perfect Sense for Ag Businesses
It's no big mystery why cloud accounting has become a popular and effective way to manage agricultural businesses. Cloud accounting offers a savvy, robust way to track complicated expenses such as water and labor - and especially when you're working across multiple partnerships, thorough records are critical.  "Oftentimes, our Ag Team works closely with our internal Grimbleby Coleman cloud accounting specialists to provide expertise to ag clients ready to make the jump to QuickBooks or Intacct," says Ag Team Lead and Principal Jeff Bowman. "This hybrid client-service approach has proven valuable for many of our ag clients recently, allowing them to evaluate income from the actual crop year, not just residual revenue from the fiscal year."  Why Should You Try Cloud Accounting on the Ranch? Cloud accounting allows you to scale based on your needs. For example, we recommend tracking by field to truly monitor actual costs. That information is invaluable, especially if you're trying to decide whether to reinvest in your orchard or evaluate new opportunities.  "With water being so scarce, our clients really need to know how they will be able to afford and nurture a young field or orchard," Bowman says.          Many family - and even corporate - ranches have operations within various partnership entities. That makes tracking paramount, especially when each entity is providing complementary services such as paying for labor, water rights, equipment rentals, or providing cash flow to another entity. Cloud services will allow you to capture and articulate your full financial portfolio.  In the past, growers have been able to evaluate production expenses by comparing fields side-by-side; however, actual field costs were harder to track. Now growers can account for costs, labor, and various expenses such as poling, pruning, and harvesting to provide comparisons between fields, seasons, or even varieties.   Recommended Cloud Accounting Tools The two most highly recommended and regularly used tools are QuickBooks Online and Intacct. Bill.com works nicely as a way to pay vendors, as well. Our team is certified in all of these tools.  When using QuickBooks Online or Intacct, the first step is to determine what you would like to track regularly. Most customers opt to see cash by account, accounts payable, debt with available lines of credit, cash on hand for each entity, and cash requirements over the next week and month. Easy-to-read graphics and charts make it easy to understand your full picture - as long as you're working with good information.  "If you put garbage in, you'll get garbage out," says Implementation Specialist Tami Davis. "With cloud services, you have to be conscientious of your inputs to gain the information you need."  QuickBooks Online         QuickBooks Online provides plenty of power for small entities. It uses "classes" to track items such as acres and types of crops, and it's easy to customize the user-friendly interface for your needs. Our cloud accounting team can access your QuickBooks Online account remotely to assess records, which is an especially helpful perk if you need assistance or coverage for your regular bookkeeper.  Click here to learn more about our QuickBooks seminars, led by Linda Bossard.  Intacct We prefer Intacct for multi-entity businesses, especially those with several partners.  Intacct's customizable dashboard allows us to track expenses by lot, which means you can access a quick P&L report for each entity.         Intacct's security settings can be easily adjusted so parent companies can view the big picture while monitoring the books within each business. As with QuickBooks Online, our team can easily access the service and provide oversight and recommendations from afar. Intacct also offers storage for PDFs, Microsoft Word documents, bank statements, and other relevant attachments. Their easy tracking system allows you to include other non-financial information such as seed, chemical, and field service logs.  "It can be easy to get a little carried away with all of Intacct's features," Davis says, "but a simplified chart of accounts can actually provide better reporting."  How Can Your Business Work with Our Cloud Accounting Services Team? The Accounting Services and Cloud Accounting Services Teams can seamlessly integrate into your business on a temporary or permanent basis. We can serve as bookkeeper, controller, accountant, or even chief financial officer. We're excellent trainers for internal teams, as well.  "We're here to fill the gaps as needed," Lisa Mazza, Principal, CPA and Cloud Accounting Team Lead says. "Oftentimes our services are used to take accounting beyond the expertise of the client's bookkeeper.   This results in more meaningful accounting data for analysis, decision making and tax planning.    Is it time to tune up your books during this harvest season? If so, please reach out to your accountant, Jeff Bowman, or Lisa Mazza for a demonstration or to learn more.  

Featured News

Our Free "Quickbooks Jam Sessions" Start on January 21st!
We just completed our first year of Quickbook Jam Sessions and the feedback was so positive we've decided to do it again!  This year we are opening up the informative (and fun!)Quickbooks series to any bookkeeper or business owner in our community, client or not! The first session is Thursday, January 21st and will take place the third Thursday of each month throughout 2016. Each session will be held from 12:00PM-1:30PM and includes a delicious lunch on us.
 
The program is led by Tami Davis, Core Accounting Services Supervisor, and co-led by Karen Sanders, Accounting Technician and Quickbooks Pro Advisor. The sessions were started by Linda Bossard, EA and USTCP, to help teach our clients and their bookkeepers how to properly utilize Quickbooks protocols and tools.  
"After years of sorting through our client Quickbooks accounts I've learned that without a general understanding of the program there will inevitably be a big mess to reconcile at the end of the year," mentions Linda Bossard. "We are looking to save our clients time, money and headaches by providing useful tools and training." 
 
"The Quickbooks sessions have been extremely helpful, and provided our bookkeeper with a much firmer grasp on Quickbooks operational capabilities," says Julie Hutchings, Founder and CEO of TeleContact Resource Services. "The personal accessibility and in-person meetings are particularly helpful and have improved the learning curve tremendously."  
Each session is a stand-alone session, so if you miss one you don't necessarily have to start back at square one. Space is limited to our first 15 sign ups. Please contact Linda Bossard or 209-527-4220 for more information.

Featured Staff

Terri provides administrative support to the partners, professional staff and clients at Grimbleby Coleman.  She's cross-trained in all aspects of Administration and can easily step into each roll, joking that if this were a football team, she'd "be a special-teams player." 

Her personal mentors are Mom and Dad ”high school sweethearts who taught me to work hard, love deeply and family means everything. Now I'm blessed to work for a company and wonderful people who celebrate these same qualities." 

After having a life-long love of German Shepherd dogs, she now volunteers her time assisting German Shepherd Rescue efforts throughout the valley and Bay Area.

Terri Zapata Administrative Assistant read more

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