What happens next? That question can haunt farm families when it's time to exchange ownership from one generation to the next. How can farm families and businesses plan for their children's futures and ensure financial security? Who is entitled to what? And by the way, how can you broach these emotional and potentially contentious topics without ruining a holiday dinner?
We recently hosted a farming succession event with succession planner Kevin Spafford, who gave us helpful tips he's discovered while working with hundreds of ag families. We think they'll help you, too.
Five Keys to Succession Planning:
- Plan, plan, plan! This is a big fish to fry for any farming family. Don't avoid "The Talk" because it is a touchy or fight-triggering subject. Have an honest conversation with all parties involved and discuss who will be taking ownership of the farm in the coming years. Remember: preparation will steer the farm away from failure.
- Obstacles like greed, family disharmony, control freaks, self-interest, and lack of contribution are tricky topics to air. Speak candidly about those downfalls and nip them in the bud with new solutions. Come to terms with the fact that your family and in-laws are dynamic people who make mistakes. No matter what the concern, you must focus on the BIG picture - your children's futures and the future of the farm.
- Families can find common ground and unity by writing down both small and major goals that every person can agree on. What are your family's values? Write, type or record what your family's values are so they can properly be passed down to the next generation. Make sure every family member is aware of what you stand for and what your goals are.
- Good communication with relatives is crucial to a farm, so it's important to schedule regular meetings with the entire family during the year. If a family member can't attend because of a scheduling conflict, have them attend the meeting via speakerphone or Skype. Again, make sure that notes are taken at every meeting; it doesn't matter whether they are handwritten, typed, or even recorded. If these meetings become unfriendly, make it a rule that any family member can call a timeout.
- All the planning in the world isn't going to save a business if people don't commit, so strive to have every person on board with your family's succession plan. Speak freely when issues arise and keep lines of communication open.
Grimbleby Coleman is a trusted ally when it comes to assisting with succession planning. We want every family to accomplish its long-term financial and farm goals. There's no time quite like the present when it comes to the matter of succession planning - make plans with your family today.
This time of year, our Grimbleby Coleman team often receives emails and phone calls from clients inquiring about ways to avoid the most dreaded tax experience: an IRS audit. Nathan Miller, Partner and CPA, says Grimbleby Coleman CPAs assist clients by weighing the odds and evaluating risk to stay out of the IRS spotlight.
"There's no sure way to avoid an IRS audit, but there are red flags out there that can increase your chance of IRS scrutiny. The IRS utilizes a computer scoring system to evaluate individuals and businesses based on past returns that show patterns of losses, as well as the potential for unreported income," he says. "Too high of a score and you're potentially in the hot seat. "
List of Top Red Flags for the IRS:
For individual returns:
Nathan Miller, Partner and CPA
- Taking large charitable deductions, especially non-cash charitable contribution deductions, such as Goodwill donations, without receipts
- Consistently showing losses year after year on your rental properties or small home business
- Underreporting or incorrectly reporting income, such as interest and dividends which are reported to the IRS by a third party
- Claiming the home office deduction
- Failing to report a foreign bank account
- Claiming deductions that are higher than average compared to your income
For business returns:
- Sole proprietors showing multiple years of losses. The IRS has Hobby Loss rules to try and prevent someone from deducting their hobby as a business.
- High meal and entertainment expenses (Tip: only 50% is deductible)
- Writing off a fleet of cars even though you have only a few employees
- Claiming 100% business use of a vehicle
- High repair and maintenance expenses (Tip: the IRS will look to see if there are any assets that should have been capitalized)
- If you are unorganized or remiss in sending 1099s
- Reporting less income on your return than was reported by your customers on Form 1099 (Tip: compare the 1099s received against your gross income on the return.)
Ag team Lead, Partner, CPA;
Partner, CPA and Ag Team lead Jeff Bowman updated The Stanislaus Estate Planning Counsel about the benefits and tactical implementation of an IC-DISC for farming clients. Jeff regularly collaborates with Lou Friedman of Gianelli & Associates to execute IC-DISCs on behalf of our clients.
Colleen Meenk, Partner and CPA; Treasurer, Stanislaus Estate Planning Council
Colleen Meenk, Partner and CPA, presently serves as the Treasurer of The Stanislaus Estate Planning Counsel and stated that "our members of the estate planning council were very interested to learn how the IC-DISC is set up legally speaking, as well as how it functions and benefits clients from a tax perspective. There is quite a bit of crossover from tax to estate planning, so this is a top-of-mind subject, especially in our ag-focused region."
The Stanislaus Estate Planning Counsel was formed to share best practices for professionals involved in estate planning. Founder, Partner and CPA Clive Grimbleby attended the meeting and expressed that "Jeff represented the firm well, while demonstrating his deep expertise in completing IC-DISCs here locally."
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.
We're smack in the middle of another busy tax season, but you might already be wondering how you can do a better job of tax planning for your construction company next year. Ian Grimbleby - Principal, CPA, and Construction Team Leader - offers his top tips.
Ian Grimbleby, Principal, CPA and Construction Team Lead
It's the most common question Grimbleby hears: "Should I buy or lease a new truck for the business?" Grimbleby recommends carefully tracking the miles, gas, and maintenance per vehicle. Knowing those numbers will make it easier to choose between keeping your old trucks vs. purchasing new ones. Sometimes repair expenses are more expensive than a new purchase, Grimbleby says.
Curious about the second most common question Grimbleby receives? It is a follow-up question about vehicles! "So, if I decide to buy a vehicle, how much can I 'write-off' this year?" Vehicles have very specific tax depreciation treatments, which can be complicated to interpret and worth giving us a call to review.
Saving for retirement is important to most people, and is a common discussion point with our clients. Retirement plans, such as a 401(k) plan, are a great way to reduce income tax now and save for the future; however, knowing what plan type and options to pick for your business can be complicated. In the construction industry, it gets even more complicated if you have government contracts with prevailing wages. We would be pleased to discuss your options.
If you're using a white board or an Excel spreadsheet, you're in grave danger. Those antiquated methods are not a recipe for success in this day and age. The first step to automating the books is to use a tool such as QuickBooks or industry specific accounting software.
"Every company is unique, however, as a general rule, once a construction company reaches the $10 million annual revenue mark, it is time to invest in specialized construction software tools," Grimbleby says. "The software will provide project management, profitability per project, benchmarking, reporting and tax preparation assistance."
Grimbleby also notes that "$10m in revenue is also the point when you can no longer be taxed based on 'cash' books." Several highly regarded construction software tools to look into are Dexter + Chaney, Jonas, Foundation Software, Sage and Viewpoint.
Please contact Ian Grimbleby and the Construction Team to learn more tips and recommendations for implementing savvy tax preparation tips into your business practices.