Farm Horizons, December 2016
Another year completed
By Myron Oftedahl
We have reached the end of another crop year, and 2016 was not without its trials, with wet, cold weather after some of the early plantings, some drowned out spots, and a lot of wet spots come harvest time.
Is your year really completed?
Now that you have the machinery cleaned up and put away (you did clean all of the mud off, didn’t you?), the bins checked and the centers pulled out, and now being cooled down for the winter, you are done, right?
Not so fast. Now, you have some record-keeping to do, some accounting to do, and a tax estimate to be done. So, we have some office time as the days get shorter and colder, and the ice is not thick enough to go fishing.
Let’s tackle the record-keeping first. Yields should be tracked for each field. If you have yield maps from the combine, you need to study them for patterns. What is consistent with the low yields and the high yields? Can anything be done to improve the areas with low yields drainage, fertility, organic matter, tilth? These would all be possibilities, along with variety, misapplication, field history, and a dozen more.
I had a college professor say that a productive field is always fertile, but a fertile field is not always productive. See the list above for possible reasons why.
You also need accurate production records for Farm Service Agency, crop insurance, and to do an enterprise analysis. Did you make any money on that crop; on that farm? What chemical was applied? Does it have any carryover restrictions? What mode of action was it? Was the chemical program effective? Was it a restricted-use product? Are your spraying records complete?
OK, we have the production records done, now we can move to the accounting. If you haven’t started your financial records yet, you have a lot of work to enter into the software before the year-end. Better get a glass of water or coffee and sit down at your desk/table and get to work.
It is essential to get a tax estimate done before the year-end. That doesn’t mean getting your appointment for Dec. 30. You need time to get the estimate done, and that may mean explaining the results to your family and the banker. There is no reason for taxes to be a surprise come January and February. We have at our disposal a very good tax estimate worksheet that allows you to see the income and expenses for the year, along with depreciation, personal income and withholdings, and some tax credits.
Doing an estimate allows you to see ahead of tax time what your tax liability would be, and then you can explore how you can manage that liability. Do you defer income, bring income in, or use prepayments to increase expenses on the Schedule F?
We have a lot of options to manage this expense prior to the end of the year. After Jan. 1, 2017, the only option to manage taxes is to put money into an IRA or SEP account.
Keep in mind that your self-employment tax for Social Security is a part of that tax liability. There are a lot of retired farmers that boasted about never paying taxes, and now are living on the minimum payment for Social Security.
If you have higher earnings than you expected, use the Section 179 deduction if you have made any capitol purchases. However, if you have a loan for that piece of equipment, then you need to use the regular depreciation and not the Section 179 deduction.
Depreciation is the allowance for the principal payments that would be due on that loan, so if you expense the entire machine you now have no allowance for the payments and could get yourself into a cash bind during the life of that loan.
Also, remember that Minnesota limits your Section 179 deduction to $25,000 per year. If you have more than that for a year, then the amount over $25,000 must be carried over and 20 percent used each year for the next five years on the state return.
If you have a Domestic Production Activities Deduction (DPAD) credit from a cooperative that has elected to pass the credit through, be sure to have that paperwork with, so that the credit can be used. This, and other credits are available and should be used.
So, between now and the end of the year, you need to spend time at your desk and do some financial management and record-keeping. You cannot manage something if you don’t first measure it and record it.
If you need help with your record system, contact a Farm Management Instructor. We are here to help.