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Thursday, January 12, 2017

New W-2 and 1099 Deadlines

By Rob Holcomb, EA
Extension Educator, Ag. Business Management
University of Minnesota Extension

January 12, 2017

New for 2016, in an effort to combat identity theft, the IRS is requiring employers and business owners to file forms W-2, W-3 and 1099-MISC by January 31, 2017.  These changes were contained in the PATH Act (Protecting Americans from Tax Hikes) which was signed into law December of 2015. 

A W-2 is the form that reports wages paid to an employee.  The W-3 is a transmittal form that summarizes all the W-2s issued from a single employer. 

Form 1099-MISC is issued to individuals or entities that are not employees.   Form 1099-MISC is typically issued for rent, non-employee compensation and custom hire.  The payment threshold for issuing a 1099-MISC is $600.  The threshold is based upon the total amount paid to the individual or entity during the calendar year without regard to the number of checks or transactions.   Typically, corporations are exempt from the filing requirements to issue Form 1099-MISC.  In other words, if you paid over $600 to a corporation for custom harvesting, you would not be required to file a 1099-MISC because you paid the funds to a corporation.  There are two exceptions to this rule: (1) Attorney fees (over $600) paid in the course of a trade or business requires filing a 1099-MISC even if the firm is incorporated.  (2) Payments to veterinarians are payments for medical and health care services.  This requires taxpayers to issue Form 1099-MISC for such services (over $600) in the course of a trade or business even if the veterinarian is incorporated.   

New legislation increases the penalties for failure to timely file information returns.  The new penalties are in effect for all information returns due after December 31, 2015. Penalties range from $50 per return to $250 per return depending upon when the taxpayer issues the required information return.  For failures or misstatements due to intentional disregard, the penalty per return or statement increases to $500. 


References:

Agricultural Tax Issues. Fall 2015. Harris, P.E., Tax Insight, LLC. Madison, WI.

2016 National Income Tax Workbook.  Land Grant University Tax Education Foundation.  www.taxworkbook.com

Internal Revenue Service Website.  www.irs.gov




Planning for a Successful 2017

Happy 2017! I love New Year’s. It’s the start of something brand new. The year is full of promise and opportunities. It is a fresh start.

As a general rule, I recommend that farms look at their financial records around January 1st. This helps to provide a consistent point in time for comparison. Farming is seasonal and a farmer’s finances are no different. Your checkbook after planting (June) might look very different than your checkbook after you sell harvested grain (December). By comparing the same points in time, you get a clearer picture of how you’re doing financially.

Additionally, it is wise to think about what your finances might look like in the year ahead. This is called “cash flow planning”. Simply put, it’s creating a budget for the year. You’ll look at your cash from operations, investing, and financing activities.

To do this, you’ll want to have monthly records of your income and expenses. If you use an accounting software, you can print off these records. Your banker or farm business management instructor can also help. Remember, your records are as good as what you put into them. If you haven’t done a good job keeping financial records, it will be difficult for you to identify how much you should budget. Good records are important for all types and sizes of businesses.

Begin by looking at cash from operating and start with your cash inflows. (Table 1) What is your checkbook balance? That goes in the first line. Add in any sales, payments, dividends, or other income you received. Sum up the total of all lines. This is your total cash inflow.


Table 1: cash inflows
Cash inflows January
Beginning cash balance (Checkbook) $5,000
Sales of crops $250,000
Sales of livestock $2,000
Government payments $0
Dividends $0
Other income $0
Total $257,000

Next you want to determine your cash outflows (Table 2). What expenses do you expect that you’ll have? If you’re not sure, try looking back at your records. As an example, if you are trying to figure out your January 2017 expenses, look at your January 2016 expenses. Use those as a benchmark. Remember, this is budgeting and the numbers are not written in stone. Give your best estimate. You’ll also want to identify the minimum balance you want to have in your checkbook. I used $5,000. Add up all of these numbers to calculate your outflow.

Table 2: cash outflows
Cash outflows January
Seed $0
Fertilizer $0
Chemicals $0
Crop insurance $0
Drying fuel $0
Fuel and oil $2,000
Repairs $1,500
Land Rent $75,000
Real estate taxes $0
Farm insurance $0
Utilities $500
Capital purchase $0
Misc $600
Living expenses/draw $4,500
Minimum checkbook balance $5,000
Total outflow $91,100
Operating surplus/deficit $165,500

Now you want to subtract your outflow from your inflow. In this case $257,000-$91,100= $165,900. It’s a positive number, which means there was money left over after covering expenses. A negative number tells us there wasn’t enough to cover all the expenses.

Next, you move to cash from investing and financing activities next. (Table 3) This includes your capital sales, capital purchases, new term credit, and our term debt payments. This farm is not planning any capital sales, but is planning to purchase a farm truck later in the year. Fill in your loan payments and sum them up. Here’s the tricky part, find your operating surplus deficit, add capital sales and new credit to it, and subtract your loan payments and capital purchases. This will give you your total surplus/deficit.

Table 3: cash from investing and financing activities
Capital sales January
None planned $0
Capital purchases
Farm truck $0
New credit
Truck loan $0
Loan payments
House $400
Land $0
Truck loan $0
Tractor $0
Combine $0
Total loan $400
Total surplus/deficit
(Operating Surplus/Deficit + Capital
Sales-Capital Purchases+ New Credit-Loan Payments)
$165,500

Finally, refer to your operating loan. (Table 4) Find your operating loan balance. That goes in the second line. If you had a deficit, you borrow against your operating loan (line 3). If you had a surplus, you pay down the balance and interest (lines 4 and 5). Calculate your ending balance based on what you paid or borrowed and fill in. (line 6) Finally, determine your new cash balance. If you have an operating surplus, subtract off the principal payment and interest payment from the surplus, and add in your minimum checkbook balance (here it’s $5,000). If you have a deficit, add the operating loan borrowing and minimum cash balance to the deficit.

Table 4: Operating loan
Annual operating loan January
Surplus or deficit $165,500
Operating Loan Balance $20,000
Operating Loan Borrowing $0
Operating Loan Interest Payment $100
Operating Loan Principal Payment $20,000
Ending Operating Balance $0
Accrued Interest $0
Ending cash balance $150,400

You’ll need to do this for each month of the year. Your ending cash balance from January becomes your beginning cash balance in February, your February ending cash balance becomes your beginning cash balance in March, etc. A template for this can be found at: https://www.extension.iastate.edu/agdm/decisionaidswd.html. (Look for cash flow budget)

By doing this planning, you can get a picture for how your year will shape up financially. This can help you determine how much you need to borrow for your operating loan. It will also help you understand if you will be able to pay your bills. I try to be honest about these exercises. This one will take some time. Enlist the help of a trusted financial advisor if you need to. The important part of this is the finalized budget. With this you will be able to determine what you can afford for land rent, if you can purchase new equipment, and get an idea of the financial health of your business.

Be proactive. It is one of the best things you can do to be successful in your business. Good luck in the New Year!

Monday, January 9, 2017

Comparing Corn and Soybean Cash Prices with Average Southern Minnesota Farmland Rental Rates

by David Bau, Extension Educator

The average cash price for corn and soybeans each calendar year since 2000 is listed in Table 1 below. Columns 2 and 3 list the average cash prices each year in Worthington for corn and soybeans. The Column 4 lists the average percent change in corn and soybean prices from the prior year. Column 5 lists the average rent paid by 1200 farmers in Southern Minnesota who are part of an Adult Farm Management Programs. Column 5 multiplies the price percent change by previous year’s actual average rents to determine the farmland rent each year. Column 7 starts with the average rent $98.31 in 2000 and then multiplies this by the corn and soybean price change (-3.21) to determine a rental rate of $95.16 for 2001. To determine the 2002 rental rate, start with the 2001 rate of $95.16 and multiply this by the price change (15.06) and to determine an average rent of $109.49 for 2002. This process was repeated to determine rentals rate through 2016. There are two question marks for 2016 as the average rent will not be available until March of this year.


The last three columns vary quite significantly. If the change in corn and soybean prices was the main factor determining Southern Minnesota farmland rental rates, you would expect the actual rental rates to be similar to the Column 6. Comparing these figures the estimated rents using the price change factor were $25.94 lower than the actual rents listed in Column 5 over fifteen year or an average of $1.73 per acre per year, very close. Using the second calculation of starting with the 2000 average ($98.31) and adding or subtracting the price change each year to the previous calculation, there is much more variability and with calculated rents in Column 7 were higher by $775.67 over the fifteen years or $51.71 per acre per year, a significant difference.

Rent had been on a steady increasing trend of less than $10 per from 2000 through 2005 then started increasing more rapidly from 2006 through 2010 and then increased only slightly in 2011 due to lower prices in 2009 and 2010, with $6.00 plus corn and $12.00 plus soybean prices, rents took off in 2012 and 2013 before beginning to decline in 2014 as corn and soybean prices moved lower.

Many factors effect rental rates like property taxes, input costs, yields, prices and gross income, but there does seem to be a relatively close tie to corn and soybean prices and rental rates.

Thursday, January 5, 2017

Five Tips for Planning for Your Future

by Betty Berning

Extension Educator

It is the start of a New Year.  It’s full of promise and opportunities!  What are you going to do?  Did you make a few resolutions in your personal life?  Maybe you’ll spend more time with your family, exercise, or read more books?   

Planning in business and farming is similar to making resolutions.  Both require giving some thought to the future by identifying what you might like to do.  They both take commitment and patience.  Plans in farming, though, are often more complicated than some of the simple resolutions we make in our personal life.  Additionally, it may take longer to reach our business goals than our personal goals.  In order for a business to be successful, it is critical to have a plan in place. I’d like to offer five tips for business planning:

  1. Take the Time to Make the Plan:  It is really easy to get caught up in daily tasks of milking cows, running errands, fixing machinery, and growing crops.  These day-to-day activities will eat up all of your time, if you let them.  Set aside time (schedule it if you have to!) to work on your plan.  It might not feel like you are increasing profitability by thinking and writing, but you will create more value by mapping out your vision and working toward it than you will if you simply keep with the status quo.
  2. Bring others into the conversation:  Talk to your spouse, parents, and business partners about your plans.  What are their goals?  Are you aligned?  It is critical that everyone is working toward the same goals.  If not, conflicts will arise as you each work on your own interests.
  3.  Be Willing to Acknowledge Past Mistakes:  This can be difficult, but is very important.  If you want to take charge of your future, you have to be willing to determine where you could have been more proactive, rather than reactive.  Look back.  Where could you have done better?  Don’t feel sorry for yourself, but be honest about your shortcomings.  Identify them and determine where you could have done better.  Perhaps you failed to market your grain and had full bins at harvest time.  What can you do to avoid that in the future?
  4.  Make a realistic plan:  Chances are slim that you will increase your acreage from 1,000 acres to 10,000 acres in a year.  Don’t set yourself up for failure.  Be realistic.  Set short, medium, and long range goals.  For your long range goals, identify what you need to do in the next year to make progress.
  5. Revisit your plan:  This is a lot like the first point.  You need to make time to not only work on your plan, but also to revisit it on a consistent basis.  If your goal is to grow your milking herd from 80 cows to 300 cows, you’ll want to check in to see how you’re doing against that goal.  What are your next steps?  When can you accomplish them?  Is your goal still realistic?  Spend time on the plan so you can keep moving forward.


Interested in learning more about planning for your future?  Mark your calendar for Women in Ag Network’s annual conference on February 16, 2017 in Willmar, MN.  The theme will be “Planning for our Future”.  More information can be found at:  http://www.extension.umn.edu/women-ag  For update on the event, please like us on Facebook:  https://www.facebook.com/umnextwomeninag.  

Tuesday, December 27, 2016

Southwestern Minnesota Farmland Values Decline 2.6 percent in 2016

By David Bau, Extension Educator

At the end of each year for the last twenty-two years, a survey has been conducted of farm land sales in fourteen southwestern Minnesota counties. Land values had been on a steadily increasing until 2014. The survey reports bare farm land sales to non-related parties for the first six months of each year. After reaching record high prices in 2013, the upward trend was broken as prices declined in 2014. The trend continued in 2015 and 2016.  Data collected in this survey is available at the county extension offices in Chippewa, Cottonwood, Jackson, Lac qui Parle, Lincoln, Lyon, Martin, Murray, Nobles, Pipestone, Redwood, Rock, Watonwan and Yellow Medicine Counties. This year the decline across the fourteen counties averaged 2.6%. Average land values had not declined since 1996 when the average SW Minnesota land prices were $1,175 per acre in 1995 to a high in 2013 to $8,466 then declined in 2014, 2015 and again to $6,751 in 2016.

Data from these counties indicate prices decreased from an average of $6,929 in 2015 to $6,751 in 2016 or a decrease of 2.63%.  This is only the third decrease as far back as this data has been collect since 1995. In 2013 was the largest year to year increase of 35.6%.  Farmland prices decreased in eight counties and while increased in seven counties including Cottonwood, Lyon, Martin, Murray, Nobles and Watonwan from 2015 to 2016.  There was a lot of variability in the numbers from 2015 to 2016. The largest increase was in Pipestone County with an increase of 21.2% while Lincoln experienced the largest decrease of 30.3% for the sales that met the bare farmland to non-related party transaction.

Thursday, December 22, 2016

What Are the Keys to Successful Farm Business Management?

By:  Pauline Van Nurden, Extension Educator

The new year is right around the corner and with that comes a blank page to create your financial plan for the coming year. As a farmer, do you ever struggle with what needs to be included in your financial management plan? Are you looking to boost your farm financial management skills? As you look to start the new year off on the right foot, make sure you have a handle on your business;s finances. 

  • Balance Sheet – Do you sit down at the beginning of the year to create a balance sheet? This gives a snapshot of what you own and what’s owed against it. You’ll then determine your net worth. Creating a balance sheet at least annually is important to assess your profitability and business gains. 
  • Income Statement – Do you look at the profitability of your farm over the last year by creating an income statement? The income statement measures profitability by determining the net income of your farm. This is calculated by subtracting the farm expenses from the farm revenue for the year. The best approach is to calculate the accrual adjusted income because this factors in changes in inventory and depreciation during the year. By doing this, you learn the true profitability of the operation. 
  • Cash Flow Projection – Do you create a plan each year for your money? A cash flow projection can help you do just that. The statement of cash flows looks at where cash is utilized in the operation – either for operating, investing, or financing activities. Remaining funds build your cash balance. Planning how every dollar will be best used is important and will get your business off to the right start in the new year. 
These financial statements are created using your farm records and aid you in making important financial decisions for your operation. The MN Soybean Research and Promotion Council knows the importance of sound farm financial management as well. They are generously sponsoring two workshop sessions aimed directly at these skills. “Taking Charge of YOUR Finances: How to Survive & Thrive” workshop will help farmers put these tools into action to gain financial management skills. To learn more go to z.umn.edu/thriveworkshop. To register go to z.umn.edu/thrive2017. For more information, contact Pauline Van Nurden at: pvannurd@umn.edu or 320-235-0726, ext 2008.

Monday, December 12, 2016

Look Back to Look Ahead

by Betty Berning
Extension Educator

The end of the year is rapidly approaching.  It is a special time of family, friends, and reflection.  As 2016 comes to an end, look at the year past and the year ahead.  I’d like to suggest that you ask yourself four questions:
  1. What went well?
  2.  What didn’t go well?
  3.  What do I want to do differently?
  4. Where do I want to go from here?
Being positive is important.    Start off by identifying areas where things went as planned.  It was a tough year.  You survived.  What did you do well?  What are you grateful for?  Maybe your family worked well together.  Perhaps the cows had great production.  In spite of the slow harvest, did you have record yields?  Look at your victories.  Spend some time analyzing them and asking “why did this happen?  What was my role in it?”  This will help you understand what behaviors or actions made a difference and what to continue in the future.  It is really important to focus on the positive during challenging times.

Moving on, think about what didn’t go well.  Was it milk price?  Completing harvest?  There were a lot of challenges this year.  Be honest with yourself about what didn’t go well and stick to the facts.  There is no need to throw a pity party.  Pick a few key issues.  Determine what you had control over and what you didn’t have control over. 

There are many things that fall in a gray area; we can’t completely control them, but we have some control.   For example, we don’t control milk price, but we can take advantage of opportunities to forward contract milk.  Another example is weather.  We don’t control the weather.  However, you can think about how to prioritize field work on good weather days and who might be able to pitch in so that you can get more done on those days. 

Look ahead, what do you want to do differently?  It might be as simple as avoiding some of the issues identifies in question #2.  It could also be that you are looking to make some changes to your farm in the form of expansion, adding a child as a business partner, hiring additional labor, etc.  These are opportunities for you to improve.

Last question:  Where do I want to go from here?  If you answer this questions after you’ve answered the previous three, this should be the easiest to answer.  This is where you can start to think about your farm’s vision and strategic plans.  Think about what your goals are for 2017 and even beyond (5 year goals?  10 year goals?)  What is it that you want to accomplish?   What changes need to occur?  If you’re thinking about expansion, do you have a plan in place?  Are you following that plan?  Where might your plan need to changed?  If you haven’t written these things out, write them out now.  Then you can revisit them on a regular basis.      

Not everyone likes to write out goals.  Some people like to stay in the present moment.  Generally speaking, that’s a good way to live on a daily basis; however, on occasion a business (any business, including a farm) must look at its past and learn.  It must also look forward to identify where it might like to go.  Without an idea of where you may be headed, it is difficult to know what steps are needed next.  In other words, without a roadmap, it’s hard to find your destination.    

2016 is almost over.  2017 will be a new year that is completely different.  There will be new challenges and opportunities.  Take time to reflect.  Think of it as strategic business planning.  Talk to your business partners and families about your answers to the above questions.  Discuss their answers to the questions.  Together you can create a great plan and vision for your business moving forward. 

Although 2016 hasn’t been easy, be sure to be positive and focus on what you can control.  Keep after your goals and adjust them where you need to.  Finally, be patient.  Lots of small steps add up over time.  Life if journey made up of many steps.  We don’t arrive at our destination immediately.  Keep stepping forward toward your destination.  With time and hard work, your many small steps will bring you to your goal.  Best wishes to you!
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