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Publishing Information
Ag Connection is published monthly for Central Missouri
Region producers and is supported by University of Missouri Extension, the Commercial
Agriculture program, the Missouri Agricultural Experiment Station and the College of
Agriculture, Food and Natural Resources, UM-Columbia. Editorial board: Joni Ross, Managing
Editor; Mary Sobba, Parman Green, Gene Schmitz, Mark Stewart, Wendy Flatt, Jim
Jarman, Todd Lorenz, Wayne Crook, Dustin Vendrely and Kent Shannon.
 Comments or Suggestions?
Please send your comments and suggestions to
Joni Ross, Agronomy Specialist, University of Missouri Extension, 100 E Newton
St., 4th Floor, Versailles, MO 65084, call 573/378-5358 or send messages by
e-mail to: rossjo@missouri.edu.
To send a message to an author, click on the author's name at the end of an article.
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- Where Is Your Farm Business Headed?
Farm Leases -- Little Things Cause Big Problems
"Decommodation"
Taxation Tidbits: Charitable Contributions of Farm Raised
Inventory
- Year End Planning Tidbits
2000 Federal Income Tax Worksheet
2000 Income Tax Rate Schedules
[This Month in Ag
Connection] [Ag Connection - Other Issues Online]
Where Is Your Farm Business Headed?
When was the last time
you put significant thought and effort into the long-range goals of the farm business? At
some point, you should pause to really study and think about where you want the farm
business to be in 5 years, 10 years, or 25 years. How will you get there?
Typically, the winter season is the time to do
planning and paperwork. Given the changing nature of agriculture, a tool to consider is a
business plan written specifically for your farm.
A business plan describes how the
business is structured and operated along with future plans. Business plans generally
contain the following four sections.
Description of
the Business
This section includes descriptive items such as the legal business name, owners and
address information. Another item is the description of your location. This includes legal
descriptions and physical locations, as well as needs for changes/improvements. This is
also the section in which the commodity(s), product(s) or service(s) are described in
detail. Additional information may be - Why is your product unique?
The
Marketing Plan
The marketing plan contains goals concerning selling strategies. All marketing
alternatives need to be evaluated and appropriate strategies implemented. Any direct
competition needs to be recognized and should be viewed as a source of information,
observing what works and what fails. The marketing section can also include advertising
and public relation activities. Your product(s) will determine if advertising is
necessary. For example, if the product is contract hogs, advertising probably is not
necessary, but if the product is replacement heifers, then advertising is essential.
Public relations are important for any business. Public relations could be as simple as
sponsoring a trophy at a local county fair to as in-depth as joining an organization and
working on national issues.
The
Operational Management Plan (land, labor, and capital)
This section accounts for all the human and production resources. Job responsibilities are
assigned and plans for emergencies are developed. Identify each person's strengths and
weaknesses and determine how to maximize the resources for the business.
This section will also identify how land and
capital will be utilized to meet the goals and objectives of the business. Enterprises and
production processes are defined, along with utilization of capital assets.
The
Financial Management Plan
Farm records and accounting are a part of financial management. Future financial needs of
the farm business are identified. Financial records include a projected budget, balance
sheet, depreciation schedule, cash flow statement and profit/loss statement.
The plan needs to be routinely reviewed and
updated to account for changes in the business. If all members of the farm business have
an understanding of the goals and the plans to reach them, everyone can work more
efficiently and be more productive.
Resources: U.S.
Small Business Administration
(Author: Mary Sobba, Farm Management Specialist)
[This Month in Ag
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 Farm Leases -- Little Things Cause Big Problems
A good lease is defined as one in which
both landowner and tenant are satisfied that it is equitable. While problems can occur
when one party becomes dissatisfied with the amount of cash rent or crop/cost shares, more
often it is the result of a misunderstanding about details or the "little
things" that cause problems to develop.
"My tenant is
taking advantage of me!" -- Landowner concerns the tenant should consider.
Appearance of the property and crops is typically important to the landowner. Mowing weeds
around buildings, field edges, and roadways may be important to how the landowner sees the
tenant taking care of the property. These expectations are often overlooked during lease
negotiations and may not be specified in the lease.
The use and compensation for machine sheds,
grain bins or livestock facilities are often overlooked when leases are negotiated. The
tenant may just assume that these go with the property while the landowner sees an
investment that the tenant is getting for nothing! In some cases trades are appropriate.
For example, the tenant might mow weeds in exchange for use of a machine shed.
Additional misunderstandings often occur when
a spouse or the younger generation inherits the farm and weren't involved in the original
lease discussions. Many times they look at the market value of the property and the amount
of rent income and wonder why there is such a low return on capital. These things often
lead them to conclude, "My tenant must be cheating me!" Changing farming
practices or different enterprises may also cause concern. The heirs may look at no-till
fields or a deteriorating unused livestock facility and say, "That's not the way it
used to look!" It is very important for tenants to understand these concerns and
communicate with the heirs, especially if they are unfamiliar with current farming
practices or how farmland is typically leased.
"My landlord is
unreasonable!" -- Tenant concerns the landowners should consider.
Timeliness of operations is important. However, landowners should realize that the tenant
may rent farms from several other landlords ¾ they can't all be first! The landowner
should discuss this with the tenant and reach an understanding about timeliness of
operations that is workable for the tenant.
Some things may not be useful to the tenant.
While a large lake may add beauty and value to the farm, it may be of no value to the
tenant's use of the property. Obsolete buildings, even if they are in excellent shape,
generally are of little use to the tenant. Some property characteristics may be a negative
to the tenant. For example, narrow gates create a problem for a tenant with large
machinery, regardless of how new or how good the fences are. It is important for
landowners to understand how the tenant is using the property -- not how they had used it.
In general, while landowners are justified in
expecting tenants to maintain and care for the property, the landowner should not expect
the tenant to make major improvements or long-term investments without compensation or
special arrangements. Who is responsible, along with what they are responsible for, when
fences or buildings need repair and other property maintenance or construction is required
should be included in lease negotiations and the lease agreement.
Long term expenses such as lime often cause
problems. In the past it was a common custom for the landowner to pay for lime since it
was a multi-year expense and considered part of the base fertility of the soil rented to
the tenant. Some landowners are now reluctant to make this expenditure since the tenant's
crops benefit, especially if it is a cash lease. In this case the tenant might agree to
pay for lime if the landlord agrees to reimburse for the "unused" portion if the
lease is not renewed.
Many problems and
misunderstandings can be prevented with a written lease.
Unfortunately, many farms are rented using only an oral agreement. Some think that
suggesting a written lease will be interpreted as a sign of mistrust. Trust is not the
issue! A written lease won't make a dishonest person honest and it is probably unwise to
enter a lease with someone who can't be trusted regardless of whether it is written or
not. A written lease protects both the landowner and the tenant. A good written lease
spells out the details of the rent amount or share, uses of the property, and each party's
responsibilities along with any special agreements. A lease protects the heirs of both
parties and provides them with the details of the agreement.
The process of preparing a written lease
forces both sides to think about the details. This alone often justifies preparing the
written lease. Discussing and putting into a written document agreements about maintenance
or repairs and bin or building rents along with details about care and use of property
avoids many problems and misunderstandings that could occur later.
Finally, just
communicating with each other and trying to understand the other party's concerns can
solve many problems.
The tenant should respect the landowner's concerns and try to care for the property in an
acceptable manner. Tenants should also take the time to explain their plans for the
property, especially if the owners are not familiar with current practices. If both
parties are reasonable, communication, and consideration of the other's concerns will
enable solving most questions that arise.
(Author: Melvin Brees, Farm Management Specialist)
[This Month
in Ag Connection] [Ag Connection - Other Issues Online]
 "Decommodification"
You won't
find "decommodification" in the dictionary. It is a term one speaker used
recently to describe what is occurring in agriculture. The speaker described "decommodification
of agriculture" as the process of moving away from producing bulk commodities.
Most agricultural production has been
commodity based -- corn, soybeans, wheat, cattle, hogs, etc. An individual
farmer's production is not differentiated and can be mixed with others; a bushel of corn
is essentially the same whether it's produced in Missouri, Iowa or anywhere else. Product
characteristics are defined by standards such as #2 corn or choice grade cattle.
Commodities are priced based on these standards.
Commodities are transportable in bulk and can
be sold in central markets that are described as being transparent. Central markets
allow easy price discovery, by open bidding, and market information reporting. Anyone can
get current price and market information by listening to or obtaining daily market
reports.
"Decommodification" suggests
farmers will move away from independent production and marketing of bulk commodities to an
interdependent role in production or product chains. These chains will
consist of input supply, production, processing and marketing of products to consumers or
retailers. Farmers may become subcontractors in this production chain or they may organize
added value businesses to participate partially or completely in the product chain.
Many grain and livestock producers are already
involved in added value marketing. Identity-preserved grain contracts have provided
premiums and livestock have been sold on grids to gain premiums over base commodity
prices. This move away from a commodity-based agriculture will result in a less
transparent market. For example, the low percentage of hogs currently sold in cash markets
suggests that this market may not represent the "real market" and basing a
contract on it may not result in a "fair market price."
Among suggested alternatives is a "cost
plus" contract for a price that offers a return above the cost of production. A
similar pricing situation occurs when producers organize added value production
enterprises. The farm production becomes an integrated part of the total consumer product
process and a cost item to be recovered instead of a product to be sold.
Knowing the cost of production has always
been important to commodity marketing. "Decommodification" would make it
essential! It will be necessary to negotiate or determine a price that
will recover cost and offer profits while meeting consumer demand. This represents big
changes in the way you manage and market farm production.
(Author: Melvin Brees, Farm Management Specialist)
[This Month in Ag
Connection] [Ag Connection - Other Issues Online]
 Taxation
Tidbits
Charitable Contributions of
Farm Raised Inventory
While contributions of
raised commodities to your favorite charitable organization could provide additional tax
advantages, the timing and method of transfer are critical to meeting the requirements of
the tax-saving provision. The best time for most grain farmers to take advantage of this
tax-saving provision is after the end of the tax year.
To a non-profit charitable organization, there
is no tax difference between the receipt of cash or an equal value of commodities.
However, if you are a cash basis farmer, there can be a substantial difference in the tax
consequences resulting from the donation of cash or raised inventory. A tax advantage
results from the fact there is no income recognition by the farmer-donor upon the gift
transfer of inventory. The IRS has ruled the gift of raised farm commodities by a cash
basis farmer represents a transfer of an asset rather than the "assignment of
income".
The donor must:
 reduce the basis of the inventory (which for a
cash basis taxpayer is zero) or,
reduce any undeducted expenses related to the commodity which has been gifted. Tax
practitioners are interpreting this language to mean any related costs deducted in a tax
year prior to the year of the gift will not be adjusted. For example, donating corn in
2001 that was produced in 2000 avoids adjusting 2000 production costs.
For farmers who use the standard deduction
instead of itemizing, the charitable contribution of inventory removes this potential
income from taxation. Further, whether you use the standard deduction or itemize, if your
farm income is less than the self-employment earnings cap, the charitable gift of
inventory will also reduce your self-employment tax liability. Thus, farmers gifting
inventory to charities reduce their liability for federal and state income taxes and
possibly on self-employment taxes.
The following are key factors for effective
tax savings from charitable gifts of inventory:
you must be a cash basis taxpayer;
you must have
materially participated in the production of the commodity;
gift prior-year
production to prevent the reduction of undeducted production expenses, and
title and
control of the commodity must be transferred to the charity.
The direct transfer of raised inventory to a
charity can provide for a substantial tax savings. However, the "i's" must be
dotted and the "t's" crossed! Therefore, the review of this strategy with a tax
consultant is advised.
(Author: Parman Green, Farm Business Management Specialist)
[This Month in Ag
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Year-End Planning Tidbits
- Calculate your current taxable income and make year-end
adjustments.
- Section 179 "capital expense write-off election"
has been increased to $20,000 for 2000; this increases to $24,000 in 2001.
- If more than 40% of your depreciable assets were acquired in
the last quarter of the year, you will be required to use mid-quarter depreciation instead
of mid-year depreciation.
- Analyze sales of capital assets – beware of the annual
net capital loss limitation ($3,000 or $1,500 if married and file a separate return).
- Avoid year-end (paper) overdrafts. If necessary, borrow the
needed funds for a few days.
- Review the three year farm income averaging or five year net
operating loss carryback provisions, as appropriate.
- Consider utilizing pension, individual retirement accounts
(IRA), or Roth IRA.
- Be aware the IRS is vigorously and successfully
reclassifying cash rents paid to shareholders, partners, and spouses where they
concurrently participate in the business operations - as earned income subject to
self-employment tax.
- The self-employment health insurance deduction has been
increased to 60%.
- The maximum earnings subject to social security has been
increased to $76,200.
- You generally must make periodic deposits of employee taxes
if you are liable for $1,000 or more of Social Security, Medicare taxes, and withheld
income tax.
- By January 31you must furnish each employee with a Form W-2;
as well as 1099s to non-corporate cash rent landlords, contractors, etc. who were paid
$600 or more throughout the year.
- Review all your ’99 and ’00 CCC grain loan and
market loan gain transactions to insure you are not over reporting taxable income from
these transactions.
- Farmers only – if you do not pay your estimated income
tax by January 16, 2001, you must file your 2000 return and pay the tax due by March 1,
2001 to avoid the underpayment of estimated tax penalty.
- Complete any gifts by December 31 which you desire to be
included in transfers qualifying for the 2000 calendar year $10,000 annual gift exclusion
per donee. Reminder: to qualify for the annual gift exclusion – the gifts must be
present-interest gifts.
- The unified credit applicable exclusion for estate taxes is
$675,000 for 2000 and 2001.
- Conduct an "estate fire-drill" – you just
"DIED" – don’t worry about the exactness of the tax liability –
but in general, what would be the tax liability and settlement costs. How would your
assets be distributed; how will your liabilities be handled; who will manage the business;
do you foresee any intra-family problems generated by your demise; etc., etc.? Did the
estate fire-drill identify some areas to be given greater attention?
To view file of a 2000 Federal
Income Tax Worksheet click here. (Will need free Adobe Acrobat Reader to
view.)
To view file on 2000 Income Tax
Rate Schedules click here. (Will need free Adobe Acrobat Reader to
view.)
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