Approaches to Resoving Conflict

Resolving conflict is a challenge for many farming businesses. Conflicts among family members or business partners that go unchecked will likely adversely affect productivity and profitability. Unresolved conflict can even go so far as to cause a business failure. A method of resolving conflict should be in place in every farming operation to help ensure its success.

Although formal methods of conflict resolution such as mediation, arbitration, and litigation are available, the most effective conflict resolution method is open and frequent communication. The key is to deal with issues within the operation before they become major conflicts and create adversity among the parties. If the parties can share their thoughts, frustrations, and concerns in an honest manner, on a periodic and timely basis, issues the size of anthills can be resolved before they become adversities the size of mountains. Implementing planned methods for communication is often the best way to foster open and honest sharing. Regularly scheduled weekly or monthly meetings with all parties attending is an effective means of dealing with issues. Such regularly scheduled meetings should require one hundred percent attendance. Giving this level of importance to communication should minimize hard feelings and business disruptions.

Sometimes, even with the best of efforts and intentions, the parties just cannot seem to work things out through communication, or just cannot communicate at all. In these situations, a formal conflict resolution procedure may be in order. Perhaps the most common of these is mediation. Mediation is a method of nonbinding dispute resolution involving a neutral third party counselor who tries to help the disputing parties reach a mutually agreeable solution. The key aspect of mediation is that it is non-binding. The parties must agree to cooperate and abide by the mediator’s conclusion. Many attorneys, trained mediators and other professionals are well suited to assist with conflict resolution.

Arbitration, another form of dispute resolution, is much like mediation. Arbitration, by agreement between the parties, may be binding or non-binding. If non-binding, the arbitrator may rule but the parties may still not agree. If binding, the parties are legally obligated by the arbitrator’s judgment. Once the arbitrator rules, neither party can take the issue to the judicial system. The arbitration procedure may involve one or more arbitrators. Both mediation and arbitration are usually much faster and less costly than litigation due to the less formal nature of the proceedings.

Litigation should be the last resort for resolving conflicts. Litigation involves taking the issue to the judicial system and asking a judge or jury for a resolution. Besides a potentially significant investment of time and money, litigation can be procedurally complex, and may take years. However, there are times when litigation is appropriate and at such times, legal counsel should be retained.

Continual, honest and meaningful communication is certainly the recommended way to deal with conflict resolution. If the parties can not find a resolution, then engaging professional help to mediate or arbitrate may be economically wise and emotionally less draining.

Roth vs Regular IRA vs 401K

Regrettably the days when one could reduce their tax liability in a high income year by putting money into an IRA are gone. Using an IRA to level income has virtually been eliminated, since the deduction amount for a regular IRA ratchets down as taxable income goes up. One can still contribute to an IRA, but for most the tax benefit the year of or for the previous year is gone.

Thus, the regular IRA has taken a back seat to the Roth IRA. The Roth does not and has never allowed for a deduction the year before or the year of contribution. However, assuming conditions have been met, there is no taxation of money withdrawn from a Roth IRA.

The question then arises, should money go into a Roth, Regular IRA, 401k, 403b, non-qualified stocks/bonds, etc. Even though there are exceptions, if an employer matches money placed in a 401k, 403b, retirement account, etc., don’t pass that up. There are different levels of match, but many are dollar for dollar, which are the most lucrative for the employee.

With a regular IRA, the objective is to withdraw the money much later when it is taxed at a significantly lower tax rate than what would have been paid without the deduction. If taxation at 25% is averted up front and only 15% is paid when withdrawn, the regular IRA makes sense. However, if all or a significant portion of the money going into a regular IRA gets no deduction, a regular IRA is usually not the best option.

Stock/bonds can also be a better choice than a regular IRA if no up front deduction was allowed. Gains from money in a regular IRA, even if no initial deduction was allowed are taxed as ordinary income when withdrawn. However, long term gains from stocks/bonds are taxed at a lower rate.

The Roth IRA has become popular, with the maximum contribution income limit of $95,000 for singles and $150,000 for a couple. Those who anticipate little reduction in taxable income during retirement especially like the Roth IRA. With the Roth withdrawals do not need to start at age 70.5. Finally, money in a Roth is not assessed estate tax and withdrawal by heirs is less restrictive than for a regular IRA, 401k or 403b. For more information on a Roth IRA refer to: http://www.fairmark.com/rothira

Bankruptcy: The Option of Last Resort

Low yields in areas of the state most affected by past weather problems, or expanding dairy operations during recent years of extremely low prices, have lead some to consider bankruptcy. Certainly, businesses unable to service all indebtedness, facing pressure from creditors and possible legal action, may seek protection under the Bankruptcy Code, but only as the last resort. Voluntary workouts should first be considered, to include: restructure of debts or repayment of loans over a longer term, partial sale of assets, interest only payments, reduction of interest rates, or forgiveness of part of the debt. These negotiations may include additional collateral or other credit enhancements provided to the lenders. When all else fails, the Bankruptcy Code offers the following choices: Chapter 7 liquidation, Chapter 11 reorganization, or the streamlined version of reorganization for family farms, Chapter 12. Chapter 12 is modeled after the Chapter 13 bankruptcy for wage earners and was added to the Code in 1986. It is important to have a cash flow plan well thought out before filing a Chapter 12 because of the shorten time lines provided by the Code. Within 90 days of the filing of a Chapter 12 petition, a repayment plan must be presented to the Bankruptcy Court. Except for cause, confirmation hearings must conclude within 45 days after filing of the plan. The University of Minnesota Extension Service has an excellent series of fact sheets, for example “Chapter 12 Reorganization,” (including a listing of the fact sheet series). http://www.extension.umn.edu/distribution/businessmanagement/DF7301.html

Farm Machinery Cost Estimates for 2004

University Extension Economists periodically calculate machinery costs for tractors, combines, and field equipment. The Universities of Minnesota and Nebraska have recently updated these estimates for 2004. Extension Economists William Lazarus ( University of Minnesota Extension ) and Roger Selley ( University of Nebraska Extension ) have collaborated to update these Cost Estimates. These estimates are useful for setting custom rates for machinery operations, establishing rental rates for farm machinery, and analyzing machinery costs on farms. These costs are estimated using formulas developed by the American Society of Agricultural Engineers.

Machine costs are separated into time-related and use-related categories. Use-related costs are incurred only when a machine is used. They include fuel, lubrication, use related repairs and labor. Time related costs, also often referred to as overhead costs, accrue to the owner whether or not the machine is used. Overhead includes time related economic costs: interest, insurance, personal property taxes, and housing. Depreciation will be related to use to the extent that increased annual usage shortens years of life and/or reduces salvage value. While not entirely use-related, depreciation is included along with operating expenses and labor costs in the columns labeled “use-related cost/acre”. For the complete publication go to the following webpage: http://www.apec.umn.edu/faculty/wlazarus/mf2003.pdf

Tax Management After Year's End

Decisions still need to be made after January 1 that will affect a manager’s taxable income and his final tax liability. These decisions relate to the choice of depreciation methods and the amount of depreciation to be claimed for assets placed in service during the year, investing in a tax-deductible IRA and the use of Schedule J, farm income averaging.< Current tax law allows a business investing in qualifying capital assets great flexibility in recovering those capital costs over time. The choice among depreciation methods, the increased section 179 deduction and the 30% and 50% additional first year depreciation gives the manager the ability to manage the net income shown on Schedule F. For example, if a farm business invests $50,000 in new equipment the potential deductions in 2004 vary from 100% of the qualifying cost to 5% for the first year depending on the amount of net income generated by the business. Section 179 allows for a write-off of up to $102,000 for new business property placed in service during 2004. Qualifying property includes all 3, 5, 7 and 10 year property plus drainage tile and water developments. The amount expensed is limited to business income. If $50,000 of new capital expenditures is to be expensed, there has to be a net income on Schedule F plus capital gains from farm property plus any W-2 income of at least $50,000 to allow the deduction. The 179 election is taken only on the cash portion of any asset received in a like-kind exchange that involves boot. Once the investment in qualifying property reaches $410,000 there is then a dollar for dollar reduction in the amount of 179 allowed. For example, an investment of $460,000 in qualifying assets limits the amount of 179 that can be claimed to $52,000 ($102,000 - ($460,000 - $410,000)). The additional first year depreciation allowance (AFYD) of 30% or 50% is for property used originally by the taxpayer (brand-new property) and the property must be placed in service before January 1, 2005 . Used property is not eligible for AFYD. Qualifying property is MACRS property with a life of 20 years or less. All property falling in the categories of 3, 5, 7, 10, 15 and 20 year property is eligible. The 30% or 50% allowance is calculated on the remaining basis after any section 179 is claimed. For assets acquired in a like-kind exchange, the AFYD is calculated on both the cash or “boot” money paid and the carry-over basis of the traded asset. The tax legislation that took effect on October 22, 2004 did not extend the provision for AFYD. 2004 will be the last year that AFYD can be used as a tax management strategy. Any basis remaining after using 179 and AFYD is then depreciated using MACRS depreciation and there are four alternatives to choose among. For example, agricultural equipment, 7 year property, can be depreciated using the 150% declining balance over 7 years (the GDS life) or 10 years (the ADS life) or the property can be depreciated using straight line depreciation over 7 or 10 years. If more than 40% of the bases of assets placed in service during the year were placed in service during the first three quarters, the regular depreciation is calculated with a mid-year convention. If not then a mid-quarter convention is used for each asset. If more deductions are needed to level net income, the use of 179, the AFYD and the accelerated 150% DB MACRS are options to consider. If less depreciation is needed section 179 and the AFYD should be used sparingly and the straight line method of depreciation may be a better choice. But as the decision relating to how much depreciation to claim for 2004 is made, keep in mind how much depreciation will be or will not be available in 2005 and later years. While the choice of how much and what kind of depreciation to claim affects the net income on Schedule F, taxable income can also be reduced by investing in a traditional IRA. For those that are eligible, the 2004 limits are $3,000 plus a catch-up additional of $500 for taxpayers over the age of 50. The deduction is taken on the front of the Form 1040 and is an “above the line” deduction meaning that it reduces adjusted gross income and taxable income. Investing in an IRA is an excellent way to put away extra funds for retirement and should be done each year if possible. The last option is the use of farm income averaging on Schedule J. The purpose of Schedule J is to subtract the “elected” farm income (EFI) from the current year's taxable income and add one-third of the EFI to the taxable income of each of the previous three years to determine if the total income tax liability for the current year can be reduced. If your farm income is higher in the current year and was lower in one or several of the three previous years farm income averaging may reduce your tax liability for the current year. Gains from the sale of land or timber are not eligible to be included in the “elected” farm income. Schedule J affects only the income tax liability for the current year and not the self-employment tax liability. As a result of the recent tax legislation farm income averaging no longer increases a producer's alternative minimum tax liability. This change is effective for tax years beginning with 2004. The regular tax liability is determined without regard to farm income averaging and compared to the AMT liability. If farm income averaging lowers the tax liability, the AMT liability, if any, does not increase. This change allows those using farm income averaging to receive its full benefit. While most tax planning needs to be done prior to the year's end, decisions regarding depreciation, investing in tax-deductible IRA's and the use of farm income averaging all will have an effect on the final tax liability. As these final decisions are made keep in mind that the over-all goal of tax management is not to minimize the tax liability, but to remove the fluctuations in net farm income. Consult with your tax professional to help with the decisions that are best for your operation.

Estate Planning Help Available

A 12 lesson letter study course is available on estate planning. Take a look at the second lesson at http://lorain.osu.edu/ag/Lesson22.pdf which addresses the cost of settling an estate. The lesson ends with the following table that suggests possible savings for a couple with the simplest planning.

If you would like all 12 lessons, visit http://lorain.osu.edu/ag/pg1.htm for enrollment and other information on the letter study.

Crop Profit Game Agronomy Information

The first of three Crop Profit Game broadcast will be December 14 th from 7-9 pm . These programs will build upon each other in sharing the latest on research information, recommendations and input concerns for Ohio row crop producers. Broadcast will be available at many Extension Offices across the state. For the location nearest to you call your local extension office or see http://cropprofit.osu.edu for an interactive map or zip code search.

Presentations for the December 14 th program include:

P&K Rates for Corn & Soybeans

Robert Mullen

Soybean Cyst Nematode

Anne Dorrance

Soybean Seeding Rates Research and Inoculants

Jim Beuerlein

Soybean Seed Treatments: Current Product Lines Use Rates

Anne Dorrance

Corn Seed Treatments and Technology

Ron Hammond

Rating Corn Disease Importance In Hybrid Selection

Pat Lipps

Be sure to mark your calendars for the other Crop Profit Game dates January 11 th and February 15 th . Agenda’s for these upcoming programs can be found at http://cropprofit.osu.edu . If you have question about these programs contact Greg La Barge at 419-337-9210 or labarge.1@osu.edu or Harold Watters at waters.35@osu.edu.