A Comparison of Business Entities Available to Ohio Farmers

Ohio farmers have many choices when selecting a business entity for their farm operations. The choice of business entity affects liability, taxation, management, and succession planning. Therefore, selecting a business entity should be given a great deal of thought and attention. Topic to be considered include: formation of the business, governing documents needed, cost of creation, personal liability of owners, taxation, management, raising capital, transfer of ownership, and dissolution and liquidation costs.

For more information on this topic, please refer to the OSU Extension Factsheet “A Comparison of Business Entities Available to Farmers” available at the following webpage:
http://ohioline.osu.edu/anr-fact/pdf/3613.pdf

This Factsheet and others addressing issues related to Farm Transition Planning are available at:
http://ohioagmanager.osu.edu/resources/index.php

Should you have questions, contact Barry Ward at ward.8@osu.edu

Crop Insurance Taxation

Generally, farmers who use cash accounting must report payments in the year they receive the payments. This method can cause a bunching of income for farmers who normally sell their crop the year after it is harvested if a crop is lost due to a natural disaster because they may receive an insurance or disaster payment for that crop in the year it would have been harvested. An exception to the general rule that payments must be reported in the year they are received allows a cash-basis farmer to postpone reporting a crop loss payment by 1 year. To qualify for the exception, a taxpayer must use the cash method of accounting and must be able to show that, under the taxpayer’s normal business practice, the income from the crop would have been reported in a year following the year of the receipt of the payment. An election to defer recognition of income from crop loss payments must be attached to the return (or amended return) for the tax year in which the payment was received.

Some farmers received compensation in 2007 under Crop Revenue Coverage (CRC) policies they purchased from the Federal Crop Insurance Corporation. These payments are based on the price, as well as the quantity and quality, of the commodity produced. Only the payment for destruction or damage is eligible for the deferral. Therefore, a farmer who receives compensation from a CRC policy must determine the portion of the payment that is due to crop destruction or damage rather than due to a reduced market price.

New Kiddie Tax Rules and Gifts of Grain

The change of Kiddie Tax rules has made gifting of grain or other commodities to children, even for college expenses, a bit less attractive in 2008. The kiddie tax subjects the net unearned income of a child that exceeds a specified threshold to taxation at the parent’s tax rates if the parent’s tax rates are higher than the child’s tax rates. Unearned income is any income other than earned income, and therefore includes interest, dividends, and rents, as well as income recognized from the sale of assets such as raised grain received as a gift. 2006 legislation extended the kiddie tax rules to a child under age 18 rather than under age 14 as in the prior law. Under the rules for 2007, a dependent child with no earned income is allowed a standard deduction of $850 that offsets the first $850 of unearned income. The next $850 of unearned income is taxed at the child’s 10% rate as a single individual. Finally, the unearned income in excess of $1,700 is taxed at the parent’s higher tax rate. This change may subject gains realized by a 14-17 year-old on a 2007 sale of gifts of commodities raised in a prior year to taxation at the parent’s tax rate, significantly reducing the tax savings. Although the income tax savings may be reduced, a gift of commodities to an individual who is not considered to in the business of selling grain should still avoid the self-employment tax. The Kiddie Tax form is 8615.

The Small Business and Work Opportunity Tax Act of 2007 expands the kiddie tax for the 2008 and later tax years. Children age 18 (whether or not they are students) and children who are age 19 through 23 (if they are full-time students for at least 5 months of the year) are subject to the kiddie tax if their earned income for the tax year does not exceed 50% of their support. The support test is based on the dependency exemption regulations and includes food, shelter, clothing, medical care, education, and capital items provided to a child (such as a car purchased for and titled in the child’s name). Support provided by scholarships is not taken into account.

Giving grain to a child may reduce the taxes on the gain from the sale of the grain, even if the gain is taxed at the parents’ marginal tax rate. In the hands of the child, the grain is a capital asset unless the child is in the business of raising or selling grain. Therefore, the gain from the sale by the child is capital gain that is not subject to self-employment tax. When it is taxed at the parents’ marginal rate, it is taxed at their 15% capital gains rate rather than at their ordinary income tax rate and self-employment tax rate.

Some planning tips include:
1. Make the gift of grain after the first of the year so that expenses are already deducted on the previous year’s Schedule F, therefore the tax basis of the grain becomes zero. If a gift is made at harvest or during the tax year, the expenses used to produce the grain is to be subtracted from the parent’s Schedule F and becomes the basis for the gifted grain.


2. The donee (child) must have dominion and control and have the unrestricted right to sell at any time. A warehouse receipt or separate grain storage would be recommended.


3. If the child is not otherwise producing their own grain, the gifted grain becomes a capital asset and the sale is reported on the child’s Schedule D. Therefore, no self-employment tax is paid.


4. Now, is the grain considered short or long term? That depends on the holding period, which needs to be 12 months for long term consideration. The doner’s holding period is added to the donee’s and apparently begins when the crop is planted. As a practical matter, if the grain is sold in April or May it should be eligible for long term capital gains treatment. Otherwise, if a harvest date were to be used as the beginning of the holding period, it would generally not be practical to hold grain until the next fall to satisfy the 12 month long-term holding period requirement.


5. Pay your children for work. A dependant child’s income tax deduction is limited to the higher of $850 or earned income plus $300 up to the standard deduction ($5350 for 2007). Therefore, pay your child for working to increase the child’s income tax deductions. Remember, a person may hire their children and until the child is 18 are not required to pay self-employment tax. Furthermore, the labor expense is a Schedule F deduction. Even if the child earns more than the standard deduction, their tax rate may still be lower than the parent’s. Wages are not subject to the kiddie tax rules.

Start Out 2008 by Organizing Your Farm Financial Records

With the new year upon us, now is a great time to make those yearly resolutions to get the farm financial records organized. We all make resolutions every year that fall by the wayside. For example, I still have a closet full of clothes that don’t fit and a junk drawer that is overflowing! However, resolving to organize your farm financial recordkeeping can be very helpful to your business and save you time in the future. Organized financial records provide the information needed to develop a balance sheet as well as other important financial measures that help gauge the financial health of your farm business. Contrary to popular belief, financial records are not just for tax purposes, and recordkeeping is important rather the farm business is large or small.

There are many excuses that have to be set aside as you are getting started. Thoughts like, “It’s too hard” or “I don’t have time” may be running through your mind. It will take some time and effort, but things worth doing often seem difficult in the beginning. Tackle the file cabinet, shoe box or your current recordkeeping system in small steps. An example would be to start with a particular enterprise and get that organized. Choosing a recordkeeping system that works for you is another important starting point. Computerized records may be an option for some, while others may use written records. If you are interested in getting started with the Quicken computer program, a useful guide can be found at http://ohioline.osu.edu/b931/. No matter your system, it will take some time to get it organized and in a form that works for you, so patience is also vital to this process.

Another common excuse for not spending time on farm paperwork is, “I’m not an accountant.” Most farmers I know are productionists and feel less comfortable with the recordkeeping end of the business. That means a competent accountant is important to most farm businesses. However, you will feel more comfortable with time and experience. Spending time with your accountant and setting up an organizational system that helps produce the numbers needed at tax time will make life less stressful for both you and your accountant, as well as assist with management of the farm business.

Increasing your comfort level and knowledge of the numbers that drive both the production and financial ends of your farm business, will help you make farm decisions beyond tax planning. Decisions such as adding a son or daughter to the business or determining if there is a need for off-farm employment can be aided by having complete financial records to review. Estate planning is another activity requiring sound financial records.

One last step to organization of the farm financials is to set-up a regular place to work, and the kitchen table doesn’t count! Dedicated office space and file space makes organizing paperwork easier. Some things to think about including in your office space include: computer, printer/fax/copier, financial software and spreadsheets, phone and internet access, filing space and most importantly work space to organize paperwork (or as in our farm office, the “to be filed” piles)!

Once the information is organized, it will be easier to pull out the needed numbers to develop financial statements that provide a picture of where the farm stands financially. Annual development of financial statements will be the yardstick by which the progress toward financial goals of both the farm and the family can be measured. Lenders are also interested in reviewing the farm business’s financial statements before extending credit.

One important financial statement to the farm manager and also one lenders will ask for each year is a balance sheet. The balance sheet is a snapshot of how funds are invested in the farm business (assets) and the financing methods used to purchase such assets (liabilities) at any one given point in time. Assets include items such as: fertilizer and supplies, livestock, stored grain, machinery, land, and cash. Liabilities are unpaid accounts, notes and mortgages. The farm’s net worth or equity is determined by the value of total assets less total liabilities.

Farm managers can use the comparison of balance sheets over several years to determine if the farm’s net worth is increasing or decreasing. Also, the comparison between total current assets to total noncurrent assets will help you determine if too much or too little capital is tied up in permanent investments. If your balance reflects primarily noncurrent assets, your business will be less flexible than one with sufficient current assets. Some flexibility is good for the business. These are just a couple of examples of how a balance sheet can be useful to your farm business.

The balance sheet is typically developed at the same time each year. What better time to put together your farm’s balance than at the start of a new year? Best wishes for a happy, prosperous and financially organized new year!

Ohio Minimum Wage Increase

The Ohio Department of Commerce’s Division of Labor & Worker Safety is reminding Ohioans that the state’s minimum wage for most employees will increase on January 1, 2008, to $7.00 per hour for non-tipped employees and to $3.50 per hour for tipped employees, plus tips.

Ohio’s current minimum wage is $6.85 per hour for non-tipped employees and $3.43 per hour for tipped employees, plus tips.

On January 1, 2008, the increased state minimum wage will apply to employers that annually gross more than $255,000. Currently, Ohio’s minimum wage applies to employers that gross more than $250,000 per year.

The constitutional amendment passed by voters in November 2006 states that Ohio’s minimum wage shall increase on January 1 of each year by the rate of inflation.

The Ohio minimum wage has a different scale for:

* 14- and 15-year olds.
* Employees who work for employers that currently gross $250,000 and less per year, or $255,000 and less annually after January 1, 2008.

For those workers, the state minimum wage is the same as the federal minimum wage. That rate is currently set at $5.85 per hour and will increase to $6.55 on July 24, 2008.

Information on Ohio’s minimum wage as of January 1, 2008, is available at www.com.state.oh.us/laws/pub/MinimumWage.pdf

A Summary of 2006 Ohio Farm Income

Cash receipts during 2006, from Ohio’s livestock, livestock products, and crops totaled $5.48 billion , 6.3 percent above last year’s $5.15 billion. Cash receipts from all crops in 2006 were up 11.1 percent from 2005. Cash receipts from livestock in 2006 were 0.9 percent below the 2005 cash receipts from livestock.


The 2006 value of cash receipts for crops is $3.45 billion. Based on the preliminary estimates the 2006 crops cash receipts breaks the record set in 1997 representing an 11.0 percent increase from 2005 and a 2.2 percent increase over the record of $3.37 billion in 1997. The percentage of total farm marketings attributable to crops in 2006 was 62.9 percent, 2.7 percentage points above the revised 2005 data.


The 2006 cash receipts for livestock and livestock products totaled $2.03 billion. This is the third highest total of all time, and is 0.9 percent lower than last year and 2.0 percent below the $2.07 billion record set in 2004. The percentage of total farm marketings from livestock and livestock products is 37.1 percent, 2.7 percentage points below the revised 2005 cash receipts.


Government payments totaled $442 million, 28.2 percent below last year’s $615 million. This represents 7.5 percent of total cash receipts including government payments. Ohio agriculture contributed a net value added of $2.73 billion to the National economy in 2006, up from $2.58 billion in 2005 but below the $2.77 billion of 2004. The final agricultural sector output, at $6.83 billion, is up 6.0 percent from 2005. Purchased inputs totaled $3.24 billion, down 0.27 percent from last year. Capital consumption is at $986.1 million up 4.2 percent from 2005, while payments to stakeholders at $1.11 billion are down 1.5 percent.


To view the complete report, access the following website:
http://aede.osu.edu/resources/docs/pdf/YYWNO9FM-LYNQ-0GM9-SSXWAEOUB9HU9TE4.pdf

Ohio Ag Manager: 2008 User Survey

The Ohio Ag Manager was started in July, 2004 to provide timely farm management information to farmers, agribusinesses and industry personnel. We hope that each of our readers have found the management articles useful. Today, we would like to invite you to complete a short survey to provide feedback on the Ohio Ag Manager newsletter. This survey is being conducted to help the Ohio Ag Manager Team better understand how the newsletter and web site are being used. Information learned from this survey will be used to help improve our farm management outreach.

Please note that individual survey results will not be shared with others, only collective results will be published. Your participation is voluntary. You may skip any questions which you are uncomfortable answering. All email subscribers to the newsletter received a separate email invitation last week. If you have already responded to this invitation, you do not need to submit another survey.

This survey should take approximately 10 minutes to complete. Thank you for your timely and valuable input. Click here to respond to this survey:
http://www.zoomerang.com/survey.zgi?p=WEB227AMYYPFL5

Results from the survey will be posted in a future issue of the Ohio Ag Manager newsletter. Contact David Marrison at marrison.2@osu.edu or 440-576-9008 for more information.

When is Flexible Cash Rent Treated as Fixed Cash Rent by Farm Services Agency

There has been much confusion about whether a flexible cash rent provision in a cash rental arrangement caused the owner to be considered “materially participating” in the risk and reward of the farm business. With the increased grain prices and subsequent increases in rental rates, farmers and land owners might want to consider a flexible cash rental arrangement. These types of arrangement allow the land owner to increase rental payments if yield and/or prices are exceptional while protecting the farmer if they are not. For more information go to
http://ohioline.osu.edu/fr-fact/0002.html.


This past summer the USDA issued guidelines that clarified their position on the issue of flexible cash rents and material participation. If the flexible cash lease terms are dependent on the production of the farmland, then USDA considers the landowner to be materially participating and the farm program payment would need to be divided between the tenant and the landowner. However, if the rental payment is based on a set amount of production tied to a future market value, not associated with the farm’s specific production then program regulations provide that this type of arrangement shall be considered a cash-lease situation because the rental payment is not contingent on the actual production of the crop or the crop proceeds.


Example:
A lease states, “The annual rental payment is $150 per acre, but in the event that average corn yield for the county exceeds 170 bushels and/or the average cash price at the local elevator for the months of September, October, and November exceeds $3 per bushel, the rent per acre shall be $175 per acre.” This lease would be considered a cash lease because the bonus payment is not tied to a specific yield on the farm nor the price received for that specific production. In cash-lease situations, the tenant is eligible to receive 100 percent of the DCP payments for the applicable farm, provided all other program eligibility requirements are met.

Additional examples of flexible cash leases along with the classification into cash rent arrangement or share crop arrangement can be found in the USDA, FSA Notice DCP-172 posted to the Ohio Ag Manager Website at:

http://ohioagmanager.osu.edu/resources/dcp_172.pdf.

Since the official county average yield is typically not know until the spring following harvest, one strategy might be to base the 2008 cash rental rate on the 2007 price and yield levels. Using this strategy allow the official USDA NASS county yield to be known and allows the rent to be aligned with productivity and market prices the farmer received this year.

The burden, to decide if the flexible cash rental arrangement is to be treated as a cash lease or share crop lease, falls on the local Farm Services Agency (FSA) County Committee. However, the responsibility to communicate clearly the provisions of the rental arrangement falls on the tenant farmer. There are a few methods that are currently acceptable. The easiest is to bring a signed copy of the written farm lease containing the lease provisions to be kept on file at FSA for the length of the lease. If there is no written lease, then farmers will need to create a form that includes the provisions of the rental arrangement specifically the method of payment determination. Farmers might check with their local FSA office to see if additional information such as FSA farm number and acres would be beneficial in improving accuracy. The form should be signed by the land owner and tenant and submitted to your local FSA office.

The Farm Service Agency (FSA) and the Risk Management Agency (RMA) are reopening and extending the comment period for the advance notice of proposed rulemaking, Cash and Share Lease Provisions for Future Farm Programs. The original comment period closed November 27, 2007. FSA and RMA are reopening and extending it for 30 days from the date of this notice. This extension responds to requests from the public to provide more time to comment. This Federal Register Rules Proposal has also been posted to the OAM Website at http://ohioagmanager.osu.edu/resources/dcp_0802.pdf. Interested parties have until January 17, 2008 to submit comments. USDA invites you to submit comments on this notice. In your comment, include the volume, date, and page number of this issue of the Federal Register. You may submit comments by any of the following methods:

E-Mail: Salomon.Ramirez@wdc.usda.gov.
Mail: Director, Production, Emergencies, & Compliance Division,
Farm Service Agency (FSA), United States Department of Agriculture
(USDA), STOP 0517, 1400 Independence Avenue, SW., Washington, DC 20250-0517.
Fax: Submit comments by facsimile transmission to (202) 690-2130.

Hogs and Pigs Report Analysis

Losses Mount and Inventories Grow for Pork Producers. The USDA released the December Hogs and Pigs report on the 27th and estimated the inventory of all hogs to be 65.1 million head, up 4.2 percent from a year earlier. The market hog inventory was up 4.5 percent while the breeding herd increased 1.1 percent indicating that herd expansion is still underway. The USDA reported numbers were higher than the pre-report market hogs estimates of +3.5 percent and equal to the pre-report breeding herd estimate. The report will likely be seen as neutral to bearish by the trade. The Iowa State University Estimated Returns to Farrow-to-Finish operations reported losses of nearly $29/head on November sales. Losses on hogs sold in December are expected to be nearly as large. Given corn and soybean meal prices predicted for 2008, cost of production for farrow-to-finish operations is projected to be near $70/cwt carcass weight or in the mid-$50/cwt live weight. Hog prices are forecast to be below breakeven throughout the year with the exception of possible profits on the summer highs. Thus, 2008 is shaping up to be a negative return year for pork producers.

For the complete report summary by John Lawrence go to: http://www.econ.iastate.edu/faculty/lawrence/IFO122707.pdf

Professional Marketer Program

Do you spend six months of the year shopping around for the best price on seed, fertilizer, and chemicals? Are you one to drive up to the grain probe and tell the operator you are selling? What are futures and options? Can you actually make money by purchasing crop insurance? What does weather have to do with the price you receive for your crop? If this sounds like you, or you have asked these questions, then the exciting in-depth Professional Marketer Program is your answer.

The Professional Marketer Program features 48 hours of intensive market training from the top marketing consultants in the US as well as the best researchers from The Ohio State University. Topics that will be covered in the Professional Marketer include: budgets/breakevens, futures contract seasonality, futures/options and basis, commodity pricing strategies, market technical analysis, crop insurance, livestock marketing, contracts, weather effect on markets, and the impact of ethanol on grain markets. In addition to the lectures there will be several hands on activities that will guide you through the process of developing a personal marketing plan.

The program consists of three two-day sessions held on January 31st and February 1st, February 11th and 13th, and February 28th and 29th. Each day will run from 8:00 AM to 4:30 PM at the Fayette County Agriculture Service Center in Wilmington, Ohio. The cost of the program is $150 per participant, and includes a notebook of marketing factsheets and lecture handouts. Lunch and refreshments will be provided throughout the program by local businesses. Registrations are now being accepted. For details about the course and/or a registration form, contact the Clinton County Extension office at 937-382.0901 or go online at clinton.osu.edu and print off the information and registration form.