Business records vital to making sound business decisions
MADISON – Good farm records are more than just a way to figure tax deductions at the end of the year.
Business consultant Gary Sipiorski has more than 30 years of experience working with farmers on managing their farm records. He says these records are important for income tax planning but they are also vital for making sound business decisions on the farm.
Sipiorski, who owns Gary Sipiorski Consulting, LLC, spoke on tax preparation issues and concerns during Heart of the Farm-Women in Agriculture online Coffee Chats series. The topic is timely as farmers’ accountants are busy preparing their income tax papers.
While January may not seem like the time of year to be looking at these income and expense reports with many thinking its too late to do any income tax strategizing. However, Sipiorski says that careful record keeping and an analysis of those records is important for more than just determining tax deductions.
He also points out that sometimes trying to take too many expense deductions just to save a little money on income tax can actually be penny wise and pound foolish.
Tax planning, Sipiorski says, actually begins in October or November. Taking a look at the finances at that time will help in deciding if more deductions will be needed according to the year’s income. In a high income year it may be wise to do some prepaying of feed or fuel or buy an additional piece of equipment or defer some farm income until after the first of the year. In a low income year or in a year when there were more than usual farm expenses, spending additional money before the first of the year will not be a tax advantage.
He also points out that there are some ways to lower the income tax bill by considering things like paying into an IRA or paying a salary to children who work on the farm. Sometimes it might be appropriate for that money paid to children to be deposited in a college fund that offers tax benefits to parents or grandparents who do so and benefits to the children later when they pull that money out at the time they need it for school.
He also suggests paying a wage to the spouse working on the farm. It creates an expense and it also establishes a base for her future social security.
One other thing Sipiorski says farmers need to consider is how far off they are from retirement. He reminds them that their social security payments in the future will be based on 40 quarters of income. If a farmer avoids paying income tax completely it may mean little or no payment for social security ten years later.
He points out that this year about 42% of a farmer’s income actually came from the government. He said tax accountants keep up with the latest changes in tax laws and it will be important to consult with them about how much of those government payments will be taxed and which, if any, will not be subject to tax.
He stresses the importance of working with an accountant that specializes in farm taxes because tax rules for farmers are changing all the time and accountants that do not specialize in agriculture may not always be aware of changes.
While it is too late to make any changes on records to offset paying income tax, he says it is not too late to use those records along with other financial information to look at the over-all health of the business.
Taxes are a poor indicator of what your farm’s profitability is, Sipiorski said.
“You need to look at all of your assets on December 31 and all of your debt. Do a cash income statement. It looks at true depreciation, not just the depreciation as it was determined for taxes. Look at inventory changes and pre-paid items,” he said.
Sipiorski says producers can't run their farms farm based on tax reports.
“Along with looking at your financial status at the end of the year you need to do projections for next year,” he said.
He suggests looking at anticipated expenses and income and principal payments that will be made. This provides a true picture of the actual cost of production. From there it will then be possible to do marketing, based on the cost of producing the product.
“Don’t go into a marketing plan blindfolded,” he urges.
Once all the accurate numbers are in place do a business plan. That plan will look at areas where expenses can be lowered or income can be increased. He uses as an example a somatic cell count. He points out that a farmer has little control over the price paid for milk but improving somatic cell count is one way to get a little more.
“Look at three or four items on the income side to see if there is a way to increase that a little. Then look at the expense side to see if there are things that could be cut or lowered,” he recommends.
He notes that only 20% of today’s dairy producers actually do plans now but he says that number 'needs to increase'. "The future in farming of all kinds is going to be in knowing and managing your numbers,” he said.
Sipiorski suggests that buying large items just for income tax purposes too often comes back to bite farmers.
Finally, Sipiorski recommends sharing farm financial information with family members involved in helping on the farm, particularly if they will be the ones who will eventually take over. Even when the older generation owns the farm if the younger generation is working on the farm and making plans to eventually take over they should be in on financial and management decisions.
He suggests paying children for work performed on the farm and having children get their own checking account while still in school and even a credit or debit card. When payments are made on the card it is an opportunity to go over the monthly statement with them to help them understand how to manage these financial tools.