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September 28, 2017
KFMA Newsletters
well as, examining your crop profitability and the lease arrangements … cost of production and
the profitability of the crop and livestock … gross farm income to what the previous year’s tax return showed …
July 1, 2009
KFMA Newsletters
summarized.
In modeling credit risk, financial institutions
rely … including liquidity
ratios, profitability ratios, repayment capacity … BB, B, and CCC.
Using previous research, the probability …
September 30, 2019
KFMA Newsletters
resources and mitigating risks. From fall farm visits to … purpose is to increase farm profitability and sustainability. To do … founder of The Ranching for Profit School. There
were great …
June 1, 2016
KFMA Newsletters
out of a period of strong profitability in the agriculture sector … levels in 2014 (as well as the previous three- or four-year
period … with a
period of excellent profits. However, a closer look …
September 1, 2011
KFMA Newsletters
SC
WILL WHEAT BE PROFITABLE IN 2012?
The time has … other
crops have become more profitable alternatives.
There are … newsletter:
¾ Relative Profitability of Wheat
Enterprises Pg …
June 5, 2019
KFMA Newsletters
making and management of risk.
During 2018, the top 25 … so the ability to compare previous operation
practices to current … they need to be to make a profit. This is an excellent business …
December 20, 2017
KFMA Newsletters
KFMA Economist
How much profit do we need to keep the farm … roughly $0.80 expense and $0.20 profit. It is important to remember … labor. Therefore, the 20% profit margin goes to pay the operator …
October 15, 2018
KFMA Newsletters
The TCJA implements several significant—even structural—changes to the tax code. Included among these are the
elimination of personal exemptions, the substantial increase (near‐doubling) of standard deductions, an expansion of
the child tax credit (in amount, refundable portion, and income limits), creation of a new 20% “Qualified Business
Income” (QBI) deduction, and extensive changes in depreciation rules for farmers. Add in tax rate changes and many
more modifications not mentioned here and you can see why TCJA is being described as the most sweeping tax bill
passed by Congress in the last 30 years. (For a detailed dissection of TCJA, see “Tax Cuts and Jobs Act” by Mark Dikeman
in the March 2018 KFMA Newsletter.)
Before discussing the usage of some of the tools TCJA gives us to manage tax, a brief review of the concept of tax
management would be helpful. Put concisely, tax management should attempt to remove the upper income from very
good years, raise the troughs of very poor years, and align taxable income levels from year to year. Recall that not only
income tax should be managed, but also self‐employment tax (Social Security and Medicare taxes for self‐employed
individuals). Also remember that Social Security benefits are based upon the level of income on which self‐employment
taxes are paid over the working life of the individual. The 35 highest earning years (after accounting for inflation) are
used to determine the Social Security retirement‐related benefit. Intuitively, managing taxes in such a manner as to
simply reduce the net income reported on the tax return each year—and therefore the taxes paid—to as low a value as
possible is not an efficient tax management method. Net return after taxes is a much more important measure than
taxes paid. Also, as returns to agriculture are by nature volatile over time, it is vital to implement tax management with
a multi‐year mindset. That is, recognize that decisions made regarding the current income tax year directly affect future
years as well (and not just the following year, either). Tax management should be implemented with an eye toward
using the tax attributes you have available in the most efficient manner possible over multiple years. Manage your tax
tools and attributes (deductions, deferrals, flexible depreciation rules, prepays, etc.) like you would your farm assets.
Use them efficiently, do not waste them, and definitely do not allow the process of tax management to alter the
enterprises on your farm or ranch, or how you get things done.
In a lower income year, techniques employed to manage taxes are used very differently than they are in high income
years. Be prepared for a different mindset concerning tax management this year if you are working through a low
income 2018. Instead of advancing expenses into the current year, deferring income into the following year, or
aggressively electing to deduct additional depreciation from machinery purchases via Section 179, you may be
http://www.agmanager.info/kfma/ September 2018 E‐newsletter 3
employing the opposite techniques in order to prop up this year’s taxable income to a level similar to your recent past
levels. In low income years, avoiding an overall loss of the tax return (a net operating loss, or NOL) is nearly always
advisable, if possible. It is true that NOL’s can be carried forward and utilized in future years, but in doing so some
deductions are often lost and the NOL does not reduce any self‐employment tax in the years to which it is carried. Also,
attempting to fill the lower income tax brackets that you have traditionally filled is often beneficial. Remember, you will
not receive a wider bottom tax bracket next year just because you didn’t fill the current year’s bottom bracket.
One of the areas of significant change brought on by TCJA is that of depreciation. These changes result in most farm
machinery being depreciated in more of a frontloaded manner and sometimes even over a shorter depreciable life. (See
“New Depreciation Rules” by Amy Boline and Chelsea Fullerton in this issue of the KFMA newsletter for a complete
breakdown of these depreciation changes.) In a low‐income year, it is helpful to review significant repairs made and
supplies purchased to determine if any of these expenses should be capitalized instead of immediately deducted as
repairs or supplies. Doing so gives you options. You can accelerate all or a portion of the purchase via Section 179 if the
expense is necessary in the end to manage your tax situation, but you can instead leave the item on your depreciation
schedule, effectively pushing deductions (the depreciation expense not deducted in the current year) forward, when the
hope is they will be able to be better utilized. Importantly, the depreciation rule changes in TCJA make this a bit of an
easier decision. This is so because the depreciation—if not accelerated via Section 179 in the year of purchase—will be
deducted more rapidly now and possibly over fewer future tax years.
The TCJA also made drastic changes affecting machinery trades. (Again, see “New Depreciation Rules” by Boline and
Fullerton in this issue for more detail on this.) Due to these changes, one may be inclined to utilize Section 179 to the
extent that Schedule F is driven negative in order to offset the taxable gain now resulting from the machinery trade (a
result of the changes brought by TCJA). However, the act of driving Schedule F negative should be investigated
thoroughly before actually doing so. It is often beneficial to avoid a negative Schedule F, even if it means landing in a
higher tax bracket than you historically have. This is so for several potential reasons. First, if Schedule F is negative, the
last depreciation dollars expensed via Section 179 that made F negative did not reduce self‐employment tax at all. In
other words, once Schedule F drops to zero, you are already at the point where no self‐employment tax is paid (other
than a possible minimal elected amount). Those depreciation dollars that made Schedule F negative only reduced
income tax, not self‐employment tax. If, instead, less depreciation was deducted via Section 179 and Schedule F was not
reduced below zero, the ability to utilize those saved depreciation dollars in future years to (hopefully) reduce income
tax AND self‐employment tax could very well more than offset the added income tax burden from a higher tax bracket.
This is also where the new 20% “Qualified Business Income” (QBI) deduction comes into play. Without going into detail
on the mechanics of this deduction, by keeping Schedule F at least up to a net of zero (and not negative), the QBI
deduction would nearly always be greater than if F was negative. Additionally, the possible usage of Farm Income
Averaging if you end up in a higher tax bracket than you have recently adds potential value to this technique. Finally,
possible deductions for health insurance and certain retirement account contributions are tied to having a positive
Schedule F. All these tax attributes make it extremely important to scrutinize the decision to use Section 179 to drive
Schedule F negative, even if it is to offset now‐taxed gains arising from machinery trades that were not present under
previous tax law.
Managing income and self‐employment taxes requires the knowledge of all tax tools and attributes available to you and
seems to grow ever more complex. Also, the techniques employed in low income years are very different than those
utilized in high income years. The Tax Cuts and Jobs Act adds some tools that will help us in the area of tax
management, but also adds complexity to the process at the same time.
http://www.agmanager.info/kfma/ September 2018 E‐newsletter 4
Managing …
July 1, 2019
KFMA Newsletters
financial data from current and previous years can pay
handsomely … choose between Agricultural Risk Coverage (ARC) and Price … have a low
payment if the previous year was not as poor. In …
June 28, 2018
KFMA Newsletters
While the agriculture sector continues in a period of tight margins and cash flow constraints, the average net farm
income for KFMA member farms increased to $62,944 in 2017. There is much variability from farm to farm within the
data – differences in production (record yields for some, drought for others), differences in financial position and cost
structure, differences in decision making and management of risk. For summary reports of the KFMA data, please visit
www.agmanager.info/KFMA.
As we do each year, six KFMA economists and myself participated in a roundtable discussion of the new reports for the
May 10 edition of the “Agriculture Today” radio program, produced by K‐State Research and Extension. That discussion
is available online at http://agtodayksu.libsyn.com/report‐2017‐kansas‐net‐farm‐income‐agriculture‐today‐may‐10‐
2018. A follow up interview was completed and will air the final week of June. All Agricultural Economic related radio
show recordings are available at http://www.agmanager.info/news#ksrn‐radio‐interviews .
Keeping accurate records, and benchmarking with those records to identify strengths and weaknesses, will help you
focus your management efforts. Your records can help you identify and manage production costs, provide a starting
point for market planning, and give you the opportunity to understand your farm business better than anyone else. Your
investment of time into this process is important as you seek to manage the current environment successfully.
Kevin
Kansas …