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June 28, 2018
KFMA Newsletters
Net Income
http://www.agmanager.info/kfma/ June 2018 E‐newsletter 5
In the 1980’s the state saw this ratio climb higher (15.7 to 1) as farms struggled through that period’s farming crisis.
Following this period was a time of consistency as farmers rebuilt their operation under more stable conditions. As the
farm economy picked up in the 2000’s and early 2010’s, net farm income jumped significantly. While this additional
income provided farmers the opportunity to service their farm debt, many chose instead to grow their operation with
borrowed capital, thinking net income levels would remain high for a sustainable period, causing debt to jump
proportionally. So, when the state’s farm economy took its most recent downturn beginning in 2014‐15, farms were
already carrying a sizable debt load. When you look at the data graphically (previous page), debt sharply jumped as
farms took out a significant amount of loans on top of their other liabilities to make up for lack of income.
The debt to net income ratio currently sits around 10.3, an improvement from 2016 (13.04), as farm income has
rebounded a little. Visually the numbers tell a deeper story as it appears debt has not yet leveled off. If this trend
continues, farms around the state may struggle to meet debt obligations in the coming years as the spread between net
income and debt is the largest it’s been since the 1980’s. This spread will hamper any future rebuilding projects farms
undertake. The question many farms are now facing is, when will net income reach a level of capacity to manage the
current level of debt outstanding? Hopefully the answer is sooner rather than later. Until then, farms should continue to
evaluate their management records to best help them navigate through this tough economic time.
Economist …
July 1, 2019
KFMA Newsletters
financial data from current and previous years can pay
handsomely … have a low
payment if the previous year was not as poor. In … https://www.agmanager.info/events/k-state-2018-farm-bill-meetings …
July 27, 2012
Macro and Global Economic Perspectives
1. Identify the issues/events.
2. How likely will this … How likely will this issue/event occur?
3. If thisevent occurred, by how much will … probabilities and impacts of certain events.
– Only focused on SINGLE …
February 6, 2017
inflation-adjusted terms than previous boom period
9% lower than … 30%)
27.0%
27.0%
6.1%
Kansas Farm Economy
Previous analysis has examined only … Economist in August, 2014. She previously worked for four years as …
June 5, 2019
KFMA Newsletters
so the ability to compare previous operation
practices to current … her family, track and field events, and playing outdoors. Chelsea … the 5,000 and 10,000-meter events while studying Business Economics …
September 30, 2019
KFMA Newsletters
Upcoming Agricultural Economics Events
• October - December 2019 … o https://agmanager.info/events/kansas-income-tax-institute … https://www.agmanager.info/events/kansas-crop-insurance-workshop …
September 15, 2016
KFMA Newsletters
back and offsets income previously taxed in prior years. The … to a Roth IRA is a taxable event. The
advantage of conversion … only a few S-corps that were previously operated as a C-corp.
…
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
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