Author: Kevin Burkett

Several articles have been written for Southern Ag Today on how farms can manage their tax obligations. This time of year, farm management specialists begin to receive questions of all kinds regarding taxes, especially for farms that try to meet the March 1 filing deadline available for qualifying farmers. Tax management is only one part of managing a farm but can be crucial. We wanted to relay a handful of resources that producers and other agribusiness specialists may find useful this time of year.

The Internal Revenue Service (IRS) website, www.IRS.gov, is often the first and best place to begin looking for information. The site contains a vast amount of information and resources, which can also make it a bit daunting. You can find copies of individual tax forms, form instructions, news updates, and educational resources such as Publication 225 – Farmers Tax Guide. The Interactive Tax Assistant (ITA) is designed to answer many basic questions that a taxpayer may have. It includes basic tax return information like filing status, dependents, due dates, and so on, but it can also answer questions regarding tax deductions, credits, income, and payment-related questions. Typically, the assistant will ask questions related to your situation that will help determine which rules may impact you. 

The other section of the IRS website that farm owners may find helpful is the Small Business Self-Employed Tax Center. This section provides information for self-employed individuals with Schedule C (small business) and/or Schedule F (farming) activities relevant for most farm owners. One of the best sections is the IRS Video Portal and Small Business Virtual Tax Workshop, which includes short video explanations on various tax rules. Other tools within the IRS website help taxpayers and preparers, including free filing options, year-to-date withholding amounts, payment options, and finding transcripts of a taxpayer’s account.

Outside of the IRS, there are several other sources of information. The USDA website, www.farmers.gov, has a section specifically on tax education. On this website, you will find webinars on timely topics, frequently asked questions regarding farm taxation, and other resources to help farmers (especially newer farmers) navigate some of these issues. 

Another site, www.RuralTax.org, is maintained by land-grant university professionals throughout the country who work in farm management and tax education. There are dozens of articles available on newer, timely topics, as well as archived information and a small farms tax guide producers may find helpful. Other sources of local help include lenders, fellow producers, your local Extension office, and certainly a designated tax professional. If you need to find a tax preparer, there are guides available through the IRS and Rural Tax. This article is not intended as professional tax advice but general knowledge for agricultural businesses who may benefit by having a bit more information and resources at their disposal. We encourage you to work with a professional who knows you and your farm and can best advise you on your situation.

Burkett, Kevin. “Death and …” Southern Ag Today 5(10.1). March 3, 2025. Permalink

This time of year is busy as summer comes to a close, children have returned to school, harvest is in full swing, and we anticipate busy days in the fall and winter months. Another item for your to-do list is meeting with your tax professional. This appointment is often scheduled for the early part of the year, but there can be advantages to carving out some time now. 

One of the main advantages is that even though a large majority of the year has passed, there is opportunity for tax planning and management relative to where things currently stand. This allows you (or you and the preparer together) to determine what you would like to see happen by the end of the year. 

If it is a lower-income year so far, consider making additional sales to generate revenue when your income tax rate is lower. This could include making sales of business assets you are considering disposing of as the depreciation recapture or possible capital gains treatment rates could be lower. For expenses, we often think about taking as much expense as possible, but if income is already low, it may be advantageous to save those expenses for another time period. This may mean using depreciation sparingly, not pre-paying farm expenses, or otherwise cutting back on discretionary farm expenditures.

In times of high income, the opposite strategies would be appropriate. We may hold off on making additional sales during the year to slow down revenue recognition. This could include installment sales, deferred payment contracts, deferring any disaster payments, and holding off on selling any assets from the business. To lower our taxable income, we may look to recognize additional expenses through depreciation, pre-paid inputs, or otherwise try to find ways to re-invest in the business or take personal deductions. If high income still seems likely, Schedule J income averaging may be another tax planning opportunity for the farm.

A tax preparer may also clean up your business’ accounting records. Generally, late fall would be a slower time for CPA and accounting firms, which may provide focused attention on your operation when things are not so hectic. Again, getting a clear picture of revenues and expenses at this stage can help with decision-making, tax or otherwise. For a preparer, clients who are easy to work with and make the business run smoother are going to receive better outcomes and better service. Likely, you have ideas or plans between now and the end of the year. Sharing those with your tax advisor can alert you to any possible negative tax outcomes. Too often, preparers get a call after the fact, making the accounting/tax work more difficult and more expensive for you. 

Each year will be unique, with new challenges and new opportunities.  Spending a bit more time communicating with your preparer, especially before year-end, may pay dividends for all involved.  

Burkett, Kevin. “Preparing For Your Preparer.” Southern Ag Today 4(41.1). October 7, 2024. Permalink

It may seem that barely covering expenses with little positive net farm income means a business is “treading water.” Ideally, a farm would generate revenues that exceed total expenses each year and have cash and other resources to reinvest into the business. However, agriculture can be highly variable from farm to farm and year to year. Reaching incremental financial goals can help producers hit economic targets and minimize risk. To think of financial well-being as a ladder, the bottom rung is financial loss, and the highest rung is maximum profitability. Each rung that is attained is a higher position and further away from financial harm. 

It may not be flashy, but a farm that can generate revenues to break-even and pay down debts has indeed climbed several rungs on the financial ladder. It may not afford much extra cash or the ability to expand the operation, but the business is still making progress. To think of the equation total farm assets – total farm liabilities = farm equity, covering all variable and fixed expenses means the farms equity is continuing to grow. Over time, the owner(s) continues to own more of the business until an ownership change or business dissolution. Either way the owner has accrued increased net worth over time. 

Of course, there are other items that impact total farm assets or total farm liabilities. Asset values can change from year to year. In some cases, they could be quite volatile depending on the valuation method. For discussion, we’ll assume an adjusted cost basis with no major adjustments. Fixed asset accounts can decrease because of depreciation, but we assume this expense is a fixed cost of the business. Liabilities are useful and, in some cases, necessary, but a farm taking on unnecessary liabilities can tip the scales away from the owner, allowing creditors to own more of the operation. Liabilities such as bank loans allow the business to leverage resources to increase production, profitability, efficiency, and other measures. If the farm incurs aliability but the increase in assets is greater than the liability + interest over time, then it will add to the farms’ equity. It’s not always possible to understand the impact of a decision right away, it may take several cycles before seeing the resulting change in farm equity. For an asset purchase with a loan, the initial impact on equity will likely be zero. $100,000 farm asset increase – $100,000 farm liability increase = $0 change in farm equity. However, the influx of cash resulting from the asset’s productivity, allowing the business to cover the depreciation of the item, interest, and debt payments, can have a positive impact on farm equity.

It is important to consider context, too. A farm with successive losses but is now at break-even would seem to be making progress. A farm that has had big years but is now at break-even could signal a downward trend, or it could be merely a speedbump resulting in a short-term modest return.  In general, a business that is paying down debts is contributing positively to farm equity and adds financial resiliency to the business. Should the operation need to borrow again in the future, end up with a financial loss one year, or eventually sell out, the farm will be in better financial position because of the previous farm equity contributions made. 

Burkett, Kevin. “Building Equity.” Southern Ag Today 4(23.3). June 5, 2024. Permalink.

An important financial consideration for any business is the costs they incur during the year. Ultimately, it affects the amount of profit or loss that will be realized by the business. There are certain “costs of doing business” known as overhead. These are things that an organization will have to pay for but are not designated to any one activity. An example might be property taxes. The taxes are owed and necessary for the business to maintain its property and obligations but typically could not be solely attributable to one activity like raising livestock or producing a crop. Usually, the costs are known but sometimes take a backseat to direct input costs when it comes to evaluation. For a true look at profitability, overhead must be factored in. The good thing is it may present opportunities for the business to cut down on its overall spending. 

Overhead expenses occur once a year, several times a year, or even more sporadically. The first step is making sure they are logged in the books and records of the business. They can be reviewed to make sure they are necessary, reasonable, and have ultimately been paid. Common overhead expenses include insurance, taxes, depreciation, utilities, office expenses, and salaries. This list may not be all-encompassing, and it is important to mention that any personal expenditures for these items are not included in farm profitability.  Often, the business will have a bill or receipt that includes the amount. For others, it may be more of a calculation like depreciation or extracting the business use of utilities. The main goal is to account for all “costs of doing business”. 

Determining total overhead is the first step. Once that has been completed, a producer may want to allocate the overhead costs to their different enterprises. This is not necessarily a precise calculation but is up to the owner or business manager. Some may approach it from a revenue perspective. For instance, if cotton is 50% of total farm revenue, then 50% of overhead will be allocated to it. Another method may be according to labor hours. If the time spent on a particular crop is 50% of the total hours worked (by everyone on the farm), then 50% of the overhead will be allocated to that crop. Product mix and profit margins will be different on each farm, so it is up to them to determine what is most appropriate. 

In reviewing the information, a farm may realize that there are opportunities to cut costs. While not advocating for a farm to run without its necessary expenditures, overhead may be where some costs can be scrutinized. Checking insurance rates every couple of years can provide the same coverage at a lower cost from a different carrier. Computer software and other subscription services may have promotions or discounts for being a continued customer. Perhaps there are subscription services that are going unused and could be cut out completely. If computer equipment is upgraded every couple of years, extending that out an additional year or two can defer the expense. Often, farmers may attend trade shows or conferences to pick up new information. Sometimes, the conference host or other farm organizations will provide a cost share for travel or reimbursement for the conference. 

The above are only a few ideas of cutting overhead costs. Individually, the costs may not account for much, but an effort to manage overhead can provide significant combined savings in the long run. If a farm is operating fairly lean from an input perspective, overhead may provide other opportunities to affect profitability. At the end of the day, revenues minus expenses determines net returns. Which expenses are reduced does not matter for the overall equation.

Burkett, Kevin. “Look Out Overhead.” Southern Ag Today 3(52.3). December 27, 2023. Permalink