Southern Ag Today

Category: Farm Management

  • What to Bring to Your Accountant

    What to Bring to Your Accountant

    Financial record keeping is an important aspect of farming. Tracking how your farm is doing over time can help you diagnose any potential issues that may arise. Having an accountant can help you understand how your farm is doing financially and prepare your tax returns. To save time and money, it is essential to provide your accountant with accurate records that reflect what actually happened on your farm. Mislabeling an income or expense can lead to incorrect categorization that will take your accountant more time to correct and/or could create a higher tax bill. 

    You know your farm better than your accountant, and the more detailed records you have on your farm, the better they are going to be able to help you prepare your financial documents. The following are some tips to make your records more organized for your accountant:

    1. Keep business and personal expenses separate.
      • If the farm bank account is used for a personal expense, make a note of it.
      • In a sole proprietorship or general partnership, what is personal and business use might be unclear, so it is useful to track all income and expenses. 
      • In a limited partnership, limited liability company (LLC), or corporation, you must use separate accounts for personal and business use. 
    2. Record information on each income and expense transaction.
      • Each income transaction should have the following: Date, Reference Number, Purchaser, Amount Deposited, and the Type of Income.
      • Each expense transaction should have the following: Date, Check/Reference Number, Payee, Amount Paid, and the Type of Expense.
      • Write legibly on checks and leave a note in the memo line as to the purpose of a purchase.
        • Clear and detailed information on each check will help you and your accountant decide how to categorize checks for tax or management purposes.
    3. Have the principal and interest payment figures separated for any fixed asset loans.
      • This can be found on the last statement of the year or a 1099 from the entity you are paying.
    4. For any contract laborer who is paid more than $600 within the tax year or any employee for whom you pay payroll taxes, your accountant will need that person’s social security number and address to file a 1099 or W-2 form for those workers on your behalf.
      • Consult your accountant for information on paying the proper payroll taxes for any farm worker.

    This list is just a starting point for what you need to think about before visiting your accountant. Again, you know your farm better than your accountant, so the more information you can bring to your accountant, the better they will be able to help you. This will save both your accountant’s time and your money. It will also allow you to get a better understanding of how your farm is doing financially. In both good and tough years, it is important to know your full financial situation so that you can plan accordingly. 

    Mills, Brian E., Kitty Charlton, and Kevin Kim. “What to Bring to Your Accountant.” Southern Ag Today 4(53.1). December 30, 2024. Permalink

  • Business Structure Basics

    Business Structure Basics

    Farm business structure is an important aspect of farming, though it can often be overlooked. Properly structuring your farm operation can lead to management, financial, and legal advantages. It is important to consider your own financial goals before choosing a structure for your farming operation.

    Sole proprietorships are businesses owned by one individual. They are the least complex business structure to start; if you have done nothing to start a business for your farm, then you are operating as a sole proprietorship by default.  While sole proprietorships are low maintenance, there are some disadvantages. Since the business and individual are legally one entity, the individual is responsible for all obligations of the business, which puts personal assets at risk. Sole proprietorships are best suited for small farms without many assets at risk and are also best if one wants full decision-making authority for the operation. To legally add another decision-maker to the operation, while still operating similarly to a sole proprietorship, one should consider starting a partnership.  

    Partnerships are like sole proprietorships but allow for multiple owners. Partnerships combine the resources of multiple people, which can make operating or obtaining credit easier. Certain partnerships allow for silent partners, who contribute resources but do not make operational decisions. Partnerships have no legal separation between the farm and owners, meaning each partner’s personal assets are at risk. Additionally, there is risk in working with others; if one partner does not uphold their end of the business, the remaining partners will be responsible. Partnerships are best for farmers that currently do or want to do business with others, perhaps a spouse or family member. Partnerships also help with farm transition and estate planning. If one wishes to pass their share of the partnership to their child after death, they should detail this in the partnership agreement to avoid a dispute that could cause the partnership to dissolve. They are best for small or beginning farmers, or farms with minimal assets at risk. 

    Limited Liability Companies (LLCs) limit the personal liability of members while offering an easier establishment than corporations; LLCs have a structure similar to partnerships and sole proprietorships. The main benefit of establishing an LLC is protecting personal assets if the farm experiences financial or legal issues. LLCs have one or multiple owners. LLCs are more appropriate for farmers interested in limiting their personal liability while maintaining a simple farm business structure. An LLC structure could be beneficial if the farm is high-risk and the members want to protect their personal assets. 

    Corporations are legal entities that are legally separated from their owners. A disadvantage of corporations is complex establishment and management. Corporations are typically more regulated than other structures, creating additional reporting. Corporations are good for large, high-risk businesses. Since the individual and the business are separate legal entities, there is no risk of losing personal assets if the corporation fails. This could be beneficial for a large-scale farm or one with a high chance of becoming delinquent on financing.  Businesses low on capital that need to raise funds could benefit from a corporation because it allows for capital to be generated from either debt or a variety of owner investment.

    While this article is not an exhaustive guide to business structures; it serves as a brief overview of each structure to help producers make informed decisions on the best business structure for their farming enterprise. It is important to consult with legal and tax professionals to evaluate the detailed advantages and disadvantages of business structure options. 

    References

    Backman, Carrie. (2015). Business Structure for Small Farms: A Quick Guide. Retrieved on March 11, 2024, fromhttps://s3.wp.wsu.edu/uploads/sites/2073/2019/01/Business-Structure-For-Small-Farms_A-Quick-Guide.pdf

    Childs, Milton. (2004). Using Family Limited Partnerships for Estate Planning. Marquette Elder’s Advisor: Vol. 5: Iss. 2, Article 5. https://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=1104&context=elders

    Internal Revenue Service. (2024). Forms, Instructions & Publications. Retrieved on March 15, 2024, from https://www.irs.gov/forms-instructions

    Tax Policy Center. (n.d.). What are pass-through businesses? Retrieved on March 13, 2024, from https://www.taxpolicycenter.org/briefing-book/what-are-pass-through-businesses

    U.S. Small Business Administration. (n.d.). Choose your business structure. Retrieved on March 13, 2024, from https://www.sba.gov/business-guide/launch-your-business/choose-business-structure#id-compare-business-structure s

    Myer, IvaNelle, and Ryan Loy. “Business Structure Basics.” Southern Ag Today 4(52.1). December 23, 2024. Permalink

  • H-2A Wage Violations Against Workers Hired by Farm Labor Contractors

    H-2A Wage Violations Against Workers Hired by Farm Labor Contractors

    This article is a companion to the article titled: Hiring H-2A Workers through
    Farm Labor Contracts     published in Southern Ag Today on July 24, 2024.

    The role of Farm Labor Contractors (FLCs) in hiring foreign workers under the H-2A Temporary Guest Foreign Farm Worker Visa Program has grown considerably in recent years.  FLCs’ share in the annual total employment of H-2A workers has grown from 17% in 2007 to 44 % in 2022 (Castillo, Martin, and Rutledge, 2022).  FLCs’ increasing involvement in H-2A hiring coincides with the program’s rapid growth in patronage in recent years.  Between 2017 and 2022, H-2A labor certifications grew by 64.7% (American Immigration Council, 2024).

    There are logical grounds for the relevance of the FLC alternative under the H-2A program.  Compared to potential individual farmer employers of H-2A workers, FLCs have extensive social and business networks in foreign labor markets. FLCs’ greater familiarity and good connections with foreign workers enable them to lure and recruit residents, especially those in rural communities overseas, to consider H-2A employment in the U.S. that offers potential significant economic relief to their families. 

    A cursory review of wage violation data compiled by the Department of Labor’s Wage and Hour Division (WHD),[1] however, indicates the consistent recurrence of FLC-hired H-2A workers in the wage violation cases apprehended by the agency.  According to the wage violation data summary in Table 1, H-2A-related wage violations account for 33.86% (2016) to 73.44% (2022) in terms of number of affected workers in the agricultural sector during the period 2016 to 2023.  In terms of nominal back wages, the program’s share ranges from 29.96% (2016) to 69.70% (2021).  Within the H-2A program, FLC employment’s share in the number of workers with back wages ranges from 27.30% (2022) to 35.03% (2020), while its back wages account for about 14.63% (2022) to 36.42% (2018) of all H-2A back wages.  

    Figure 1 presents a comparison of the extent of FLC and non-FLC wage violation cases.  The trend lines indicate that more workers are usually affected in FLC cases (annual counts of 34 to 56 per case) than in non-FLC cases (11 to 36 workers per case).  Based on the bar plots, FLC cases involve larger nominal wage violations than non-FLC cases in most years analyzed.  

    Figure 1.  H-2A Wage Violations Associated with Farm Labor Contracting, 2016-2023

    Source:  Department of Labor, Wage and Hour Division

    Anecdotal evidence collected from various workers’ accounts and popular media coverage expose at least two types of H-2A wage violations associated with the FLC hiring scheme: petition padding (requesting more workers than needed) and collection of illegal recruitment fees (usually at exorbitant rates) (Grinspan, 2023; Vasquez, 2023; CDM, 2020).  Consequently, some foreign workers begin their work contracts already heavy in debt (because of illegal recruitment fees); some end up receiving less than the “promised” wages; while others find themselves either underemployed or unemployed (when FLCs could not place them in their original work destinations because labor petition padding practices).

    Policymakers must revisit and consider modifying existing regulations on FLCs’ involvement in the H-2A program. In addition to imposing stiffer sanctions and penalties on violations, policies must also launch more effective employer compliance audits. To accomplish this, the government would have to seriously consider expanding its current funding and resource allocation to WHD.  Currently, WHD’s case investigations capture only about 1% of all agricultural employers in the country, as its 2022 budget has not grown since 2006, while its 810 employees are overburdened in handling more than 200,000 cases each (Costa and Martin, 2023).

    [1] WHD is a government agency that oversees the protection of workers’ rights.

    References:

    American Immigration Council (2024). “The Expanding Role of H-2A Workers in U.S. Agriculture.” Available online at https://www.americanimmigrationcouncil.org/research/h-2a-workers-us-agriculture#:~:text=Between %202017%20and%202022%2C%20the,to%20fill %20its%20open%20jobs. Accessed on November 11, 2024.

    Castillo, M., P. Martin, and Z. Rutledge. (2022).  The H-2A Temporary Agricultural Worker Program in 2020.  Economic Information Bulletin #238, Economic Research Service, U.S. Department of Agriculture.  Washington, DC.

    Centro de los Derechos del Migrante, Inc. (CDM) (2020). Ripe for Reform: Abuses of Agricultural Workers in the H-2A Visa Program. Centro de los Derechos del Migrante, Inc., Baltimore, MD; Oaxaca, Mexico; Mexico City, Mexico.

    Costa, D. and P. Martin. (2023). Record-low number of federal wage and hour investigations of farms in 2022.  Economic Policy Institute.  Washington, DC.

    Grinspan, L. (2023). “They all went away:  Why some foreign farmworkers end up leaving the fields.”  Atlanta Journal Constitution.  Available online at https://www.ajc.com/news/georgia-news/they-all-went-away-why-some-foreign-farmworkers-end-up-leaving-the-fields/ZXDQUQHKMNH63ASCASK32BXB3M/. Accessed on October 19, 2023.

    Vasquez, T. (2023). “Human Trafficking or a Guest Worker Program?  H-2A’s Systemic Issues Result in Catastrophic Violations.”  Futuro Unidad Hinojosa. Available online at https://futuroinvestigates.org/investigative-stories/head-down/human-trafficking-or-a-guest-worker-program-h-2as-systemic-issues-result-in-catastrophic-violations/ Accessed on October 19, 2023.

    Escalante, Cesar L., Joshua Emmanuel, and Bishal Gaire. “H-2A Wage Violations Against Workers Hired by Farm Labor Contractors.” Southern Ag Today 4(51.1). December 16, 2024. Permalink

  • Benefits of Debt Consolidation to Improve Short-Term Liquidity

    Benefits of Debt Consolidation to Improve Short-Term Liquidity

    Historically, low commodity prices, high input costs, and expensive financing have been some of the most significant issues farmers have faced in the last few years. Luckily, some financial relief may come in the form of lower interest rates from the Fed reducing COVID-era rate increases (Wright, 2024). The Fed aggressively moved in September to cut 50 basis points, bringing the target Federal Funds rate to 4.75 – 5%, with indications for at least another 50 basis points before the end of 2024 (Fannie Mae, 2024). This article explores a hypothetical situation of a producer leveraging lower interest rates to consolidate debt to improve short-term liquidity. 

    Consider a farmer’s debt obligation for 2024 (Table 1). In this scenario, the farmer holds a land loan with an original principal balance of $450,000 at a fixed interest rate over 20 years. As of 2024, the remaining principal stands at $330,000, with 12 years left in the repayment period. Additionally, the farmer has a machinery loan with an original principal balance of $180,000, structured over a 7-year term. The outstanding balance on this loan is currently $110,000, with 4 years left until maturity. 

    The farmer also faces a $50,000 operating loan, due at the end of this year. Unfortunately, this year has not been profitable, and he cannot cashflow all his debt obligations. 

    Table 1. Current Debt Obligations – Before Consolidation

    The farmer’s total current debt obligation amounts to $123,000 for the year (Table 2). To address this financial strain, the producer meets with their lender to explore options for restructuring their debt. They discuss the possibility of consolidating existing debt into a longer-term, more favorable interest rate structure. The lender agrees to consolidate the remaining principal balances on all three loans ($330,000 + $110,000 + $50,000) into a new 10-year note totaling $490,000 (Table 3). The lender agrees to secure this loan using the equity in the farmer’s financed land as collateral. 

    Table 2. Debt Financing Structure Before Consolidation

    Table 3. Consolidated Debt Structure

    Under this new debt structure, the farmer not only relieves the burden of the current year payments, but also reduces the ongoing obligation from $73,000/year to $63,000/year.  While debt consolidation offers advantages, it’s also important to consider potential drawbacks. For example, under the original debt structure, the annual debt service obligation would have dropped to $40,000/year, after the machinery loan was paid off in 4 years.  Under the consolidated note, the producer is committed to $63,000/year for a full 10 years.  Longer-term debt obligations also potentially lead to paying higher total interest expenses, even with an interest rate lower than their original loan(s) due to the extended accrual period. Additionally, creating a new loan comes with closing costs and fees that could offset the immediate financial benefits. Every situation is unique, and the pros/cons are not always clear.  Those looking to consolidate existing debt should meet with their lenders and determine the best strategy for their farm’s short-term viability and long-term sustainability. 

    References

    Wright, Andrew. “Lower Interest Rates Create Opportunities for Managing Debt on the Farm.” Southern Ag Today 4(37.3). September 11, 2024.

    Fannie Mae. (2024). Fed Cuts Interest Rates Amid Sluggish Existing Sales but a Rebound in Starts Activity. Retrieved November 5, 2024, from https://www.fanniemae.com/research-and-insights/forecast/fed-cuts-interest-rates-amid-sluggish-existing-sales-rebound-starts-activity#:~:text=The%20Federal%20Open%20Market%20Committee,rate%20of%202.75%2D3%20percent.

  • Upcoming Deadline: Beneficial Ownership Information 

    Upcoming Deadline: Beneficial Ownership Information 

    As we wind down the year, an approaching deadline will impact many producers and operations throughout the country. The deadline for filing Beneficial Ownership Information (BOI) is set for January 1, 2025. The Corporate Transparency Act (CTA) is the federal act that requires filing the BOI with the Financial Crimes Enforcement Network (FinCEN). The BOI is sometimes collected by financial institutions, but providing that information does not satisfy filing with FinCEN. FinCEN reporting collects information that is not collected by a financial institution.  FinCEN requirements include: 

    1) a unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents: 

    a) U.S. passport, b) state driver’s license, c) identification document issued by a state, local government, or Indian Tribe, or d) Foreign passport. 

    2) Any trade name or doing business as (DBA name

    3) Jurisdiction of formation and registration (if a foreign entity)

    4) Information about company applicant(s)

    5) Certification by the individual filing the report with FinCEN:

    a) The report is true, correct, and complete.

    FinCEN defines a “Beneficial Owner” as an individual who directly or indirectly exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. 

    There are two types of reporting company definitions:

    • Domestic reporting companies: corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
    • Foreign reporting companies: entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

    There is no maximum number of beneficial owners who must be reported to FinCEN. If you fall under the above definition, you should consider filing the BOI application with FinCEN. 

    Failing to file can result in monetary penalties and possible felony charges. More information on filing BOI, and updates, can be found here. 

    Martinez, Charley. “Upcoming Deadline: Beneficial Ownership Information.” Southern Ag Today 4(49.1). December 2, 2024. Permalink