Category: Farm Management

Even in the year 2024, farming tends to be a family affair. The late nights and subsequent long hours can mean the most promising way to spend family time is by spending it together in the field or on the ranch. Predictably, the kids of generational farm parents can morph quickly into farm hands – driving grain carts, loading hay, working cattle, and, in general, proving themselves to be reliable help.

Farm families and family labor are multi-layered. The roles of manager and parent, employee and child begin to overlap, blend, and mesh over time. The slow, steady drip of ever-increasing labor from the kid often means there’s never a set hire date. Then, suddenly, your brand-new teenager has put in a 40-hour week on her summer break, completely unpaid. The farmer parent may make the valid point that they allow their child to work “for free” on the farm under the guise of building character or as an exchange for a future allowance like a car or college. While I’m never one to argue with character building, this route is not the best approach from a financial and tax perspective. 

If your farm kid was hard at work in the wheat field or hay field this summer break, consider putting them on the payroll. In 2024, the standard deduction is $14,600. This means one could earn up to $14,600 and not owe any federal tax. Further, if a parent pays their child through a sole proprietorship, and the child is also under the age of 18, the child is also exempt from Social Security and Medicare taxes. The child can also be exempt from Social Security and Medicare taxes when working for a partnership as long as both partners are the child’s parents. 

The wage paid to an employee who happens to be your child is a fully deductible expense to the payer, and if the amount falls under the threshold mentioned above, the child will not be subject to federal tax. In some instances, state and local taxes may apply, but those amounts are often nominal. This scenario is a win-win for the child and for the parents. 

There are considerations to be made when adding your children to the payroll. 

• The wage and the work must be reasonable. One can’t suddenly decide their child is worth $100 per stacked straw bale or $14,000 for a day’s worth of work. 

• There’s paperwork. It’s important to treat your child like a proper employee. Keep and maintain payroll records and be sure to file the necessary forms throughout the year and at year-end, including issuing them a W2. 
  
• Tax allowances are not labor and safety laws. Ensure you are following all laws in regard to children in agricultural settings. 

• Every farming situation is unique. It’s best to speak with your local tax preparer to discuss your situation and ensure you follow the rules.

If you want to further set your children up for success, consider helping them invest their wages into a tax-free savings vehicle. A college investment account or a retirement account for those not college bound are a great option. Investing those wages while mom and dad are footing the bill for living expenses will really help to secure a person’s future.

Paying your kids to work on the family farm is a great way to instill the value of hard work, perseverance, and determination. Done the right way, adding your child to the payroll can be a beneficial situation for all parties involved.  

---

A “triple threat” of low commodity prices, high input costs, and high interest rates creates a challenging financial environment for many producers.  This is especially true for producers with little working capital and who rely on operating loans to finance their business activities.  The good news is that one part of this “triple threat” may soon begin to ease.  

The Federal Reserve began raising the federal funds rate in the first quarter of 2022 in response to rising inflation (see Figure 1).  This started a series of rate increases that ended in August 2023.  Since, then, the federal funds rate has held steady at 5.33%.  As the federal funds rate increased, interest rates charged on agricultural loans went up from about 5% to around 9% (Figure 1). 

However, in a speech on August 23, 2024, Federal Reserve Chair Jerome Powell indicated that the Federal Open Market Committee (FOMC) would begin to lower the federal funds rate, perhaps as early as their September meeting.  As the FOMC lowers the federal funds rate, other interest rates will begin to fall as well.  This will be a welcome reprieve for producers as the cost of borrowing to finance operations decreases.  It also provides producers with opportunities to manage the debt they have incurred over the last few years at high interest rates.  Two strategies that producers might use as interest rates fall are debt refinancing and debt consolidation.

When debt is refinanced, an existing loan is replaced by a new loan with different terms and conditions for repayment.  The new loan pays off the remaining principal plus any accrued interest that is still owed on the old loan.  The amount that is paid off becomes the principal owed on the new loan.  Payments are then made on this new loan, ideally with lower periodic payments.  Debt consolidation is a form of refinancing in which multiple debts are combined into a single loan.  The new loan pays off the remaining principal and any accrued interest on all the old loans, and the amount that is paid off becomes the principal owed on the new loan.

The primary benefit of refinancing or consolidating debt is smaller monthly or periodic payments, which occurs for two reasons.  First, refinancing or consolidating debt often involves extending the debt’s repayment period.  The amount owed is paid back over a longer period than the original loan(s) terms allowed for, so payments in each month are less.  Second, refinancing or consolidating debt as interest rates decrease means the new loan should charge less in interest monthly than was charged on the old loan(s).  The potential results of this benefit include improved monthly cash flow and an easier time making regular payments on debt.

Before a producer considers either of these strategies to help manage their debt, it is important to consider the potential pitfalls of refinancing or consolidation.  First, extending the loan payment period may incur higher total interest costs.  Although the amount owed in any single period is less, the fact that the loan principal is paid back over a longer time means interest accrues for longer as well.  Therefore, there may be a tradeoff between lower periodic payments and higher overall costs for the loan.  A second pitfall to consider is the closing costs and fees the producer must pay to initiate the new loan.  Producers should consider whether they can pay these costs, and whether incurring these costs are worth any benefits of refinancing or consolidation, before initiating either process with their lender.  Ultimately, producers will need to consult with their lenders to determine what refinancing or consolidations options are available to them and whether these options will be beneficial in the long run.

Figure 1.  Changes in the Inflation rate, the Federal Funds Rate, and the Unemployment Rate, January 2018-February 2024 

---

References

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Agricultural Survey, retrieved from the Federal Reserve Bank of Dallas; https://www.dallasfed.org/research/surveys/agsurvey/2024/ag2401#tab-report.

---

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

Irrigation water is a significant resource for row crop agriculture in the Mid-South (Eastern Arkansas, Northeastern Louisiana, Northwestern Mississippi, and Southeastern Missouri). The primary crops grown in the region are rice, soybeans, cotton, and corn. All rice acres and most soybean, corn, and cotton acres in the region are irrigated. The region’s primary irrigation source is groundwater pumped from the Mississippi River Valley alluvial aquifer (MRVAA) (Massey et al., 2017). Pumping costs vary greatly throughout the region depending on the crop grown, the mode of power used to pump the water, and the pumping depth of water. This article looks more closely at the range of pumping costs for the Mid-South.

Table 1 presents the estimated costs per acre of pumping irrigation water for the four major crops grown in the Mid-South by energy source (diesel, electric) and by total dynamic head (TDH) (depth to water plus drawdown and discharge pressure). Crop irrigation amounts (acre-inches) represent average amounts reported for each crop in enterprise budgets from both the University of Arkansas and Mississippi State University. A diesel price of $3.54/gallon is used to calculate diesel pumping costs, while an electric price of $0.138/kWh is used to calculate electric pumping costs. The amount of diesel and electric energy used to pump irrigation water for a given TDH is based on irrigation energy consumption data for alluvial wells from McDougal (2015). 

Diesel power is currently more expensive than electric power. Farmers in the region have switched many of their diesel irrigation motors to electric motors because of the lower cost of electricity, but diesel is still prevalent due to the expense of running electricity to fields located far from electric utility lines. The proportion of diesel to electric pumps can vary greatly by farm in the region.

Pumping costs can vary greatly depending on geographic location and groundwater availability. To demonstrate this, Figures 1 and 2 present estimated average pumping costs per acre for rice and soybeans by county in Eastern Arkansas. Estimated average pumping costs in these figures assume half diesel and half electric power and are calculated using depth-to-water data from the Arkansas Groundwater Protection and Management Report for 2023 (Arkansas Department of Agriculture, NRD, 2024). Average depth-to-water values for each county are adjusted upward to TDH by adding 28 feet to account for drawdown and discharge pressure (Chris Henry, University of Arkansas Water Management Engineer, personal communication). Counties with a darker shade of red in both figures have the highest average pumping costs. Groundwater is more limiting for these counties relative to counties where water is more plentiful (counties with a lighter shade of red). Less groundwater translates into deeper pumping depths, making irrigation water more expensive in locations where water is more limiting.

References and Resources

Arkansas Department of Agriculture, Natural Resources Division (2024). Arkansas Groundwater Protection and Management Report 2023. https://www.agriculture.arkansas.gov/wp-content/uploads/2023-Groundwater-Report-Final.pdf

McDougall, W. M. (2015). A Pump Monitoring Approach to Irrigation Pumping Plant Performance Testing. Graduate Theses and Dissertations Retrieved from https://scholarworks.uark.edu/etd/1146

Massey, J.H., C.M. Stiles, J.W. Epting, R.S. Powers, D.B. Kelley, T.H. Bowling, C.L. Janes, and D.A. Pennington (2017). Long-Term Measurements of Agronomic Crop Irrigation Made in the Mississippi Delta Portion of the Lower Mississippi River Valley. Irrigation Science. 35:297-313. 

---

Watkins, Brad. “Irrigation Water Pumping Costs in the Mid-South.” Southern Ag Today 4(36.3). September 4, 2024. Permalink

Following recent droughts, hurricanes, or other natural disasters, many timber owners may wonder if they can deduct timber losses on their federal income tax returns. As with many tax questions, the answer is often, “It depends.” While it sounds unhelpful, it reflects the complexity of factors that can influence the eligibility for the tax deduction. Furthermore, even if the timber losses are deductible, they may be subject to different deduction rules regarding types of losses, ways to calculate the deduction, and limitations on the deductible losses. These also have implications for the forms used to claim the deductions and documents for record keeping. 

This article focuses on the tax treatment of timber losses from natural disasters for federal income tax purposes. The rules for income tax deductions for yard trees differ from those for timber. We’ll cover that topic in a future article. As mentioned in a previous article in this series, the classification of your timber holding has important tax implications. Timber holding can generally be classified as one of the following three types: 1) for personal use or as a hobby (not-for-profit); 2) as an investment; or 3) for trade or use in a trade or business.

Natural disasters and types of timber losses

Not all natural disasters are treated the same when it comes to timber loss deductions on your federal income tax returns. Timber losses from natural disasters could be treated as casualty losses or noncasualty losses. 

• Casualty timber loss. If the timber loss is caused by natural disasters such as fire, storm, flood, hurricane, volcanic eruption, or earthquake, it could be treated as a casualty loss. For federal income tax purposes, a casualty is an identifiable event that is sudden, unexpected, and unusual. Suddenness is a key element, and it means the suddenness of the loss rather than the suddenness of the event itself (Rev. Rul. 87-59). Therefore, timber losses due to gradual deterioration are not considered casualty losses. For example, losses of timber following prolonged droughts (Rev. Rul. 90-61) or epidemic attacks of Southern Pine Beetles (SPB) are generally not considered casualty losses
• Noncasualty timber losses. Noncasualty timber loss is the loss of timber due to an identifiable event that is unexpected and unusual but does not meet the suddenness requirement. The loss may result from a combination of factors. For example, timber losses from prolonged droughts or epidemic attacks of beetles (e.g., mountain pine beetles, SPB) could qualify as noncasualty losses for landowners holding timber in a trade or business or as an investment. 

However, tree mortality caused by routine disease and normal levels of insect infestation is considered a cost of doing business and is not treated as either a casualty loss or a noncasualty loss. These losses are recoverable through depletion when the timber is sold or harvested.

Tax treatment of casualty timber losses vs. noncasualty timber losses 

There are several tax advantages to timber casualty losses compared to noncasualty losses: 

• Deduction from ordinary income. Timber casualty losses are deducted from ordinary income, while timber noncasualty losses offset section 1231 gains first, which are taxed at the lower long-term capital gains rate. 
• Eligibility. Casualty loss deduction is available for all types of timber holdings, including timber for personal use (subject to the $100 reduction and 10% adjusted gross income rule and presidentially declared disaster area). In contrast, noncasualty loss deduction is only available for timber held in a trade or business or as an investment. 
• Loss estimation method. Timber casualty losses are estimated using a block approach (IRS, 2011). Deductible timber casualty loss is the lesser of (1) the adjusted timber basis or 2) the diminution in the fair market value of the timber block due to the casualty. In contrast, timber noncausality losses are estimated like a timber sale by multiplying the depletion unit by the quantity of timber destroyed. When the timber depletion block is large, and only a relatively smaller portion of it is damaged or destroyed, the deductible timber casualty loss could be greater than if the loss were considered noncasualty. 
• Special provisions for federally declared disaster areas. If the timber casualty loss results from a presidentially declared disaster, you can deduct the casualty loss in the current year or on an amended return for the previous year. 

Landowners may experience significant timber losses due to various natural disasters. Federal income tax provisions are available to help landowners recoup some of the losses. However, the tax treatment of timber losses varies depending on the type of natural disaster and the classification of the timber holding. In most cases, the deductible timber losses may not fully reflect the actual economic losses. Affected landowners are encouraged to consult with a forester and tax advisor for advice specific to their situation. 

References

IRS. 2011. Timber casualty loss audit techniques guide. 

Resources:

Li, Y. 2019. Income tax deductions for hurricane-damaged timber losses. University of Georgia.

National timber tax website: www.timbertax.org.

Tanger, S., Dicke, S., and Henderson, J. 2021. Frequently asked questions about timber casualty losses. Mississippi State University. 

Wang, L. 2018. Income tax deduction on timber and landscape tree loss from casualty. USDA Forest Service. 

---

Li, Yanshu. “Can I deduct timber loss from natural disasters?” Southern Ag Today 4(34.3). August 21, 2024. Permalink