Feature

Managing wheat health

Written by Nancy Jorgensen on .

Mel Gerber loves growing wheat, and he thinks more farmers in Missouri could profit from it.

It may seem like he’s bucking a trend. In recent years, U.S. farmers planted fewer wheat acres, as wheat profitability declined compared to corn and soybeans. However, Gerber’s strategy of double cropping soft red winter wheat with soybeans gives him an edge.

“Wheat can be more difficult to manage than corn and soybeans, and that’s why few people around here grow wheat,” Gerber said. “I help other farmers grow wheat, and once they try it, it’s worth the effort because the wheat/soybean combination is profitable. Wheat has always been a stepchild in this state, but it responds to good management.”

Acre for acre, Gerber figures that by double-cropping wheat and soybeans, his income doubles over what he would make compared to single-cropping corn.

Gerber and his wife Mary do grow corn—700 acres of it, as well as 1,100 acres of soybeans. They doublecrop wheat with soybeans on another 600 acres, meaning they raise both crops on the same 600 acres in the same year.

Gerber usually plants wheat from Oct. 10 to Nov. 10, after soybeans have been harvested. He harvests wheat in June, which leaves time to plant soybeans again on the same ground.

Growing wheat in wet conditions and on clay soils takes smart management. Gerber and other wheat growers—including farmers in wet places like North Dakota and Minnesota—have been fighting a fungal disease, fusarium head blight, also called scab.

“Almost everyone who grows small grains has to deal with this when you have heavy rainfall,” Gerber said. “In the past year, it’s been a major issue in central Missouri.”

Here’s how Gerber manages scab:

  1. He selects a variety that carries some resistance to head scab and provides good yield. “Variety selection is important,” Gerber said. “Almost all modern wheat varieties have some resistance to almost all disease.” Also, he uses seed that’s been treated to fend off common diseases and pests.
  2. He applies good nutrition. Gerber applies the first dose in the fall. He applies more fertilizer before the wheat greens up on frozen ground, usually in January or February. He applies a third time— mostly nitrogen—when the wheat’s knee-high in mid-April.
  3. He also sprays the crop with a fungicide that fights head blight. Gerber says two types work: BASF’s Caramba or Bayer’s Prosaro. “You have to apply it at the right time, when the plant’s half-flowering,” Gerber said. “This takes intense field scouting, as flowering only lasts about five days.”
  4. He harvests quickly and on a timely basis to avoid rain, which diminishes yield.

Gerber purchases farm supplies at MFA Agri Services in Versailles. He also hires MFA agronomists to test his soil. He does his own field scouting for disease and pest issues and timing of applications.

When it’s time to take the grain to the elevator, MFA and other elevators test wheat for scab, and you can be docked for grain above a certain level. Often, the grain can be blended with other wheat to reach a level that’s safe for consumption, but deliveries with high levels can be turned away.

Flourmills conduct further testing. “Mills use optical sorters that kick out infected grain and reduce it by about 50 percent,” Gerber reported. European markets increasingly examine each kernel with infrared light, and Gerber predicts the U.S. will adopt this technique.

Other diseases that concern wheat growers include soil-borne viruses, and Gerber suggests that you use seed that resists them. Insects can transmit viruses, but most insects in wheat can be addressed with pesticides, Gerber said, as long as you choose a pesticide that works for the situation.

While some wheat growers let cattle feed on winter wheat during cold months, few Missourians use this practice. “It does a lot of damage if you’re looking for high yield,” Gerber said.

Besides profitability, Gerber also sees another benefit to growing wheat. “More people are planting cover crops to keep soil from eroding, and wheat is a good cover crop,” he said, adding that his clay soil drains poorly. “Soil’s fragile here, and conservation’s important to me.”

Gerber believes that ongoing research will improve wheat yield. “Wheat breeding has fallen behind soybean research, so there’s a lot of room to improve,” he said. “I’m convinced we can go beyond the yield we typically see in the U.S.”

In MFA’s trade territory, hard red winter wheat is mostly grown in Kansas, while soft red winter wheat is the main choice in Missouri. No matter which type you grow, Jason Worthington, agronomist at MFA Incorporated, offers tips on how to keep your wheat healthy.

What can I do now in the spring to improve yield?
Scout wheat for weeds, insects and diseases, and to determine how well it made it through the winter. Count tillers (lateral branches) to determine if you should apply early nitrogen to induce tillering, as more productive tillers lead to better yield. Nitrogen application can help until the boot stage in late April, when the fully developed head can be easily seen in the swollen section of the leaf sheath. Ideally, apply one-third of your spring N as a topdress before green-up if added tillering needs to be induced. Apply the remaining two-thirds after jointing begins. If no further tillering is needed, apply all spring N after jointing. Topdress the majority of your N and sulfur, and consider two field applications of N. Always fertilize based on soil tests and prior yield data or yield goals.

How important is scouting to successful wheat?
I find that growers do not commonly devote as much attention to their wheat as they do other crops. Wheat may respond better to an intensive management system that a crop consultant can help implement. Thorough and frequent field inspections are critical, because the timing of fertilizer, pesticide and fungicide applications pays dividends. Checking pest and disease levels, hitting the right growth stage, and applying the right product can be more accurate when a professional walks the field regularly.

What’s the greatest concern for wheat disease?
Fusarium head blight (head scab) has been the greatest concern over the past year. This fungus can be borne in seed or soil, which is why we highly recommend fungicide seed treatments. However, it can infect flowering wheat heads as well. While flowering, glumes that cover reproductive parts of the flower open to allow for pollination. During this time, rain can splash head scab spores into the glumes, making wheat vulnerable. The flowering pattern of wheat also makes complete control with fungicide difficult. Head scab fungicides are not systemic—they must cover the part of the plant they’re designed to protect. You must apply fungicide during flowering when glumes are open, before infection occurs. Typically, no more than 20 to 30 percent of the wheat head flowers at one time, giving you a three- to five-day window for treatment. Regardless of when you spray, you can’t protect the entire head, but spraying remains valuable—a 30 percent reduction in head scab still increases yield and grain quality.

How do head scab fungicides help ensure grain quality?
When head scab attacks developing kernels, it leaves behind a shrunken pink berry or an empty glume called a tombstone. Tombstones lower yield, reduce grain quality and often contain high levels of mycotoxin that elevators must screen. Fungicide treatment can reduce dockage at the elevator or prevent a load from being rejected. During the 2015 harvest, even well-timed fungicide treatments weren’t always enough, as tombstone scab and mycotoxin levels ran high.

What other diseases have we been seeing?
We saw several other fungal diseases, but rust was a major concern over the last year. Rust does most of its damage by attacking leaf tissue, which reduces the plant’s ability to photosynthesize energy and convert it to grain. Stripe and leaf rust are fairly easy to control by applying fungicides to wheat before infection becomes severe and after the wheat’s flag leaf emerges. When left uncontrolled, yield losses can be severe.

How can we defeat bugs?
I always recommend a seed-applied insecticide in wheat. Aphids and armyworms are the biggest problems. You can control aphids through seed treatment as well as foliarly applied insecticides. Aphids usually do the most damage by infecting wheat with the Barley Yellow Dwarf Virus; as few as one aphid per foot of row can cause enough damage to justify treatment. Armyworms move in after moths lay eggs in developing fields and worms hatch. They also migrate into fields like an invading army—hence their name. Scout for these destructive leaf feeders frequently. If levels are high enough, control them with a foliar insecticide. Hessian fly infestations can also be a concern, but planting after a killing freeze greatly reduces its likelihood. Resistance traits in wheat can also control a small number of insects on a limited basis.

What about controlling weeds?
Several herbicides can be effective, depending on the weed species and timing of application—just like with any other crop. However, fall-applied herbicides in wheat are under-utilized.

What advice can you share on seed selection for this fall?
My top bit of advice for growing healthy wheat is to start by selecting certified, treated seed designed to tolerate the challenges that you face in your area. Look for seed varieties with high yield potential as well as traits that make the plant resistant to diseases including rust, tan spot, septoria, fusarium head blight and viruses. Buy certified seed that has been rigorously cleaned to reduce the number of shriveled kernels—these are more likely to be infected with diseases such as head scab. Certified seed also helps ensure all seeds are viable. A lot of farmers save wheat in their bins to plant, but this seed may have a low germination rate, is likely not thoroughly cleaned, and could carry higher levels of seed-born diseases.


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Forging into the dawn of a new era

Written by Steve Fairchild on .

MFA's success in 2015 was evidence that a diversified portfolio of products and services mitigates the extremes of weather and markets. With supplies and personnel aligned for a promising year, the cooperative suffered the same fate as its farmer/owners—the wettest spring in memory. For much of the planting season, MFA’s agronomic inputs and services were idle along with farmers’ planters.

The planting season was greatly compressed in most of MFA’s trade territory, with extremely late corn and soybean plantings, and on too many acres, no planting at all. In just Missouri, there were about 1.7 million acres idled by wet conditions.

While this dramatically impacted volumes and profitability in MFA retail, plant foods and seed operations, the company finished profitably. Precision agriculture acres continued to increase. The crop-protection business was strong. Strength in grain sales along with growth in feed and farm supply income helped bolster the bottom line.

Financial performance
MFA’s CFO Jeff Raetz reported a pre-tax profit of $12.5 million for fiscal year 2015.

That profit is derived from the financial performance made up of MFA’s constituent business entities: MFA Incorporated, MFA Enterprises, AGMO and several joint ventures.

MFA Incorporated is the member cooperative business with some $1.3 billion in sales. MFA Enterprises is a wholly owned subsidiary of MFA Incorporated. Formed in 2001, MFA Enterprises represents non-cooperative expansion including operations in southern Iowa, southeast Kansas, west central Missouri and northwest Missouri. It contributed some $217 million in sales in fiscal 2015.

AGMO is a farm-input financing business that until recently operated as a separate cooperative. In fiscal year 2015, it originated $71 million of crop input loans. At the beginning of fiscal year 2016, AGMO became 100 percent owned by MFA Incorporated.

Also contributing to MFA profitability were the company’s joint ventures. MFA has 50 percent ownership in these ventures. Cache River Valley Seed contributed $39 million in sales. Agri Services of Brunswick contributed $188 million in sales. Mid-State Seeds contributed $21 million in sales. Alliance Animal Care contributed $16 million in sales, and Central Missouri AgriServices, of which MFA is a 45 percent owner, contributed $127 million in sales. Together, the joint ventures delivered $391 million in sales.

Total volume for MFA’s business entities, including joint ventures was just less than $2 billion. That’s about $86 million short compared to sales figures from a year earlier. The decrease was primarily due to reduced sales volume in field crop sales and lower grain commodity prices.

“It was not the year we thought we would have coming out of the winter but a good profit year considering the challenges we encountered in the spring,” said Raetz.

Grain sales
Grain sales income has remained even for the past three years, even as bushels have increased. Grain moving through the system from the 2014 harvest meant MFA handled 83 million bushels in fiscal year 2015, a 33 percent increase compared to a year earlier. However, due to sagging commodity prices, grain sales income dipped slightly compared to fiscal year 2014. Raetz reminded the audience that grain sales reflected the bin-busting crop harvested in 2014. For reference, consider that in the four years leading up to the 83 million bushels handled in fiscal year 2015, the MFA system averaged about 56 million bushels per year.

Field crop sales
Field crop sales (plant food, seed, crop protection products) produced revenues of $665 million in fiscal 2015 compared to $741 million in 2014. A decrease of $76 million. Volume was driven lower from considerable weather difficulties in the planting season.

“The 1.7 million acres of prevented planting had significant impact on these volumes,” said Raetz. Plant food sales were down 7.5 percent compared to a year earlier which totaled 945,000 tons. This resulted in a $30 million decrease in sales. Seed sales slipped 23 percent compared to a year earlier to total $75 million. Crop protection sales volume reached $164 million, a 11 percent decrease from fiscal year 2014.

Livestock supply sales
Livestock supply sales (feed, farm supply and animal health) totaled $169 million in fiscal 2015, similar to total sales from a year earlier.

“This is not a true reflection of the volumes we are handling in livestock supply sales,” said Raetz. “Lower commodity/feed unit values have driven category sales dollars lower.”

After several years of decline, animal numbers in MFA’s trade territory are projected to increase as the beef herd rebuilds and the livestock complex adjusts to market signals in general.

Even as the low end of the beef cycle occurred in fiscal year 2015, MFA increased tons of feed sold to 343,000, about 3 percent more than the previous year.

“We continue to feed a higher percentage of the animals in our trade territory. Our feed division has developed products that set us apart from our competition,” Raetz said. “While livestock prices have recently come off all-time highs, the forecast continues to be favorable for this segment of our market.”

Higher value for livestock has meant that producers are willing to spend more on their investment. Animal Health and Farm Supply sales were up a consecutive year. In fiscal year 2015, Animal Health sales increased 14 percent to $16.1 million while Farm Supply sales increased 16 percent to $37 million.

Margins and expenses
Product margins, service revenues, joint venture earnings and patronage combined for a total of $216 million, a $7 million decrease compared to fiscal year 2014. This decrease follows the softer sales numbers mentioned earlier. In general terms, areas that reported increases in margins included MFA retail stores, due largely to increased grain volume from the 2014 harvest. Farm Supply, Feed and Animal Health increased margins on the strength of livestock markets. Areas in which margins decreased reflected the weather challenges for the year. They were Plant Foods, Crop Protection and Seed.

For fiscal year 2015, joint venture earnings, which tend to follow margins on agronomic offerings, were $2 million compared with $5.1 for fiscal 2014.

Expenses
Expenses for fiscal year 2015 totaled $203 million, a 2 percent increase over a year earlier. This total includes operating and fixed expenses, but excludes income taxes.It doesn’t come as news to farmers that agriculture is a capital-intensive business. Maintaining inventories and operating facilities requires significant expenditures.

“Good facilities, good equipment and good employees are essential to our success,” said Raetz, “And there is a cost associated with maintaining each of these. We have and will continue to manage these areas closely.” Perennially, the budget categories of Car & Truck, Repairs & Maintenance and Personnel Costs account for approximately 80 percent of MFA’s operating expenses.

Balance sheet
Working capital measures MFA’s ability to meet short-term financial obligations. In simple terms, it is current assets (receivables, inventory and prepay) minus current liabilities (vendor/grain payables and short-term debt).

“Strong working capital gives us the flexibility to take advantage of volatility in commodity prices, prepay opportunities and expansion opportunities,” said Raetz. “And it allows us to pay patronage and retire past equities.”

For fiscal year 2015, working capital finished at $75 million, down from $91 million in 2014. The decrease represents capital expenditures, additional investments in joint ventures and more than $10 million in patronage and retirement of past equities during the year. All of these expenditures were funded through working capital.

Investment activity, also funded from working capital, represents MFA’s ownership in joint ventures, interregional cooperatives and deferred assets. The total for fiscal year 2015 was $61 million, an increase of $12 million compared to a year earlier. Of that total, some $32 million is accounted for through investments in joint ventures.

Fixed assets (land, buildings, equipment and owned rolling stock) totaled $97 million, up $1 million from fiscal year 2014. This figure doesn’t account for leased equipment, which, if owned, would add an additional $30 million to the fixed assets column.

“MFA continues its plan to invest significant capital to upgrade facilities and equipment and to acquire assets in new geography,” said Raetz. “Over the past four years, the company has invested a total of $87 million in those categories.”

Total assets for fiscal year 2015 were $441 million, up slightly from the previous year’s total of $439 million.

For MFA, there are two primary sources of long-term debt: term loans with CoBank and the MFA Bond Program, which is classified as unsecured debt. Bonds are an important source of non-bank financing for MFA and represent some $57 million of $72 million in outstanding long-term debt.

Net worth
“We have a good trend line in net worth since 2011,” Raetz said. Total net worth increased to $154 million in fiscal year 2015. “This number represents the amount of the company owned by you, the farmer member,” he said.

On Aug. 31, 2015, the end of the fiscal year, member ownership was 35 percent, up a percent from the previous year. MFA has a standing goal to reach 40 percent member ownership.

Raetz said that a five-year run of strong profits on its own operations has strengthened MFA’s balance sheet and made it a much stronger company. He added that MFA has leveraged that success by building for the future through increased investment in facilities as well as increasing cash payments to member/owners.

Patronage
MFA by-laws stipulate that patronage will be paid on earnings. For fiscal year 2015, total pre-tax earnings were $12.5 million. Of that total, some $2 million was non-patronage eligible as it came from outside of cooperative-designated earnings through joint ventures and MFA Enterprises. These earnings are not eligible for distribution.

Additionally, there was $2.7 million in earnings from business with non-members—mostly from non-member wholesale business. This also is not eligible for distribution.

There was a tax adjustment of $3.4 million.

Therefore, of total earnings, there is $4.4 million available for distribution to MFA members. MFA Incorporated’s board of directors voted to make a patronage allocation of the full $4.4 million back to the members. Half ($2.2 million) will be paid in cash. The remaining 50 percent will be allocated equities.

Equity retirement
“If you look at our member equities, they currently go back to 1980 which is 35 years,” said Raetz. “MFA management has developed a plan to reduce this timeline. It’s obviously contingent on continued profitability.”

Raetz said that the company’s continuing goal is to incrementally work outstanding equities down to 25 years, then 20. He pointed out that the reduction will take time.

As part of that plan, MFA’s board of directors voted to retire 50 percent of remaining 1980 equities ($2.8 million).

The cash patronage along with 1980 equities bring the total paid to back to member/owners to $5 million.

Wholesale patronage and equity retirement began in December. Retail patronage and equity retirement began in January 2016.

Domestic production deduction
In addition to patronage, MFA will once again take advantage of a manufacturing deduction that falls under the IRS designation “Domestic Production Activities Deduction.”

“Our preliminary calculations suggest that approximately $5.5 million in deductions are available and can be passed through to members on grain sales made to MFA during fiscal 2015,” said Raetz.

Raetz informed the audience that a notice separate from patronage checks will be sent to eligible members sometime in late spring 2016. Calendar-year taxpayers will be able to use the deduction on 2016 tax returns.

Going into a challenging agricultural economy, Raetz said that MFA’s financial plan for fiscal year 2016 reflects target net income after taxes of $11.7 million, up slightly from $10.8 million this year.

“Each year, we set goals. We develop and fine-tune operating plans to continue to build the financial strength of MFA,” said Raetz.

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More in the Feb 2016 Issue of Today's Farmer Magazine

 

In this issue

Written by TF Staff on .

MFA Incorporated Annual Report for August 31, 2015

Written by MFA Staff on .

The President's / Chairman's Letter

Agricultural media are proclaiming 2010 through 2014 as the Golden Age of Agriculture. The period was one of unprecedented growth and profitability for most entities involved in agriculture.

MFA was no exception. The cooperative enjoyed its most profitable five-year period in history. That momentum was fueled by an emphasis on finance, people, and the MFA system of operations, processes and products. As a result, financial strength allowed MFA to invest in the future, return cash to our member/owners, and maintain the liquidity needed to take advantage of market-place opportunities. Working capital has seen substantial growth, recording $75 million at the end of fiscal 2015.

MFA continues to pursue growth opportunities that meet targeted returns and economically benefit our member/owners. The company is in solid financial shape.

MFA has been successful in attracting, developing and retaining talent. The cooperative has in place an intern program called the MFA Ag Experience. The program gives talented college sophomores and juniors the opportunity to prove themselves during their tenure.

MFA is a people business. We will continue to hire the best people and train them. In addition, MFA’s internal development program focuses on training employees in skills and practices essential to modern agriculture. MFA is committed to enhancing the value of the employee group.

In the past five years, MFA has acquired nine individual businesses, some in new geographic areas and others that are additions to current operations. These acquisitions are strategic. The company continues to be committed to capital expenditures that substantially upgrade grain facilities, feed mills and supply warehouses while simultaneously investing in joint ventures that strengthen the company.

The company has also made substantial investment in software enhancements to provide a platform to allow faster access to data, improved data management and customer access to their data in the MFA system.

MFA’s marketing and sales have specific financial targets and have achieved growth in almost all areas. Although fiscal 2015 was affected by untimely rains that prevented planting across significant areas of the trade territory, MFA’s efficiencies and stable operating platform continue to support growth both for the cooperative and its member/owners.

Nationally, MFA Incorporated is ranked in the top 10, not just in comparison to other cooperatives but in all of retail agriculture: in retail sales, number of storefronts, grain volume, plant food sales, crop protection sales, seed sales and precision ag sales. MFA has the products and services that are market leaders in the sales territory.

As MFA enters the new era of agriculture, the company is positioned to take advantage of opportunities. MFA is strong financially with an employee base that is second to none; with the right products and services; and with a system designed to create efficiencies and support growth.

MFA is poised to continue the momentum.

Click HERE for the MFA Incorporated and Subsidiaries Consolidated Financial Statements

 


More in the Feb 2016 Issue of Today's Farmer Magazine

Tactics for Taxes

Written by Nancy Jorgenson on .

Time is nearly up to get 2015 in order

Whether you had a good or a bad year on the farm, December is an important time to manage your 2015 taxes. Look at your records and determine your 2015 income. If your earnings look high, you may want to defer income or pre-pay purchases. If your earnings weren’t so hot, you can take other measures. We asked two farm tax experts to offer advice on steps to take now, before year-end, to minimize your 2015 tax liability.

Joe Koenen is an agricultural business specialist for the Northeast Region of the University of Missouri’s Extension Service in Unionville, Mo. “In December, estimate your income to determine where you’re at,” Koenen said. “Unlike other taxpayers, farmers can still make adjustments. You can use income averaging, and it’s a valuable tool.”

Paul Neiffer, a CPA and a principal at the agribusiness practice of CliftonLarsonAllen in Yakima, Wash, agrees that working up an estimate of your income and expenses to year’s end is the first step. “Then you can determine any additional sales you should make in 2015, or any expenses to pay or equipment to purchase to reach your optimum taxable income number.”

Shift income and expenses to 2015 or 2016

Joe KoenenIf your estimate shows you will end up with a large taxable income for 2015, consider pre-paying expenses to offset your income. IRS rules state any expenses taken must be for a business reason. “Since the cost of inputs such as seed, chemicals and fertilizer have gone up in recent years, it’s normally not a problem,” Koenen said.

If you experienced good earnings this year on grain, Neiffer said you can sell it this year but not receive payment until 2016, allowing you to defer the income into 2016. On the other hand, if you need to increase 2015 income, you can bring this income into 2015. This must be done on a contract-by-contract basis, he added.

Koenen added that an easy way to defer income is to wait to sell crops or livestock until after the first of the year. Some elevators and livestock sale facilities allow producers to sell in the current year and defer their check until the next year.

Crop insurance payments based on yield losses can be deferred from 2015 to 2016 if your normal business practice is to sell more than 50 percent of your grain in the year after harvest, Neiffer said. “But the portion related to price can’t be deferred, and this year, most crop insurance proceeds relate to price.”

Koenen pointed to a special provision for deferring crop insurance proceeds in a flood or drought year. “If you normally sell your crop in the year following harvest, then you can also defer crop insurance proceeds,” he said. “However, you must be a cash basis taxpayer, and it must be your normal business practice to delay all crop sales to the year following harvest.” If you receive insurance proceeds in the year following the disaster, you have to report the proceeds that year, he added.

Watch for depreciation rules to change

Both experts say the tax code’s Section 179 expensing can be valuable. “Section 179 allows expensing equipment and breeding livestock purchases, although this option could vary depending on whether Congress makes changes to tax law before year-end,” Koenen said.
Section 179 currently limits depreciation to $25,000 but both Koenen and Neiffer expect Congress to renew it at $500,000 for 2015 and possibly 2016. “We may not know the final amount until late December,” Neiffer said.

Koenen added that farmers get penalized under current depreciation rules. If you purchase more than 50 percent of your depreciable purchases in the last quarter, the depreciation you can take is cut drastically. “Section 179 allows you to determine your income for the year and then decide whether to take advantage of the PAUL NEIFFERoption,” he said.

Recent years brought positive earnings for many farmers, prompting booming equipment purchases toward year-end. “Buying equipment just to save on income taxes is a poor choice,” Neiffer said. “But if you need to purchase equipment, then buying by year-end will save on your 2015 taxes.”

Koenen agreed, saying you should buy equipment only when you need to upgrade or replace it. Generally, you don’t know your income or ability to purchase machinery until the end of the tax year draws near.

Neiffer added that you can also depreciate things like new buildings, irrigation equipment and conservation investments. If the 50 percent bonus depreciation comes back, you can deduct half of any new items, plus take regular depreciation on the remainder. The asset must be placed in service before year-end to qualify.

“For example, if a farmer spends $50,000 on a new machine shed before year-end, but the machine shed is not complete until 2016, then none of the $50,000 is allowed as a deduction in 2015,” Neiffer said.
Koenen and Neiffer explained how you can depreciate various investments. Most of these improvements must be purchased by the end of the year.

• You can depreciate farm buildings over a 20 year period. But single purpose livestock structures such as a hog barn or dairy parlor can only be depreciated over 10 years. They are not eligible for Section 179 expense. Koenen added that machine sheds and hay barns may qualify for first-year bonus depreciation, and Congress may extend first-year bonus depreciation by year-end.
• Irrigation systems can be depreciated over seven or 15 years.
• Soil and water conservation items can be expensed if you qualify as a farmer—if two-thirds of your gross income comes from farming—otherwise they must be capitalized and depreciated.
• Improvements on rented land can be expensed or depreciated. However, if you later lose that land, you may have to recapture some depreciation or any Section 179 expense taken.


Follow employee rules

“This is an area where I see farmers mess up a lot,” Koenen said. “The IRS states that employees include those who use your tools and machinery and are paid on a time basis such as per hour, day or month. Independent contractors have their own tools and machinery and are paid by the job, such as per square foot of dirt moved, per acre or per bale. If you pay an employee more than $250 in a year, you must withhold employee taxes.”
Here’s where Koenen sees problems. For example, you don’t think you’ll pay that much to someone early in the year so you incorrectly call them an independent contractor and don’t withhold taxes. In another situation, you hire someone to build fence but the fence-builder uses your tools and equipment; you incorrectly call him an independent contractor.

Neiffer expands on the need to determine if anyone performing services for you is an employee or an independent contractor. “There are many rules on this,” he said. “Hiring the local co-op to spray your field is not an employee situation. However, if you hire an individual to work for you and you have control over the worker’s actions, then he/she is an employee.”

Koenen and Neiffer warned that if you break this rule, you may have to pay backup withholding of 30 percent of the employee’s pay. “Fines start at under $100, but go up if you’re caught a second time,” Koenen said.

Neiffer also advised farmers to comply with the Affordable Care Act. “Essentially, if you are providing individual health insurance to more than one employee or reimbursing health insurance for more than one employee and it is not a qualified ACA group policy, you will likely be subject to a $100 per day per employee penalty.”

Line up records and tax experts now

December is the time to get your records in order. As Koenen said, “Estimating taxes requires up-to-date records. You will need all year-to-date income, expenses, capital sales and purchases.”

Neiffer added that most farmers use some type of computerized accounting system, which is great. He suggests that you keep records for at least four to seven years.

Both Neiffer and Koenen feel strongly that farmers and ranchers should seek help from a tax professional, and it helps if the expert specializes in agriculture. “Tax laws continue to change, and without appropriate knowledge and software, it would be extremely difficult for any farmer to prepare an accurate tax return,” Neiffer said.

“They have the expertise and computer programs to make tax estimates fast and relatively simple,” Koenen said. “They can also help determine your best course of action going forward.” Some Extension Ag Business Specialists like Koenen can help with tax estimates.

Is your tax bite getting bigger?

For the most part, federal tax rates remained constant in recent years. However, as our experts point out, farmers and ranchers generally pay more taxes in good years and less in poor years.

“For most crop growers, today’s lower crop prices mean income from past years will start to get taxed in 2015 or 2016,” Neiffer said. “Certainly most cattle ranchers will have higher income taxes for 2015.”

Koenen said that tax rules haven’t changed much, with one exception: “Capital gains rates were raised somewhat on higher income levels in the last few years. This impacts farmers since you have more capital assets than many individuals and businesses, including machinery, land and breeding livestock.”

Neiffer took a stab at predicting tax law changes in the future. “2016 is an election year, so nothing will happen in the coming year, but major tax reform may arrive in 2017,” he said. “Positive and negative changes may be in store for farmers. On the plus side, Section 179 may be set at $1 million permanently, and indexed to inflation. On the negative side, cash accounting for some farmers may no longer be available and depreciation might last longer.”

Here’s your best tax advice

Neiffer and Koenen summarize their best nuggets of tax advice for ag producers.
“Never not pay any income taxes,” Neiffer said. “Many farmers try to get to zero and give up many tax-free items, or don’t take advantage of standard deductions and exemptions.” Farmers need to track how your deferred tax liability might affect you in the future, he added.

Koenen stressed that it’s critical to estimate your earnings toward the end of the tax year so you can make adjustments if necessary. “After the year is over, it’s too late to complain,” he said. “Paying taxes isn’t all bad—it means you had a good year!”

This article provides general suggestions, but you must follow specific IRS rules to avoid penalties. Consult a professional tax preparer for advice on your situation. For more information, search the Internet for “IRS Publication 225, the Farmer’s Tax Guide,” and look for the 2015 version. Also, contact Extension about tax workshops and information.

 

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