This time of the year, many of us are reflecting on the previous year, contemplating changes we need to make in our lives and making New Year’s resolutions of things we need to do to improve our lives personally and financially.
For those of you that are not fully utilizing accounting reports to guide your farming operation – I challenge you to make your operation’s accounting a New Year’s resolution in 2022.
Up to date records allow you to:
- Manage your business operation effectively,
- Manage your tax liabilities effectively (and with less stress), and
- Make family living budget decisions more easily.
Accurate and up-to-date records also demonstrates your commitment to knowing your numbers and providing accurate historical results, which lenders and other capital providers love to provide back to you lending decisions in a quick and seamless manner.
Plus, it’s no fun scrambling around at the end of the year catching up on your record keeping to find out what you need to buy for inputs or equipment to minimize tax liabilities. Keeping the accounting completed throughout the year allows you more time to plan and shop for the best prices on purchases.
In addition to completing your accounting timely and routinely throughout 2022, you should also complete a budget for the upcoming year. Now is a great time to take financial measure of how your farming operation ended the previous year and to also establish your goals for the new calendar year.
A detailed and realistic budget is one of the most important tools for guiding your farming operation and providing the information necessary to operate within your family living means, handle upcoming challenges, and hopefully record profitable results. During the course of the year, you should continually refer to your farm's budget as a way of measuring performance against expectations.
How can you know what’s possible financially in the future if you don’t understand the historical results you’ve posted? The first step in the budgeting process is to make sure you know where your money has gone historically. Know your historical results!
A budget is a planning tool necessary for building a framework for your farming operation and its finances. Combining past trends with realistic forecasts for the upcoming year, a budget provides a detailed view of realistic revenue expectations and how those stack up against your anticipated expenses.
Budgets also help with setting goals and establishing priorities. Like any business, farmers should, at a minimum, look at their total farm operation each year and establish goals for the upcoming year based upon their best guesses of what will happen.
Goals should also be established for the upcoming year. Review expenses line by line, including the reasons and rationale behind any expected change in your cost structure. Will expense line items increase by cost of living adjustments or much more due to inflation? Are you going to outsource less custom hire work? Do your rent agreements have escalations in the current year?
Occasionally, farms will complete their budgets with multiple scenarios – worst-case, most likely, and best-case models are frequently used. This helps farmers to mentally prepare for contingencies and identifying potential changes from initial expectations.
For example, assume a budget accounts for $5.35 corn and $11.10 soybeans. What if, in the middle of the year, soybean prices have dropped drastically and you now expect that your sales price per bushel will be $9.00?
How would that affect your operation’s break-even price for your expected corn production?
You now need to sell your corn for $6.071 in order to break-even. Is that possible — if so, do you sell it all when you see that price available? A portion of it? If not possible - where are you at to budget on other financial statement line items? Do you need to cut expenses elsewhere? Tighten the family living belt?
You are only able to answer these questions and make educated decisions if you understand your numbers and are up to date on your record keeping — tracking actual revenue and expenses and comparing them to what was budgeted. This helps to ensure that your farm is sticking to its plans. Budgeting also offers an important means of identifying problems and opportunities.
A few other hot topic items to think about in early 2022:
- Are you eligible for the employee retention credit? All farming operations with payroll should review the requirements and decide — to be eligible to receive this credit you need to compare 2021 revenue by quarter to the same quarter in 2019. If your revenue is 20% lower in 2021 than a comparable quarter in 2019, you are eligible and are automatically eligible for the next quarter. This credit is good for up to 70% of each employee’s wages, including health insurance, each quarter maxed at $10,000 in wages per quarter ($7,000 max credit per employee). More information can be found at: Employee Retention Credit - 2020 vs 2021 Comparison Chart | Internal Revenue Service (irs.gov). This credit is taken on your 943 or 941 filings. Filings can be amended if you’ve filed already without taking the credit and now have determined you are eligible.
- Why you may want to plan to not file your taxes by March 1 each year – estimated payments during the year or by Jan. 15 can buy you extra time to file your taxes each year. Get all the details on why you may want to plan to not file your taxes by March 1 on our site, greenstonefcs.com.
- Michigan pass-through entity tax enacted Dec. 20, 2021 – On Dec. 20, 2021, Michigan Gov. Whitmer signed House Bill 5376 into law, which amends the Michigan Income Tax Act by implementing an elective flow-through entity tax. Effective for tax years beginning on or after Jan. 1, 2021, the law allows individual taxpayers with interests in partnerships or S corporations to reduce their federal income tax burden by allowing Michigan income taxes to be calculated and paid at the entity level. This optional flow-through entity tax acts as a workaround to the state and local taxes (“SALT”) cap, which was introduced in the Tax Cuts and Jobs Act of 2017 to limit the amount of SALT allowed as a federal itemized deduction to $10,000.𠊊 review of your individual tax situation and possible benefits of the election should be undertaken to determine whether this is an election you should make for 2021. If you have been limited in the past for SALT under the Tax Cuts and Jobs Act of 2017, it’s almost certain this will benefit you from a federal taxation standpoint.
If you are interested in learning more about anything you read within this article, contact your CPA or a local GreenStone branch. GreenStone offers a full array of accounting services for farmers and business owners.
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