Farms need to start year-end financial plan now to avoid problems later
With current commodity prices at record levels and crop yields still unsure 2012 will be a year where farms will want to do some early year-end financial planning.
Allowing too much of an income swing can push a farm into higher income tax brackets that will require a farm to pay more income taxes which can result in an intense downward income swing for the farm the following year. This potential for low or negative income in 2013 may create a situation that would not allow the farm to take advantage of some basic tax deductions.
In the past few years, crop farms in the Thumb and Saginaw Valley regions of Michigan have had strong commodity prices and good crop yields. Many farms have managed income by marketing much of the year’s crop production in the winter of the following year. In this situation farms would have carried the bulk of the 2011 crop production into 2012 which allowed the farm to take advantage of some very good commodity prices and fixed the 2012 crop sales income early in the year. In this case these farms would then carry the bulk of the 2012 crop into 2013 for marketing. This is where the droughts impact on 2012 crop production will impact 2013 farms with reduced bushels to market during the winter months.
Farms that expect to have less 2013 income may want to evaluate options to decrease the projected 2013 expenses. One method to reduce next year’s expenses is to claim this year’s supplies as a pre-paid expense.
There are a few rules to consider when using pre-paid expenses when claiming expenses as 2012 deductibles. The best recommendations is to review your situation with your tax advisor who can help with recommendations in building your year-end plan and define the requirements for putting the plan into action.
It is key to have the cash-flow to handle the purchase of pre-paid expenses before the end of the year farms will need to do some detailed planning. Some farms have used their operating line of credit to fund these purchases with the ability to pay these borrowed funds back shortly after the start of the new year with crop sales. In many cases the early seasonal discounts offered by some of the seed, fertilizer, chemical and other supply companies have more than offset the credit cost of borrowing the funds for three to five months. However, if you see that the drought will reduce your crop carry forward this may limit the cash income that will be generated by the winter sales of 2012 crops. Implementation of a plan now may be needed to avoid cash flow or credit problems as the year rapidly closes after fall harvest is completed. It seems common that when fall harvest kicks in farms have little time or ability to focus on other risk or management activities so now is the time to develop year-end plans.
Farms have often depended on last minute equipment purchases as an expense management tool in the past but for 2012 as equipment purchases will do little to help reduce the 2013 production expenses you may want consider another option. Every farm needs to expand their window of financial cash-flow planning into a multi-year framework to obtain the farms very best potential results.
- MSU Extension’s Drought Resources