Income tax season is a favorite for producers near and far (note the level of sarcasm in this statement). While it is a time to collect all the forms mailed to you, review all the forms you need to mail out and determine taxable income and deductible expenses, it is also a good time to evaluate the profitability of your operation.
January is behind us, hopefully taking the bitter cold with it. One thing will not move out with the running of the calendar is the need for producers to become better farm managers. The low market price trend is expected to last through 2017, into 2018. Managers will survive, and maybe thrive, based on the decisions and actions they make. Those viewing themselves as “just farmers” may not.
Tax rules and regulations change annually, so it is important for producers and tax professionals to stay up to date. For 2016 there have been some changes to the farmers and ranchers tax guide. This article will highlight the majority of the 2016 updates.
Depreciation is an important part of keeping records in agriculture. Depreciation is a reduction in the value of an asset over time, due to wear and tear. Things such as tractors, trailers, etc. all depreciate over time. Depreciation is also a way to make an income tax deduction to recover the cost of qualifying assets. Careful consideration of how to report tax depreciation helps producers comply with IRS regulations and can result in a reduction of income taxes paid.
During 2016 cattle prices continued to decline from highs observed in 2014 and 2015. There was continued expansion of cattle inventory levels in 2016, ample feed availability (which contributed to heavier slaughter weights), and expanded supplies of competing meats (such as pork). Early in the year is a good time to assess what those changes mean for price levels and basis expectations to help implement a cattle marketing plan.
While most people must file taxes by April 15, 2017, farmers’ and ranchers’ taxes must be filed by March 3rd. Due to the filing deadline many producers are beginning the process of gathering their important paperwork. In general, the law does not require any specific kinds of records (there are a few exceptions though). A producer can choose any kind of record keeping system they wish to use for their business (ex. Quicken, QuickBooks, Easy Farm, paper ledger, paper journal etc.).
Landowners and producers with pastures may want to revisit Pasture, Rangeland, and Forage (PRF) insurance. PRF is available for 2017 in South Dakota and neighboring states based on a Rainfall Index (RI), similar to a year ago. The 2017 base price used to pay out for grazing losses has been adjusted from the 2016 rate.
It is no secret that compared to recent years the 2016 calf market will be disappointing for sellers. However, producers must make decisions about their 2016 calf crop. There are options available depending on each situation. Some popular press articles have suggested that cow-calf producers should retain ownership to enhance profitability. However, producers should make sure they consider all factors before changing marketing plans to increase their chances for success.
Measuring the farm’s economic success can be accomplished by annually comparing the balance sheet, income statement, statement of cash flows and statement of owners’ equity. Comparing these financial statements can only be done if they are completed at a similar time of the year and if they are completed accurately and consistently.
As South Dakota's farmers, ranchers and communities deal with the challenges brought on by drought conditions impacting more than half the state, SDSU Extension is connecting individuals with resources and research-based information.