On a recent episode of Agday, there was a small feature on a product from Reichhardt called a minibatt.  This is a very small hand-held portable combine that allows the farmer to harvest a small amount of grain and get a very quick reading on moisture levels of the crop.  

I know growing on our farm, it was a royal pain to get a sample and take it to the elevator to get a moisture reading.  If you have farms spread out all over the county or counties, then you could pay for this machine in a very short time.  Getting your combine into the right field at the right time will is one of the fastest ways to improve the bottom line.

Remember the bottom line is more important than the top line.

The recent Stimulus Tax Package includes an extension of bonus depreication from 2008 into all of 2009.  This means that for all new equipment (including single purpose ag buildings) qualifies for 50% of the cost being deducted in 2009 with remainder being depreciated over the normal tax life of the equipment.

For example, if a farmer bought a new tractor for $150,000 in 2009, the old law would have allowed a normal depreciation deduction of about $16,000.  Under the new law, the farmer can deduct $75,000 plus about $8,000 for a total of $83,000.  There is no income or cost limits on this deduction.

Also, the new law has extended the $250,000 limit on Section 179 expensing to any taxpayers whose year starts in 2009.  This means that the purchase of qualifing equipment (does not have to be new) can be fully deducted up to $250,000.  This amount is  phased-out once your equipment purchases start to exceed $800,000.   There are other limitations on this deduction, so make sure to check with your tax advisor.

I will pass on some of the other tax goodies from the Act in later posts.

There was a new law passed last year that allows all taxpayers that use the standard deduction to take an extra deduction of up to $1,000 for real estate taxes paid on a personal residence.  This deduction is in addition to the standard deduction.  This deduction applies to farmers who do not itemize their deductions.

I know that many farmers do not itemize their deductions.  This is normally due to their house being paid off and living in a state with low or no income taxes.  If this applies to you this year, please make sure to talk to your tax advisor about this special extra deduction.  It may not be a large deduction, but it is still worth up to $350 or more for farmers in the highest tax bracket.

I saw a great post by Chuck Schwartau from the University of Minnesota Extension deparment.  The post was related to the dairy industry, but is applies to all farming and any business.  For the last twenty years or so, it seems that most people thought they could make easy money by borrowing more than they earned and putting it into stocks, bonds or even farm land.

These days, it looks like we will have to go back to making money the old way – Earn it with both hard work and smart work.  Chuck has many ideas for the dairy industry.  Chuck refers to taking shortcuts that are less productive than doing something exactly the way that it needs to be done.

Are you taking these shortcuts.  If you are, review what the right way is and start implementing it.  It may take more effort, time or capital, but in both the short-term and long-term, your bottom line will be much better.

Some areas to look at are:

• Budget – Is it up to date.  Are you preparing the budget in conjunction with your accountant and banker.  Is the budget both realistic and prudent to maximize the bottom line.  Do you show one budget to your banker and then live by another easier budget.  Your banker is your partner.  You need to be honest with both him and you.
• Production – Are your production plans up to date for what the input costs are and related possible income returns.  There are may sites out there that can help you with this process.  One geat site is the Iowa State University extension department.  Use them to maximize your potential return.
• Capital – Do you have adequate capital.  If not, how can you get it.  Look at a part-time job for you or your spouse.  Many farmers have down time in the offseason.  This may be a good time to earn some extra money from non-farming sources.
• Labor – Is your labor force at the correct size, knowledge, pay scale, etc. for your operation.  At you maximizing your return on your labor.  Do you spend too much time on the tractor and not a enough on marketing and managing your crops.

These are just some of the areas you need to look at.  Sit down with your team and brainstorm on what other areas you need to look at.

As Chuck says make sure you cut the right costs.  “Do not cut off your foot just because it will save wear on one shoe!”

Farmers are unique.  The IRS allows them to pay their income taxes later than almost anybody else.

Noramally all returns are due on April 15 of each year and taxpayers need to pay in their taxes by either having enough withholding taken out of their wages or paying 4 equal quarterly estimated tax  payments in order to not have a penalty charged.

However, farmers can either make one quarterly payment on January 15 (for the previous year) equal to the lower of 90% of their current estimated tax for the year or 100% of the prior year’s tax.  Or they can pay all of their tax by March 1 and not have to pay in any estimated taxes.  These options can save the farmer up to 5-10% on their tax bill due to the time value of money in being able to delay their tax payments for almost a year.

Information on how to qualify for this favorable treatment is at the IRS web-site.  Remember, in order to be called a farmer, at least two thirds of your gross income needs to be from farming

Uncle Sam offers a tax advantage to farmers and fishermen that no other taxpayers receive. When your income is very high compared to previous years, the tax laws allow you to assume that you were able to average all of your farm income over a four year period.

This can save you several thousand dollars of tax. For example, if you had zero income for 2005, 2006, 2007 and then had $300,000 of farm income in 2008, with out this income averaging, your tax bill for 2008 would be about $72,000. By income averaging, your tax bill for 2008 would fall to $42,000, or a savings of about $30,000.

You need to make sure that your tax preparer is aware of this in any year where your income is much higher than the last three years.

David Kohl, ag lending consulting, divides target farmers and ranchers for future agricultural lending into four categories and percentages:

• 10 percent approaching $600,000 in annual revenues and planning to grow this toward $1.5 million in revenue
• 30 percent that will be scaling down to a rural “lifestylers” or those commonly living on five to twenty acres
• 30 percent that will be exiting farming
• 30 percent that are focusing on efficiency versus growth in maintaining viable farming operations

Kohl contends that ag lender’s most important customers will be the 30% that focus on efficiency and not just growth.

I tend to agree with Mr. Kohl since many farmers went bankrupt in the late 1970’s and early 1980’s from growing way too fast. Remember, the most important number on your profit and loss statement is the bottom line profit number, not the top line revenue number.

House Democrats proposed last week an $825 billion stimulus measure including $275 billion in tax breaks and $550 billion in spending that touches almost every area of the economy including agriculture.

• The bill included $245 million for the Farm Credit Service Agency to purchase a computer system to considered necessary to implement the 2008 Farm Act.
• $100 million to guarantee $2 billion in loans for farming, ethanol production and other rural business activities. This equates to an estimated 5% write off of these loans.
• $8 billion to guarantee up to $80 billion in loans for proven renewable and transmission technologies. This equates to an estimated 10% write off of these types of loans.
• $2 billion for energy efficiency and renewable energy research, development and deployment.
• $1.5 billion to support $3.8 billion in grants and loans to help rural communities fund drinking water and wastewater treatment systems.
• $400 million for Natural Resources Conservation Service watershed improvement programs.
• $2.825 billion for rural broadband infrastructure.
• $20 billion for food stamps.
• $30 billion in highway infrastructure.

This is a lot money and I hope Congress and the government does a better job of investing it than they have in the past.

I was one of the last baby boomers (missed the 1950’s by 28 days) and all of my four boys will end up being known as the Millennial generation. Many of these will end up being your employees and the type of compensation and feedback that works for us does not work for them.

Chris Howard, Ph. D at the University of Oklahoma provides insight into how to interact with this generation. Some characteristics of this generation are:

• Taught to question authority at a young age.
• Saw lifelong employment end.
• Have no shared heroes–heroes are personal such as friends known to them.
• Question the sacrifices that Boomers have made to achieve their success.
• They are latch-key kids and raised as their parent’s “friends.”
• In thinking, they are independent, poor team players and great entrepreneurs.
• Have an attitude of prove it to me.

I can tell you all four of my boys have most if not all of these characteristics.

Dr. Howard also indicated that Millennials are:

• Generally optimistic.
• Hi-tech with electronically inclined communication and entertainment (my son’s cell phone at 2,600 text messages in one month).
• Individualistic, yet team oriented.
• Difficult for them to focus on “non-stimulating stuff” it’s DVD over books.
• New types of friendships with parents–parents catered to their wishes and did the most possible for their Millennial kids.
• Ambitious yet may appear clueless–once they accomplish a task they “expect gold medals for showing up,” but they are highly confident in their ability.
• They are “needy.”

We need to understand this generation to work effectively with them. We need to understand that they are not wrong, but simply different and the goals that worked for our generation do not apply to them.

The quicker that you grasp and promote this, the better your employer/employee relationship with Millennials will be.