One of the great options open to farmers is to pay their employees in-kind wages.  In-kind wages are the payments of the crops that a farmer grows.  For example, a farmer could pay their employees either cash wages of $10,000 or 1,000 bushels of soybeans worth $10,000.  The reason that a farmer would want to do this is that in-kind wages are not subject to self-employment taxes.  On $50,000 of these types of wages, the savings to the farmer and employee would total about $7,500.

Generally, we suggest using these types of wages where the farmer has a C corporation set up to do the farming operation and it will pay some of the farmer’s wages in-kind.  The structure of these wages is very important since if the IRS determines these are a cash equivalent, then the wages are subject to payroll taxes.

Wages paid in-kind are crops that are transferred from the employer and put into the name of the employee.  The employee then has the risk and reward due to the fluctuations in the value of the crop.  For example, the employer may transfer 1,000 bushels of beans to the employee at $10 per bushel or a total in-kind wage of $10,000.  This amount is reported to the IRS on the employee’s W-2.  After receiving the 1,000 bushel of beans, the employee will determine when and if they want to sell the beans.  If the beans go up in value by 50 cents a bushel, the employee will report a short-term capital gain of $500 (if held more than a year, then it is long-term).  Conversely, if the beans drop in value by 50 cents, they will report a short-term capital loss of $500.

The highlights of what is required to qualify is as follows:

• Did your employees perform agricultural related work?
• Did you pay the employees in commodities raised and harvested on your farm?
• Did you pay them a partial cash wage?
• Did you have an employment contract with the following:
  • Was it written
  • Was the employee’s duties defined as Agricultural labor
  • Did it state the employee would be paid a commodity wage
  • Did it state the type of commodity
  • Did it state the quantity of the commodity
  • Was it signed by both the employer and employee
  • Was it notorized on the date of the agreement
• Did the employer remove the lein, if any, on the commodity paid to the employee?
• Was the grain in open storage and not a warehouse receipt?
• Was the grain readily marketable and not contracted for sale?
• Did the employer notify the warehouse to transfer the commodity to the employee?
• Do you have bill of sale for the transfer
• Will the employee be responsible for the following:
  • Assuming the risk of loss due to price fluctuations, damage, death, etc.
  • Assuming the costs of owning and maintaining the commodity
  • Holding the commodity long enough to prove ownership and control
  • Marketing the commodities themselves

Again, these wages normally work best between a corporation owned by the farmer and the farmer as employee.  You still should make sure to pay enough cash wages to provide four full quarters of credit for social security purposes.

This is a complicated part of farm employment and make sure to review this with appropirate legal and tax advisors to enjoy the benefit.

The American Recovery and Reinvestment Act of 2009 delivered several tax goodies for farmers and their families.  Here are some of the highlights:

1.  Higher Education Credits – You can now have a maximum credit of $2,500 for higher education costs and this applies for the first four years of school instead of the old two year rule.  The phase-outs have been increased substantially so that most farm families will be able to take the whole credit.

2.  First-time homebuyer’s credit.  If you do not currently own a home and have not owned one for three years, you can now get a $8,000 rebate from the IRS.  This applies to any home before December 1, 2009.  The amount is 10% of the home’s price up to a limit of $8,000.  It does phase out if your income is too high.

3.  Making work pay credit.  This credit is intended to partially offset your social security payroll taxes.  The credit is limited to $400 for individuals and $800 for joint filers.  If you work outside the farm for a wage, this credit will increase your take home pay, but your claim the credit on your tax return.  The amount is phased-out depending on income.  This credit is available for 2009 and 2010 (for right now).

4.  New car sales tax deduction.  If you purchase a new car in 2009, you can deduct the sales tax even if you do not itemize or claim state income taxes.

5.  Bonus depreciation.  The 50% bonus depreciation on new equipment purchases is extended through the end of 2009.  For farmers, certain special use buildings may qualify for this bonus.

6.  Section 179 expensing.  This has also been extended till the end of 2009.  This allows you to expense up to $250,000 of equipment purchases in most situations.

7.  Carryback of small business net operating losses.  If you qualify, you can now carryback your net operating loss five years instead of the normal two years.  An eligible small business is if you average less than $15,000,000 in revenues over the last three years.

These are some of the tax goodies that this law is providing.  As usual, you need to discuss these with your tax advisor since there can be complications that are not apparent with the above summary.

It seemed for several months that the credit squeeze was passing farmers by.  However, lately I have ready several acticles about the credit squeeze hitting farms and farmers now.  Frontier Bank in Colorado specialized in loaning to farmers and it went under a couple of months back.  Most of these farmers using the bank were either unable to get loans with other banks, or their credit lines were shrunk so much, it was same as not having a loan.  The Ag Department is trying to help these farmers, but it may be a case of too little too late.

I think it is imperative that you communicate as much as you can with your bankers.  Even if times are looking a little tight, discuss it with him or her.  A good banker understands that the business cycle (even the farming business cycle).  Keep your budget up to date and let them know any bad news immediately.

 If you are a corn or bean farmer, the pricing for your crop for the new year should enable you to make a profit.  I would suggest start locking in part of the profit.  This will make you and your banker sleep easier.  If you are a dairy farmer,  determine how long you can continue to lose money at the current pricing.  If it is less than a year, consider selling the herd while it still has value.

Remember, the most important part of farming is what you can do now and in the future.  What happened in the past is done and can not change.  A good manager realizes that and will focus on what makes the most sense now and tomorrow.

In my previous post, I listed six reasons why strategic plans fail.   Strategic plans will succeed if they incorporate three main phases:

1. The first phase is “intuitive thinking ” and it has more of an emotional attachment to it.  This first phase answers the bigger questions such as, “Why are we in business?  Who are our customers?  What matters most to us?  Where do we see our farm in the future?”  These are the big picture, intuitive and often emotionally loaded questions.  At the beginning of a strategic plan, everybody involved needs to have time to thoughtfully think and ponder on these questions.
2. The second phase is the long-range planning.  Instead of being intuitive, it becomes very analytical.  It is about understanding such things as where your farm fits in the marketplace, what your strengths and weaknesses are.  So it is very analytical and much more comparative.
3. The third phase is operational planning.  This is when you get very practical and specific.  Based on your intuition and analysis, you now cover the specific issues that you uncovered.  During this phase it is a matter of understanding what, when and how you can get things done.  For the things you plan on doing, you create the specific plan to get them done.

My thanks to Ron Price of Price Associates  for his great analysis on this subject.

I found a great article written by Ron Price, CEO of Price Associates, in AgProfessionals.com regarding why strategic plans fail.  At one time, I was in a manufacturing company that periodically performed a strategic plan that had many of the problems brought out in this article.

In short, there are six primary reasons why strategic plan fails:

Lack of focus – Many people get lost in in trying to define their plan, vision, mission, etc.  Therefore, when it comes time to implementing the plan, they are out of steam and this is not conducive to a good plan.

 Lack of energy/resources -  Some people run out of money or energy before they can get the practical part of the plan started.  Many companies spend so much money on the vision, that they have nothing left over for the plan.

Lack of understanding – Others confuse strategic planning with operational planning.  Altough I am CPA, I know that you can not use an accountant’s mind set in setting up and perfecting a strategic plan.  It requires a long-term managerial mind to keep them going and perfected.

Lack of accountability – Many plans become too political.  There is so much time spent on protecting turf, that little of a pratical nature gets done.

Lack of follow up – Many companies end up with a very detailed notebook on how the plan is to proceed, however, they end up putting it on the shelf and never implementing it.

Lack of flexibilty – Many plans fail since circumstances change and the plan has no flexibility to allow for changes to the plan.  Good strategic plans will allow for a review mechanism to allow changes at any time.

I think over the next several months major changes will be made to the estate tax laws.  Right now, each individual can have a tax-free estate of $3.5 million.  Next year it is unlimited, however in 2011, it reverts back to $1.0 million. 

I think Congress will make changes this year to make the current $3.5 million estate permanent and indexed to inflation.  I also think they will allow married couples to combine the estates if it was not used up at the first death.  Farmers will most likely be allowed to reduce their farm valuations by a larger amount than is currently allowed.  All of these amounts may also be indexed with inflation.

This means that most farmers should be able to pass on their farms to heirs on a estate-tax free basis.  If the total value of the farm and other assets is less than $7.0 million, then it should be estate-tax free.  I know there are many farms with a value greater than $7.0 million, but compared to the old $2.0 million combined limit, these new amounts will make many more farms free from tax.