“On taxing options, you state that hedges apply to crops that you raise or feed. However, you say if you raise wheat but have no livestock an option would not be a hedge. I am confused. “

The tax definition of hedging is when a farmer has made a transaction to minimize or eliminate the risk of price action going against them.  For example, a wheat farmer may purchase a contract on the futures market to sell short their wheat at $7 per bushel.  This contract has locked in the price that the farmer will receive (subject to basis adjustments).  By entering into this contract, if the price of wheat goes up a $1 at the elevator, the farmer will get cash of $8 per bushel but lose $1 on the futures contract for a net of $7.  This is what the IRS calls a hedge.

Conversely, if a farmer only raises livestock and purchases a long contract to buy corn at $5 per bushel, they have hedged their feed costs by locking in corn at $5 per bushel (again subject to basis adjustments).

However, if a wheat farmer with no livestock operation, buys a long contract or a call option to purchase wheat at $7 per bushel, the IRS views this as not being a hedge, but rather speculation on where the price of wheat is headed.  In this case, the gain or loss on the sale of this contract is considered 60% long-term and 40% short-term.  If the farmer has a gain, this may work in their favor since 60% of the gain is taxed at a maximum 15% federal rate, however, if the farmer has a loss and no other capital gains, this loss is limited to $3,000 per year until it is fully used up.

This is why it is extremely important for a farmer to know what is a hedge and what is not for tax purposes and how it can affect them.

Just like a farmer coming to the last row of the last field of the fall harvest, today is my last day of what I call harvest time for CPA.  We have put in long hours since the first of the year (my last day off was on January 10), but this is my favorite time of the year.  Just like when I was growing up driving the combine was my favorite time.

I just want to wish my readers my thanks for their questions and feedback and now that things will be a little more back to normal, I will try to do more posts and keep the site going strong.

Thanks.

 The idea for this blog was a glimmer in my mind at the end of 2008.  While surfing on the web, I found the Golden Practices web-site that listed different industry specific blogs.  This spurred me to action and with their help, we had a fully up and running blog site in the first quarter of this year.  Some of the experiences and reflections that I have for 2009 are:

• 1.  Our readers are a very geographically diverse group.  I expected to have most of my readers from the corn belt of the US, while this is true, we seem to have many readers from India, Australia, Canada, Europe and all over the globe.  I assume most of them read English and I hope they have learned a lot about US farming.

2.  Altough I am a CPA by trade, I grew up on a farm and farmers are business people first, and taxes and finance and accounting is just part of the equation.  I have tried to balance my posts with operations, marketing, accounting, taxes and trends. 

3.  I believe that the mega trends are and will continue to support farming as a great business going forward.  All of the world has to eat and this requires farm.  Horse and carriage was replaced by cars which may be replaced by some other form of transportation a 100 years from now, but we will still be farming at that time.  China and India other growing countries will demand better food with more protein as they mature.  Our American farmers will be there to provide a lot of this food.

4.  I have set an ambitious goal for myself to get some type of online “Farmers Tax Guide” up and running by the end of 2010.  I have several parts of it done, but to be fully operational and run the way I want it to may require programming skills that I do not currently have.  Also, with tax season for me rapidly approaching, not much will get done between now and April 15.

5.  The best thing about this blog are the wonderful people that I have met or communicated with that are doing similar blogs.   A couple that you should check out at “The Exuberant Accountant“, “The Roth & Company Tax Update Blog“, and “Legacy by Design“.  You can not go wrong by checking these sites out.

6.  I thought I would get more comments on the postings and for several months, I did not get any at all.  Recently, I have started to get more comments and e-mails and I really appreciate the feedback.

7.  I also enjoyed trying to work up “White Papers” or “Tax Bulletins” on subjects that my readers have questions on.  I have already done several of these and I am planning on putting them in a little better format and posting them to the site early in 2010.

Last, but not least, we want to wish everybody a prosperous New Year in 2010 and we look forward to seeing what the year brings.

I would like to get some interaction going with my audience.  I would appreciate any questions that you might have about farm taxation, operations or any other questions that you might have.

Please feel free to send me a quick or detailed e-mail to paul@hansenneiffer.com.  I will promise to try to get an answer to you with 48 hours.  Let me know if you do not mind me sharing your question and answer on the FarmCPAToday site and I will try to post these on at least a monthly basis.