The Wall Street Journal in today’s paper had a good article on how ethanol subsidies are even closer to being eliminated.  Under the proposed deficit-reduction plan proposed on Thursday, the 45 cents a gallon blenders credit would be eliminated, however, more than $600 million of aid would be given to service stations to help promote the sale of ethanol.

As long as the mandate remains in place to produce a certain number of gallons of ethanol each year, the eliminate of the blenders credit will most likely have little or no effect on the price of corn.  The credit is simply an additional way of transferring additional revenue to the refineries and does not go directly to any corn grower.  It may affect the price the refinery is willing to pay a little bit, but with the mandate in place, they still have to purchase the ethanol.

It will be interesting to see how this finally turns out.

There is an old saying that when politics gets involved, farming can suffer.  One of the prime examples of this was issue of allowing Mexican truckers to bring products into the US by truck which was allowed for several years.  However, politics got involved a few years ago and the US stopped this and Mexico retaliated by imposing tariffs of up to 45% on certain Ag products exported by US farmers. 

These tariffs taxed about $2.4 billion of products and were especially burdensome to the fruit growers in the US.

Now the good news.  As of Wednesday, July 6, 2011, both the US and Mexico have agreed to allow the truckers back into the US.  As a result of this signing, Mexico will cut in half their tariffs within 10 days and eliminate the remainder once full cross-border traffic begins.

This is good news for our farmers.

Most farmers enjoy certain state tax exemptions that are not always available to other businesses in that state.  For example, in my state of Washington, almost all businesses pay a state Business and Occupation (B&O) tax based upon gross sales.  As a CPA, our firm pays a 1.8% tax on all of our services performed in the state and there are very little deductions available to offset against this calculation.  Most retail and wholesale businesses pay about .5% on their gross sales under this tax.  However, this tax does not apply to farmers in our state.

If this tax applied to a farm operation with about 1,500 acres of good wheat land at 100 bushels per acre and $7 wheat, the total B & O tax owed would be about $5,000 that is not owed now.

During our last legislative session, many groups wanted to get this exemption eliminated, however, farmers were able to get their voice heard and keep the exemption.  But with states seeming to need more and more money, it is probably just a matter of time before this exemption is gone.

Another area of attack is eliminating the exemption on sales of the purchase of chemicals, fertilizers and repair parts. 

Every state has their unique blend of taxes and exemptions.  It is very important that you know how this structure affects your farm operation and what you can do to prevent the imposition of more state taxes.

I never thought I would write a post on FUTA (Federal Unemployment) taxes, but here I go.  The original FUTA tax rate was 6% with an up to 5.4% credit for taxes paid to your state.  Starting in 1976, Congress had tacked on a surtax of .2% for a gross FUTA rate of 6.2%.  This surtax had always been extended until now.  Effective July 1, 2011, the FUTA rate drops back to the old 6% rate.

This means that farmers will need to keep track of the wages paid before July 1 and after July 1 since the rate of tax will be different.  Also, form 940 will need to be revised for these different rates.  In the long-run, this is a reduction in tax, however, for 2011, more paperwork will be involved.

Remember, for farmers, you are required to pay FUTA tax if you meet one of the following two rules:

1. You paid cash wages of $20,000 or more in any one quarter during this year or the previous year, or
2. You employed as least 10 workers at least one day for any 20 weeks during this year or the previous year. 

If either of these two apply, then you must pay FUTA tax.

A farm enterprise must be able to generate enough revenue and net income to support at least one farm family which I call a “living unit”.  A farm operation should calculate how much revenue the farm generates each year and divide that both by the number of full-time equivalent employees (FTE) and “living units”. 

To get the ratio of revenue to FTE is fairly easy.  You take the total revenue for the farm and divide it by the FTE on the farm.  If you have several part-time employees, you should add all of their hours together and divide by 2,080 to arrive at the FTE for them and then add it to your full-time employees.

Let’s take an example:  Assume the farm has revenue of $2.5 million, has 4 full-time employees including the farm owner and hires part-time help that totals 4,160 hours for the year.  Take 4,160, divide by 2,080 and you get 2 FTE and add the 4 full-time employees equals 6 FTE.  $2.5 million divided by 6 equals $416,667.  It is more important to see what your trend in this number is each year and due to the large recent swings in prices, you may want to also calculate acres farmed by FTE to see what your production per FTE is.

To calculate revenue per living unit (RLU) is a little more complicated.  You first need to determine the amount of net income needed to support one average farm family.  You then determine what your average farm margin is before owner’s salaries and benefits and  then divide the net income needed to support the family by this percentage.

Let’s take an example:  Assume one average farm family requires $110,000 of  wages , benefits and taxes to support the family.  A review of the farm showed that the net contribution margin to the bottom line before overall owner’s compensation and benefits was 15%.  $110,000 divided by 15% equals $733,333.  This means for this particular farm, it takes $733,333 to support each family unit employed on the farm.

What many farmers do not realize is how much revenue or acres is needed to support each additional farm living unit that they want to bring into the farm operation.  In the current case of a $2.5 million family farm, it probably could support 3 family units fairly well, however, if they elect to bring into another family member, the farm can not comfortably support 4 with their current revenues.  The farm would need to grow revenues from about $2.5 million to almost $3 million to support 4 family members.

It is important to know what this number is for your operation and what the trend has been, especially if you plan on bringing on more family members to help operate the farm.

The Wall Street Journal had an article yesterday on how Chinese companies are continuing to invest in South America especially in buying up farm land to feed their people.  Through the twelve month period ended May 31, 2011, the China’s investment in Latin America had hit $15.6 billion.

During the last three years, more than 70% of their investments had been in energy and minerals, but farming is attracting more attention. 

This month, China’s largest farming company, Heilongjian Beidahuan Nongken Group signed a joint venture with Argentina’s Creud SA to buy land and farm soybeans.  Creud SA already controls more than 2.5 million acres of land in Argentina.  Heilongjian had already indicated back in March their intentions to purchase 500 thousand acres of land overseas during this year and Latin America is their primary target area.

They are also spending $1.5 billion to develop about 750 thousand acres of land in Rio Negro Province over a ten year period.  These developments will not be a direct purchase of land, but they will be in control of the production.

With the backing of the Chinese government, we will continue to see this type of investment going forward.

Just a reminder that you can now follow me on Twitter.  I had set up my account last year, but with all of the changes with my accounting firm, I had not had a chance to take advantage of using Twitter for quick posts through out the day.  I will be using Twitter to update on any quick ideas, thoughts, etc. that I think are applicable to farmers and ag as they happen in real time.  There are many times when I have a thought that is not quite perfect for a post, but should be communicated and I will use Twitter for this.

Let me know how you like it and any changes that you think would work.

The new owner of the Whittemore Golf Course in Algona, Iowa has plowed it under to put in a corn crop for this year.  This nine hole course was originally built in 1969.  The new buyer decided that it would make more money as a farm than as a golf course.

This has caused some rift in the community since they now have lost their local course.  Here is an article on the change over.

I have a feeling that we might start to see more of this happen in smaller corn belt cities if corn and bean prices stay high and the golf participation continues to decrease.

The Supreme Court has decided to hear a case involving a dispute between the Ninth Circuit on one side and the Eighth and Tenth Circuit on the other side concerning the issue of who owes the tax on the capital gains arising from a Chapter 12 farm bankruptcy.

In most normal bankruptcies, the capital gain from selling the estate’s assets is generally treated like an unsecured claim and if there are assets available, they are used to pay the income taxes in the same pro-rata basis as all other unsecured claims.  So, in most cases, the IRS will only get pennies on the dollar from the sale of these assets.

However, the rules concerning family farm bankruptcies under Chapter 12 of the bankruptcy Code are a little more unsettled and the Ninth Court feels that these income taxes should be treated as an administrative expense and thus have priority over almost all other claims.  This means that if there is not enough assets in the estate, the claim will usually pass through to the farmer after bankruptcy.  This results in an extra liability to the farmer that they are not expecting.

Therefore, since these three Courts disagree, the Supreme Court has decided to hear this case and make a ruling.  I would expect this ruling in the next few months.  I would expect the ruling to go in the favor of the farmers, but who really knows.

Many of our readers will ask us questions about starting a farm, however, when discussing it with them, many of them are talking about a hobby farm and not a real farm.  For tax purposes, a hobby farm has some very unfavorable consequences to the farmer.  Net income is always reported, however, a net loss is limited in zero.

Therefore, how do you make sure that your farm is a farm and not a hobby.  Here are several items to keep in mind:

• Your intent of the farming operation is to make money, not create a tax loss.
• You must run the farm like a regular business.  This means having a separate checking account for the business; do not commingle personal funds and farm funds together; have letterhead and business cards for the farm, etc.
• If the operation runs at a loss for several years, you must be able to document how the farm will finally make money.  In some cases, showing how you have created extra value in the farm when it will be sold will be sufficient, but be ready for an audit if the farm shows too many years of losses.
• A horse farm has a greater chance of being determined as a hobby farm.
• The size of the operation can affect the hobby status.  It is fairly hard to argue that a 2 acre garden plot is a farm (however, in some extensive forms of farming, this can be true).

Remember, the key point to ask yourself, is this truly a operation operated like a farm business, or is it merely intended to create a tax loss.  If it is the latter, then it is more difficult to not treat as a hobby.