About This Episode
Chris Barron works through a year-end checklist with farm CPA Paul Neiffer. Neiffer says producers normally lean on three levers in December: prepaid farm expenses, buying equipment, and deferring crop sales. Two of those were compromised this year, because vendors could not lock in seed, fertilizer, chemical, and fuel pricing, and because equipment ordered in December might not arrive until 2022 or 2023. That leaves deferred payment contracts as the clean move, and they also give the CPA room to pull income back after year end.
The mechanics matter. Equipment is deducted when it is available for use on your farm, not when you write the check, so an invoice from a dealer for a machine that has not been delivered is what Neiffer calls audit lottery. Buying a one-year-old tractor sitting on the lot works, and trading it next year produces a gain but a full deduction on the replacement. Prepaid expenses need a true invoice with item, quantity, price, and extension, capped at 50 percent of other farm expenses including depreciation.
Neiffer flags the employee retention credit as the payroll item most farmers were about to miss, since farms file a 943 in January. He also raises transition planning: partnerships with negative capital accounts can generate a seven-figure tax bill the moment they transfer to the kids, so successful operations recalculate that liability every year or two and work it down on a schedule. He previews his contribution margin session for the Ag View Executive Business Conference in Phoenix.
“It isn't when you actually pay for it. It's when it actually is available for you to use on the farm.”
— Paul Neiffer
Key Takeaways
Equipment is deductible when it is available for use on your farm, not when it is ordered or paid for; deducting an undelivered machine is what Neiffer calls audit lottery.
A prepaid invoice must show the item, quantity, price, and extension. An invoice reading 'prepaid deposit, $50,000' gets thrown out on audit.
Prepaid farm expenses are capped at 50 percent of all other farm expenses, including depreciation.
If the dealer substitutes a product because they cannot deliver, the prepay stands; if the farmer makes the substitution, it is invalid.
The employee retention credit is worth 70 percent of payroll up to $10,000 per quarter per employee, so three employees could mean $21,000 in a quarter; it is claimed on the 943 filed in January.
Transferring a partnership with negative capital accounts to the next generation can trigger easily $1 million of tax, which is why Neiffer recalculates the number every year or two.
Full Transcript
Chris
Barron: Welcome everybody to another episode of the Ag View Pitch, and today we have with us Paul Niefer. Paul, how's it going today?
Paul
Neiffer: Actually, it's going pretty well. I, offline, I was telling you about how I almost forced my wife to hyperventilate because we were going up too steep of a hill in our little new RZR, but, but I survived that, so that's a good sign.
Chris
Barron: Well, you need to make sure you keep your wife healthy because she keeps you healthy, so, you know, yeah, I'm, I'm a Firm believer, happy wife, happy life.
Paul
Neiffer: So, yeah, so I failed that for a few minutes there.
Chris
Barron: So maybe you better stick to tax returns instead of driving her around on a Razor. I don't know.
Paul
Neiffer: Yeah, I think that's probably a good idea.
Chris
Barron: Yeah, or let her drive next time. So, so, um, so Paul, um, you are going to be one of the keynote speakers at our Executive Business Conference in Phoenix. We're really excited about having you there and— and just kind of touching on some things. What are some of the things you're going to hit on at, at the event?
Paul
Neiffer: Well, I think one of the things— and you and I have talked about it before— is, is farmers sometimes get lost in— I won't say the weeds, but they get lost in trying to calculate things based on net profit or net loss, whether it's per acre or what. I'm actually going to do a fairly detailed discussion on why they really should be looking at contribution margin. You know, that contribution margin. As long as you have positive contribution margin, it's going to drop to the bottom line. But you also have to understand what is contribution margin, how is it calculated, where should you be using it. So that's one of the things I'll definitely, you know, definitely discuss with everybody. And then of course, being the farm CPA, with the fact that we have Congress trying to pass the Build Back Better Act, and we may have that act passed by then.
They're already talking about it might go into 2022, but we should have it by the end of January, I hope. You know, I'll certainly review what was passed, how it affects farmers, what they should be doing going forward to, to make sure that it doesn't affect them on a negative basis.
Chris
Barron: Okay, that's awesome. Yeah, that contribution margin and just the educational piece of that. I've been there when you've gone through that with producers and some other events. And I think that's going to be going to be huge. And like you said, there's going to be a lot of tax information that we're going to be a little bit smarter on when that time rolls around. And, and so we're really excited to have you there. The other cool part is you're going to be there the entire time, so networking with producers will be really awesome. I know Alyssa told me that as of the recording here today, we've got 12 states represented in the mix. And so it's going to be a phenomenal opportunity for producers to network with you and you to network with everybody and, and farmers to network with each other. And so Super excited about that.
We've got Joe Vaclovic there also, and Shay and myself, and Damian Mason, who I know you just did a podcast with not too long ago. So, if people haven't listened to that, go on to Damian's podcast and catch that. And I just did one with you on your podcast as well. And so, I think that—
Paul
Neiffer: And actually, that should come out early next week. It should probably be out on Tuesday.
Chris
Barron: Yeah, and so, you know, I kind of watch for that. And then, you know, Jim Wiesmeyer, I mean, we're excited to have him there too to kind of talk policy. And this Bill Connerly, who is an economist out of Oregon that's really a sharp dude on just understanding what's going on in the economy. And he's not as directly correlated to agriculture, which I think is gonna be a strong suit. And then as we wrap up the conference, you know, it's the 26th, 27th, and 28th of January, As we wrap that up on the last day, I think we're going to corral all of you presenters. We're going to get everybody sort of corralled and have kind of a spitball Q&A back and forth. Maybe everybody grab a drink and we talk a little bit about just, you know, what did we get out of it? What are some of the takeaways from the conference? What did we not get answered?
And what are some things that we can really change in our business to make a difference in '22 to be successful?
Paul
Neiffer: So Really, and like you say, we're trying— we're, yeah, we're trying to make sure that we do provide some value that the, the participants can take back to their operation and use it to be more profitable. So that's the whole goal, I think, for all of us presenters is to do that.
Chris
Barron: Yeah, exactly. So, so anyway, with that said, um, while we've got you online here, um, part 2 of what we want to do here, Paul, is just kind of get a take on a couple of key things. I don't know if it's 5 or 8 or 6 or whatever, but it's that checklist of We're in December. I mean, I just talked to a client a little bit ago. He's like, boy, I'll be glad when December's over with. You know, it's like that month is when all of a sudden, you know, everything's coming down on top of us with regard to figuring out how did the year end, what do we need to be, you know, lining up from expenses and income and all those kind of things. So from your perspective, Paul, if you were to shoot us a checklist of key things that as producers we need to make sure we pay attention to in December, if that is our year end.
For some it's not, but if that's our year end, what, what are those key things we need to be focused on?
Paul
Neiffer: Well, I think producers have two key things. Well, three key things that they look at at year end. And this year, two of those key things likely are going to be a little messed up. And what do I mean by that? Prepaid farm expenses, you know, typically, you're able to prepay up to a year of, of your seed, your fertilizer, your chemicals, your fuel and oil. However, this year it's going to be difficult to do that in many areas because the vendors just don't have the ability to lock that in. So I think that's something that we have to be cognizant of. Secondly, a lot of farmers want to go out and upgrade their equipment because right now in December, if they buy it this year, it's going to be 100% deductible. Well, you know, if you buy new equipment through John Deere or Case IH or whoever it is, you may not see that piece of equipment until 2022 or 2023.
And that's when it gets deducted. It isn't when you actually pay for it. It's when it actually is available for you to use on the farm. So since those two are likely to be a little bit tougher to do this year, I'm really telling a lot of our farmers, take advantage of the deferred payment contracts. You know, go ahead and sell your crop. If you want to lock in really good prices now, go ahead and sell your crop and set up that deferred payment contract so it comes in in January. And we as a CPA, that gives us a lot of ability when we prepare your tax return after year-end. We can bring some of that income back into 2021 if you didn't do that great of a job of doing year-end tax planning. You know, you ended up prepaying too much expenses or whatever it might be.
So those are the, the 3 key things that we always look at: prepaid farm expenses, purchasing new equipment, and deferring crop sales into the following year. But as I said, this year, deferring the sales, that's the easy part. I mean, that's— that's— there really is no changes there. The other two, you know, depending where you're at, and you may not want to lock in fertilizer at $1,300 a ton, or nitrogen at $1,300 a ton, or whatever it is. So I think I'm more leaning definitely go ahead and enter into a few more deferred payment contracts to optimize your income level.
Chris
Barron: Can I ask you a question for clarification, um, on and with regard to prepayments? Okay, so I'm going to start with the machinery and equipment. So, um, I call our friend Brent Judish up, um, who's— I'm going to have on a podcast here pretty quick on equipment again because of the inflation and everything that's going on. And I, so I call Brent up and I say, all right, I need to— I want a new tractor, I need to— I want it in this year, I need it anyway. I'm not buying it because I want a tax break, I'm buying it because I need it. But he says, well, I don't have it here. It's on somebody else's farm. I got a 1-year-old you can get. Is that doable? If, if you buy the 1-year-old tractor and then maybe turn around and trade that one for a new one later on, can you deduct that one?
Paul
Neiffer: Yeah. Yeah. Yeah. No, if you, if you buy a 1-year-old tractor that happens to be on the lot so you can buy it, you know, you, you bring it onto your farm. And you have it available for use, it doesn't even mean you go out in the field, you just have it available for use, that means we can deduct it this year. Now, if you then trade it, trade it in next year for that new tractor or combine, that's fine. You'll have a gain on that trade-in, but then you get a full deduction on that new piece of equipment. And again, that's at the federal level. You know, certain states, you know, Iowa used to not allow us to full deduction starting in 2021. They're now allowing bonus depreciation, 100% bonus. So it just depends what state you're in. Minnesota can be a little quirky, Nebraska and so on.
Chris
Barron: So if you— but basically if you order the new one and that thing's not going to be in, it doesn't do any good to order it anyway. It's going to be— if you're ordering it, you're ordering it for the deduction in '22.
Paul
Neiffer: Yeah, exactly. Exactly. Now, Some people are out there, hey, if I get an invoice from the dealer and I write the check and so on, I'm going to deduct it. Yeah, that just means you're subject to audit lottery. We call that audit lottery. So the technical answer is it's got to be delivered. You've got to have the ability to use it. Doesn't mean you took it out in the field, it just means you have the ability to take it out in the field.
Chris
Barron: Okay, so what about, um supplies, like you said, you know, the supply chain issue is creating all kinds of chaos. You know, there's a lot of people out putting in Hydrosawn right now in a lot of areas. I've talked to tons of people in the last several weeks that have been able, and the weather's been holding in certain areas too. So obviously that is a prepaid expense. What if, what if the inventories at the elevator or not at the elevator How, how far out can you go there? Does that have to be delivered, those inputs?
Paul
Neiffer: No, no, that's the nice thing about— unlike equipment where you really need the delivery, with prepaid farm expenses, the only requirement is that you have on an invoice it shows, you know, what is the item you're prepaying, you know, uh, 28 or corn seed or whatever it is. The quantity and the price, and then an extension. It really needs to be a true invoice. Too many, uh, what I've seen is the invoice just simply says deposit or prepaid deposit, $50,000, $100,000. That is not a prepaid. If you got audited, they would throw that out right away. So it really needs to be a true invoice. What is the product? What's the quantity? What's the price? And then what's the extended amount? And then secondly is the maximum amount that you can prepay and deduct of those type of expenses is limited to 50% of all your other farm expenses, but including depreciation.
So that these days, that's, that's a pretty low hurdle to get over. It's more the fact that it needs to be what is the item you're buying, what's the quantity, what's the price. And that's why this year depending on who you're dealing with, some dealers don't want to lock themselves into, you know, you know, 1,000 gallons or whatever it might be at a certain price because they don't know what the price is going to be until they get it delivered to them even. So that's why I'm a little bit concerned about it.
Chris
Barron: So if that changes, if they have to make a substitution, does that violate the, the agreement?
Paul
Neiffer: Or if the farmer is the one that does the substitution then yes, that would be a— that would be an invalid, what I'd call an invalid prepaid farm expense. If the dealer can't deliver it, you know, they just physically can't get it and they have to substitute another product to, to meet that order, then that's okay. Where it's outside the control of the farmer, you know, the farmer is not going to get penalized if the dealer can never deliver it, you know, that, that's going to be fine. Or, you know, you're ordering Pioneer corn, you're ordering variety 11432 or whatever it is, and you run out, so they give you 11389, that's going to be fine.
Chris
Barron: Okay, well, that opens the door for a lot of opportunity then on the retailer side when it comes to crop protection prepays or fertilizer prepays, if you got to substitute one thing for another or whatever. Yeah, yeah.
Paul
Neiffer: So, but again, better not be the farmer doing the substitution. That's where you get in trouble. But, you know, if the dealer says 'Hey, yeah, we've sold you this, but you know, we end up— we never got it.' You know, well, that's, that's beyond the control of the farmer.
Chris
Barron: Okay, so another question I have for you is from an accounting perspective. If, you know, you're, you're going to do XYZ Farms returns and you get their final year-end accounting, what drives you nuts when you get that accounting system? I mean, what things can we be doing better in preparation and in distribution of our information to you, the CPA that's going to be doing the tax return?
Paul
Neiffer: Well, I'm going to say a lot of farmers have gotten better. Um, it used to be 10, 15— no, you're not perfect. Uh, you know, I, I will admit 10, 15 years ago was almost the proverbial shoebox. You know, they drop off all this stuff. Now that most people are using some type of computerized accounting system whatever it might be, you know, PC Mars, QuickBooks, uh, CenterPoint, FBS, whatever it might be. That has certainly made our life a little easier, uh, you know. So the more that you can have that data available and then summarize it— we certainly want all the 1099s related to cooperative transactions, governmental payments.
The, the, the more that you can show that you've reconciled your your liabilities, you know, the debt that you have with the bank or on the equipment, and you've actually made that reconciling journal entry to record the interest or to do that properly, that makes our life a whole lot easier.
Chris
Barron: Any issues on the payroll side of things for operations with a fair amount of employees or any, anything there?
Paul
Neiffer: Well, I think this year more important than ever is that we want to make sure as a farmer that you may have qualified for an employee retention credit. We've sort of— I won't say we've ignored that. I mean, we, we brought it to the attention of everybody, but a farmer is filing a 943 in January. So I would say that you want to communicate with your tax preparer, the CPA, or whoever it is fairly quickly in January, or even right now, because it's based on did your revenues go down by at least 20% in this quarter, first quarter, second quarter, third quarter. Of 2021 versus the same quarter in 2019. And if that occurred, and for a lot of farmers it did, if one quarter qualifies, then the second quarter, the next quarter, automatically qualifies. So, you know, and that credit is pretty big. It's 70% of the payroll up to $10,000 per quarter per employee.
So if you had 3 employees, you know, that potentially is $21,000 in the first quarter. $21,000 in the second quarter. And, and it's really— there's no special form that we have to fill out, but we got to do the paperwork crunching, and we need to pick up that credit on the 943 that you're going to file in January.
Chris
Barron: Okay, one of the last questions I have for you here is with regard to transition. There's a lot of farm operations out there, multi-generational businesses. You know, there's never— it's never too soon to start thinking about transition. I don't care what age you are. You know, I don't care if you're in your 30s, you need to to start thinking about, you know, what's that look like to the next generation if you have kids and you have somebody else that might be taking over. What advice do you have there? What are some of the things that, what are some of the tools that people need to be thinking about? You know, 'cause a lot of times, you know, people just don't get going on transition stuff, but there's some things that they need to be thinking about from a tax perspective. What are those?
Paul
Neiffer: Yeah, and that's a good point 'cause, So many of our farm families have, let's say, a partnership that, that is operating the farm, and they bring in the kids, or they want to transition it to the kids, and they have what we call negative capital accounts. You know, they've deducted everything and they have this debt. Well, simply transferring it to the, to the kids is going to be a taxable event, and it could be easily $1 million of taxes, and they're never ready for that. So What we find on our more successful farmers that do a good job of transitioning, they have a— likely every year, every couple years, they actually go through and calculate what is that potential liability. What are the steps that we can take to mitigate that? If we're trying to, let's say, transition it fully in 10 years, what do we need to do year by year in order to keep that liability down?
Now, Other operations, you know, that operate as a corporation, sometimes that corporation can be a little bit easier to transfer because it's capital gains, and the corporation is what really is transferring on. You know, with the partnership structure, it just involves more work at times and potentially more tax liability. Now certainly there's some benefits for the partnership structure, and I'm typically setting up partnership structures But I understand when we're doing transitioning that sometimes that doesn't always work the best.
Chris
Barron: Okay, so that's kind of a segue to wrapping things up a little bit. But it is from the standpoint of the, the presentation I'm going to give is on multi-generational business models and transition. And I'm gonna, I'm gonna corner you and have you on the stage, or at least right beside it, or have you come up there with me and back me up a little bit because You know, as we look at, and there's going to be a lot of operations there that are already put together some structures, but it never fails that, you know, there's a lot to it. There's a lot of things that occur when you structure your business, whether you form an equipment company or trucking company or, you know, your different farming entities that all intermingle with each other. And, you know, everything from the lending side to the risk management insurance side to the tax side.
Paul
Neiffer: You know, to the people's side. Yeah, and the FSA side.
Chris
Barron: All of those things. And so what I want to do in my presentation and to help people think through all these things with your assistance a little bit is, you know, business structure in a multi-business, in a multi-generational business. But I want to talk about the process. Okay, what do we do? You know, the theory is great, you know, and the dollars and cents work, you know, whether it's a collaboration or a family business, but everybody's got to get along. And if we can't get numbers right and we can't get the information accurate, we can't make very good decisions because you've got perspective on one side from one party, perspective on the other side from another party, and somewhere in the middle are the facts. And so what we want to do is make sure that people can get the facts out in front of them so that they're making good decisions for sure.
Paul
Neiffer: Yeah, yeah, yeah, definitely.
Chris
Barron: So anything else I didn't hit on? Are we ready to go? You ready to go to Phoenix?
Paul
Neiffer: I think I'm ready. Well, I'll be in Phoenix even before you guys get there because I got my wife and I have grandkids that we have to take care of for the middle of January. So actually, my wife's doing most of that. I'll help out a little bit.
Chris
Barron: So you'll get, you'll get out of Dodge when you're over at the conference anyway.
Paul
Neiffer: Yeah, exactly.
Chris
Barron: Exactly. Yeah. Sounds good. Well, hey, Paul, we really appreciate your information, your insight. It's phenomenal on the tax side of things, as always. Can't wait to see you in Phoenix and have you, you know, interacting with these, these operations. And, and the quality of people is going to be pretty phenomenal. So thanks for being part of that. Thanks for today, and we'll be in touch.
Paul
Neiffer: Okay, perfect. Thanks, Chris.
Chris
Barron: Yep, thank you, and thanks everybody for listening. We will talk to you again next time real soon, and we'll see at the Ag View Executive Business Conference as well. Thanks a lot.