Tax tips for cow-calf producers

Second, your banker needs financial statements to ensure you are a good customer to loan money to.

Third, you need tools to make business decisions on your ranch, referred to as economic analysis.

Today, we will focus on taxes.

Tax tips for livestock producers

“The cow-calf business is unlike any other business,” says Tina Barrett, director and financial consultant of the Nebraska Farm Business Inc. Barrett offers the following tips for keeping good tax records.

Remember the saying “Garbage in, garbage out”? It applies to taxes.

What goes into keeping good tax records?

Keep track of livestock. This is a problem Barrett routinely encounters that could have major tax consequences, as the classes of livestock are reported differently to the IRS. Separate purchased livestock from raised livestock. Separate breeding livestock from raised livestock.

This separation is especially important if you sell cow-calf pairs. Barrett explains, “For example, if you sell a cow-calf pair, the tax consequences of the calf and the cow are different. Even though you received one price for both animals, we need to make an allocation between them.”

The raised calf would be reported on Schedule F, while the cow would be reported as breeding livestock on Form 4797. “The raised cow will be taxed as capital gains income (the lowest category of tax you can pay), which could be 0 percent depending on your income. The raised calf is properly reported on Schedule F, which is subject to ordinary income taxes plus self-employment taxes.”

“This could be as high as 40 percent, but the tax rate is likely to be closer to 30 percent. If you incorrectly labeled the breeding cow as an inventory sale (like the calf), you could pay more taxes than you need.” On the flip side, if you did not split the income for the pair and reported it as a cow sale, you could be “grossly under-reporting income, and the penalties from the IRS are not fun for that.”

Keep track of all expenses and income. This includes ranch expenses and family living. In a perfect world, family living and the business expenses would never commingle. However, life is messy. Cattlemen “live” in their business office. Does anyone remember going on “vacations off the ranch” that were really out-of-state bull sales? Keep accounts clean by using categories to separate family and business.
Decide what you need to measure at year-end. Create categories or classes for these needs. Use the Schedule F for taxable deductions, or ask your accountant for a list of taxable income and expenses.
Do reconcile your records using your bank statements. This allows you to catch keyboarding mistakes and correct them.
Be accurate by using splits. Splits allow you to “cut up” a large invoice into multiple categories. Be consistent and realistic with your splits.

One example could be the telephone bill to your house. Because your office is in your home, you could split the bill so 20 percent goes toward the business and 80 percent goes toward family living every month.

Another example is an invoice from the cooperative. The co-op bills you for bagged mineral, a box of eartags and filling your fuel barrel with farm diesel. Use splits to divide the bill into feed expenses, supplies and farm fuel.

Remember, the principal on an agriculture loan is not deductible. The interest on the ag payment is deductible. You will need to know the amounts for both, not just the total amount due for the loan.

Paying taxes is not a bad thing. Paying taxes means you are making money. As business owners, we want to be profitable. With your accountant, look at your accrual income and try to even out the tax bill and take advantage of low-tax- bracket years.

Try to save a little extra during profitable years and build up a “rainy” day fund. Also, in good years, use these opportunities to pay down operating notes. Consider investing $5,000 every year into a traditional or Roth IRA for retirement.

The snowball effect

Too much of a good thing can be a bad thing. Prepaying expenses is a good way to reduce taxes; however, what if you have several years of good profits … in a row? While snowballing prepayments over the years, what if you decided to start rolling over the portions of calf crop to the next year?

Think of your tax load if you have prepaid all your expenses the year before, then sold two calf crops the following year. Ouch. Double income and no expenses in one year. This is a worst-case scenario, but “continual tax avoidance eventually will catch up,” Barrett states. “Paying some taxes each year could result in a lower amount of tax paid over the life of your operation.”

Counting cows

Sometimes the hardest thing to do is count cows. Accurate inventory of purchased, sold, dead and livestock on hand is important – but hard to do. Record information while it is fresh in your mind. For example, write down which cull cows are purchased or raised as they load on the trailer.

Document the number of cows exposed, calves born in the first 21 days, or pregnancy rates when you calculate these numbers during the year.

Feel comfortable keeping records to file taxes? This year, I challenge you to keep books for more than the tax accountant. Why bother with understanding your financials? Financial or economic numbers can solidify or counter-balance a “gut feeling.” With a few extra bookkeeping steps and production numbers, analyze your ranch for financial and management decisions, too.