Cutting costs is a no-brainer for 2018. In fact, you’ve already found ways to do it. You’re not purchasing that big new piece of machinery or you’re buying a used piece. You’ve found better deals on seed, chemical or fertilizer. You’ve tightened up expenditures for fuel and insurance.
But there may be even more ways to spend less. Here are four ideas you may not have considered.
1. Pay employees in commodities.
Have you ever thought about paying your agriculture employees in commodities like grain or livestock? This is a very useful tax-savings tool. Wages paid in commodities are exempt from Social Security and Medicare tax for both employee and employer. Agricultural wages paid in commodities can be used to pay your spouse, children over age 18, or any other employees who are subject to FICA tax-withholding rules.
In addition, wages paid in commodities are not subject to the federal income tax-withholding rules generally required. There are specific rules on this that you will want to discuss with your tax preparer. The IRS has some guidelines outlined in the “Market Segment Understanding—Guidelines for Agricultural Labor—Noncash Remuneration.” (https://www.irs.gov/pub/irs-utl/farmers_atg_chapter_7.pdf) A few of the guidelines are:
• The wages must be paid for agricultural labor.
• The employee must exercise dominion and control over the commodity.
• The payment must not be equivalent to cash.
• The employer must include the fair market value of the commodity transferred in the employee’s gross wages in box 1 of W-2. This is based on the commodity value at the time of transfer.
• Income equal to the fair market value of the commodities at the time of transfer must be recognized by the employee.
• A deduction equal to the fair market value of the commodities at the time of transfer is allowed to the employer on Schedule F as wage expense. However, the value of the commodity shown on the employee’s W-2 must also be included on Schedule F as additional grain sales. This will show a net effect of zero income on the Schedule F.
• The employee will record the gain or loss on the commodity sold as a short-term capital gain or loss on the Schedule D in the year the employee sells the commodity. This gain or loss will be calculated as the difference between the fair market value of the commodity at the time received and the actual sales price.
For thousands of years, the agricultural economy depended on bartering. Today, this practice is less common and rarely used. There are logical limits to what and how much you can barter, and you don’t want to put yourself into a position with a product whose quality you may not know. But it’s worth looking into a barter arrangement if cash is tight or you think your products or services would make valuable trades. For example, you need a combine for harvest and your neighbor needs some fence repaired or built, or you have extra hay and someone else has manure or excess chemicals. You can stretch your budget by swapping one product or service for another and avoid cash outlays. You can get rid of excess inventory and/or leverage your skills and talents.
As usual, the IRS has rules on this as well. The IRS states, “If you’re paid for your work in farm products, other property or services, you must report as income the fair market value of what you receive. The same rule applies if you trade farm products for other farm products, property or someone else’s labor. This is called barter income. For example, if you help a neighbor build a barn and receive a cow for your work, you must report the fair market value of the cow as ordinary income. Your basis for property you receive in a barter transaction is usually the fair market value that you include in income.” More information about the IRS rules can be found in Publication 225 Farmers Tax Guide. (https://www.irs.gov/publications/p225)
3. Yes, really, set goals and stick to a budget.
Don’t just think about—do it. If you don’t have goals or a budget, you don’t know where you are going or how to even measure if you are getting there. Remember, you can’t manage what you don’t measure. This may not seem like a big cost-saving tool, but budgeting goes right along with reduced business costs. That’s because it’s difficult to make smart business decisions without a clear idea of the revenue and costs you have coming in and going out of your business every month. A business budget that identifies your costs on a per-acre or per-head basis can become a powerful tool for knowing and reducing your business costs successfully.
4. Do the math on reducing input costs by sacrificing yields.
Yes, you may have thought about this idea, but what about more than just shopping around and finding the best deals? Can you cut input costs that sacrifice yield without having this strategy backfire? The answer may surprise you. Of all the input production costs, seeding rate and cost of seed have almost doubled in the last 40 years. The question in today’s high-cost environment is, “What yield am I shooting for and what is the cost?”
You may be able to reduce your seeding rate, and this reduced cost may more than offset the loss in revenue per bushel. Fertility is also important. High plant populations pay only when you fertilize accordingly. Those extra plants compete with one another for nutrients.
If you have a per-acre or per-bushel breakeven budget projected, do some analysis on seeding rates and fertilizer and see if you can save more in costs over the loss in revenue. You may also save some dollars in interest expense if you finance your input costs on an operating loan. Be aware that, as your yield goes down, your other overhead expenses per bushel will go up. As we all know, the weather has the largest impact over yields in a given season, so look ahead and determine if you are working toward higher profit or higher yield. They’re not always the same.
Dennis Roddy is a Midwest-based agricultural consultant with K·Coe Isom. With more than two decades of experience in ag lending and farm management, as well as real-world farming and ranching experience, he is uniquely qualified to help farmers and ranchers operate profitably. Contact him at firstname.lastname@example.org.