Did you know a farm's success is subject to its financial management? How well do you manage your finances; expenses, income, and depreciation? Do you keep track of your farm's transactions?
Many farmers assume accounting and
bookkeeping operations are for big businesses. This is a wrong misconception.
Every business, regardless of industry or size, needs effective accounting.
With overwhelming farm operations,
it's challenging to keep track of your financial records. Hiring an
agricultural accountant can save you the burden. They will manage your
finances, file your returns, and give you time to focus on your business.
Keep reading to learn more about
farming accountant services.
What
Is Agricultural Accounting
Agricultural accounting is the
recording of financial and non-financial data in farm operations. The data is
analyzed to determine agricultural operation efficiency.
This information allows you to make
better decisions regarding your farm. You can use it to decide whether to
increase or decrease production.
Agricultural accounting is concerned
with two types of assets: physical assets and economic assets. Physical assets
include land, buildings, machinery, livestock, and supplies. The monetary value
of the product represents economic assets.
Agricultural accounting aims to
present an accurate and fair view of the business's financial status. It must
be based on the historical cost and not the current market value. This means that
trading and profit should be measured as per historical cost.
However, revenue and expenses should
be recorded at the current market price.
How
is Agricultural Accounting Different?
Agricultural accounting is similar
to other accounting, but with some crucial differences. The method of recording
transactions and applying them to the accounts is the same.
Capital
and Revenue
Agriculture is a long-term industry.
It is more concerned with growing plants and animals than generating profit.
Capital assets such as machinery and buildings have very limited lives.
Farm businesses often sell multiple
products at once. This makes it difficult to track the amount of revenue for
each product.
Sales in the agricultural industry
are in cash. Also, agricultural producers often sell goods on credit. You must
keep records to show that payments have been made.
It creates the need to record credit
sales and collect from their customers later in the year.
Tax
Returns
The IRS has specific rules and
regulations that govern agricultural businesses. The IRS has a special tax form
for farmers; the 1040 Schedule F. This form is for farmers who sell products
they grow or raise.
For farmers who buy and sell
livestock, they fill 1040 Schedule F-1.
Farmers and ranchers who sell products
they grow or raise are considered self-employed. This means that they have to
pay self-employment tax in addition to income tax.
Self-employment tax is a Social
Security and Medicare tax. This tax is 15.3% of the income that you earn from
farming. You will pay half of this tax to Social Security and a half to
Medicare.
Farmers who have sales of $1,000 or more must file a tax return.
The deadline for filing is April 15, or the next business day if that date
falls on a weekend or holiday.
Farmers with less than $1,000 sales
are not required to file a tax return. To take advantage of benefits like
expense deduction for farm supplies, you must file a tax return. Farmers and
ranchers have different filing deadlines than other taxpayers.
Accrual
and Cash Accounting
Farmers have a unique set of
accounting needs. They are often in business for themselves. However, they
often grow large enough to warrant the use of accrual accounting.
Accrual accounting is different from
cash basis. It tracks income and expenses over a year instead of when cash is
received. In September, a farmer can harvest a crop and sell it in early
October.
In accrual accounting, revenue would
show in October (when the crop was sold). Cash accounting would show it in
September (when it was harvested). Accrual accounting allows farmers to keep
better track of their expenses. This is especially helpful in tax time.
For small agricultural businesses,
it is commendable to use cash accounting. Accrual accounting is more
appropriate for larger firms.
Both accounting methods allow
farmers to see where their money is coming from and going. It makes it easier
to plan for the future.
Who
Needs Agricultural Accounting Services
Many farmers think they don't need
accounting for farms. However, there are a few reasons why all farmers need
professional accounting help. It can be challenging to keep track of your
income and expenses.
You could end up losing money in
taxes or expenses. Those extra deductions and money saved can add significant
savings over time.
Unfortunately, many farmers,
ranchers, and agricultural producers have small operations. It makes it hard to
find an accountant with the skills to deal with their business needs.
At Wilson Toelner, we understand
every operation is different, and each farmer is unique. We customize
accounting services to accommodate small and largescale farmers.
A farm accountant helps
clients with budgeting, financial planning, record keeping, and tax
preparation.
The food industry is a
multi-billion-dollar industry. Those dollars are recorded in the form of
accounting entries. Accounting for the food industry is also a considerable
part of agricultural accounting.
Benefits
of Working With an Agricultural Accountant
Every business needs to keep track
of its finances. Small farm businesses, in particular, can be prone to making
mistakes. These mistakes don't have to be a part of your business.
An agricultural accountant can help
you stay on top of your financials. They prevent any errors from happening,
saving you money in the long run.
Here are some benefits of hiring an
agricultural accountant.
Tax
Consulting and Planning
Agricultural accountants ensure
farmers fulfill all tax obligations. They manage federal income and sales tax
returns. They are knowledgeable of tax laws as they pertain to agriculture and
farming.
Their expertise helps you avoid IRS
fines and penalties. They know precisely what information the IRS is looking
for on tax forms. An expert helps you decide if certain expenses are
deductible.
The accountant will advise how to
maximize deductions from the IRS. This is achievable through calculations and
data analysis.
Farmers need to do a lot of
calculations, which often are not simple. Agri-accountants calculate their farm
income and report taxes. This will help maintain good standing with the IRS.
Manage
Depreciation
A common problem in agricultural
accounting is how to manage depreciation
effectively. Most farmers identify as sole proprietors or under Subchapter S.
This means that the business does not pay income tax.
The business income and expenses
flow through the owners' tax returns. However, farm machinery and equipment are
subject to depreciation rules for tax purposes. This can create a problem
because there is no mechanism for claiming depreciation.
Manufacturers of farm machinery
provide information on how to calculate depreciation. There are two methods of
calculating depreciation for tax purposes: the standard method and the 150%
declining balance method.
The standard method applies if the
asset was purchased before 1987. The 150% declining balance method applies if
the asset was purchased after 1986. If you don't have accounting expertise, it
can be daunting to account for depreciation.
Agricultural accountants help
account for depreciation, allowing farmers to plan for future expenses.
Manage
Records and Data
Agricultural accountants manage
records and data for farmers. They keep track of the financial information of
their clients. This includes profits and losses, taxes, and other aspects of
business operations.
The first group of financial records
accountants track is money-related transactions. This includes cash
transactions like paychecks and sales. They also manage invoices and any other
form of digital payment.
The second set of financial records
involves assets and liabilities. It means that farmers have to account for
their land, property, animals, and equipment. This ensures farmers stay at or
below their set budget.
The third set is the profits and
losses of their clients. This includes taxes, which are often complex for
farmers to account for.
It is not always clear what the
government can tax. It also includes expenses, which can be anything from wages
to the cost of seeds.
Agricultural accountants keep a
close eye on your total income and expenses. To properly account for the three
sets of financial records, the accountant needs a good understanding of your
business. They also need expertise in accounting software programs and
bookkeeping.
Helps
Your Business Grow
A strong accounting team can mean
the difference between profit and loss. They guide how to improve profit margin
and ensure farm sustainability for future generations.
Farming is an uncertain business.
Farmers have to plan around variables such as weather, markets, fuel costs, and
commodities prices. Accounting for these variables before they happen helps
farmers plan responsibly and effectively.
Running a farm business is not easy.
You track planting seasons, pests, drainage, and others. Keeping tabs on where
your money goes and how much you have left can be difficult.
That's where an agricultural
accountant comes in. These professionals are great at doing all the math. They
help you set up a robust accounting system that is easy to use and understand.
Succession
Planning
Agricultural accountants can assist
with the smooth transition of family-run businesses. Family-run businesses are
one of the largest segments in the agricultural sector. Many are looking to
bring on the third generation of leaders to run the family business.
Family business succession planning
is a complicated process. It requires strategic planning to ensure sustainable
growth and profitability. There’s more at stake than just the future of the
business.
How does an agricultural accountant
help with succession planning? An accountant offers a variety of services to
help with succession planning, including:
- Creating a will
- Establishing trusts
- Providing tax planning advice for retirement, death,
and estate taxes
- Choose the right successor for your business
- Guiding successors through the process of taking over
the company
The accountant updates you on the
latest tax code changes. He will evaluate your assets and liabilities. Based on
the analysis, they will advise how to keep your business in good financial
health.
They also review current estates
planning documents, such as wills and life insurance policies. This helps
evaluate whether any changes are necessary.
How
Much Does Agricultural Accounting Services Cost?
The average small business spends $1,000 to $5,000 per month in accounting fees.
That is a ton of money that could be spent improving your farm. This is where
outsourced accounting comes in.
It's an affordable solution for
large- and small-scale farmers. It is more practical if you don't have the
internal resources or funds to hire an in-house accountant.
The cost of outsourced agricultural
accounting services depends on the following:
Farm's
Size
The cost of accounting services is
proportional to the size of the farm. A large-scale operation with multiple
employees and equipment have more accounting responsibility. This will require
more time and effort from the accountant.
The charges for large-scale farmers
are higher than for small-scale farms.
Farm's
Age
The longer a farm has been in
business, the more accounting experience. Farms that are just starting need
more help with record-keeping and cash flow management. This would cost higher
than farms that have been in business for a while.
Complexity
of Your Farming Business
The complexity of your farming
business determines the time and effort spent on accounting. Farms that grow
different crops and raise livestock require more effort to manage. The farm's
management style also affects the complexity.
Complex farm businesses attract
higher accounting fees.
Number
of Transactions
Agricultural accounting outsourcing
companies charge per transaction. If you need accounting services for a few
transactions, it will cost you less.
If you are working on a tight budget,
you can delegate complex tasks only.
You can determine the charges
through a virtual bookkeeper during a free consultation. There is no accurate
answer to how much your agricultural accounting services cost. It depends on
your business dynamics and the accounting firm.
Hire
an Agricultural Accountant to Grow Your Farm
The benefits of having an
agricultural accountant are limitless. Proper accounting can make or break your
business.
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