Livestock Wala'au

S2 Ep 06 Ag Tax Preparedness

September 13, 2022 Season 2 Episode 6
Livestock Wala'au
S2 Ep 06 Ag Tax Preparedness
Show Notes Transcript

Aloha and thank you for tuning in for season 2 of Livestock Wala'au! In this episode we’re going to talking with Shannon Sand about Ag Tax Preparedness. Listen in as she shares some tips and free tools that are available to help get your paperwork in order for the upcoming tax year! Let us know how you think you will be able to use these tools in your operation by completing our feedback survey at  the link below! 

Check out our other social media platforms!

Guest Contact Information & Episode Resources

If you have any questions, comments or request for special topics please contact us at walaau@hawaii.edu

Thanks for listening! Check out our other social media platforms!

Shannon Sand:

Aloha Today's episode is brought to you by the Western extension Risk Management Education Center, Western Regional agricultural stress Assistance Program, farm and ranch stress Assistance Network, USDA NIFA, and the University of Hawaii College of Tropical ag and human resources and the livestock extension group.

Melelani Oshiro:

Aloha and welcome to the livestock Walaʻau a podcast aims to provide educational support information, guidance and outreach to our livestock stakeholders in Hawaii. We are your host, Mele Oshiro and Shannon Sam. And today we're gonna be talking about egg tax preparedness is gonna, Shannon and I are going to be the only two on here. But Shannon is going to be sharing a lot about what to do, how to prepare for your tax season, and some tips and things that she can help you with. So

Shannon Sand:

yeah, so I do want to give some caveats that this is based off of the 2021 farmers tax guide from the IRS and the rural tax.org. website, the updated 2022 farmers tax guide has not come out. And when I say farmer, that's the IRS is definition that means anybody involved in the agricultural industry, and that includes things like cut flowers, nursery, landscaping, all of that falls under the word farmer, including ranches. So livestock, all of that stuff falls under the word farmers. So when I say it, I mean it in the most possible generic terms. But also, I'm gonna say this now consult your ag tax professional just to make sure you're doing what you need to do. So I'm trying to give as many caveats in advance of this as possible, because everybody's situation is different. And especially here, everybody's so diverse, and it's just so different. So okay, so let's talk a little bit about why is it important to keep records for Texas feels like one of those obvious things, but like, but it is a summary of business transactions, documentation to support your transactions and the documentation regarding assets. And the IRS has specific ways that they prefer for like producers to record those transactions and assets. It's also really important to keep those for however long you need to and I feel like this is also one of those things where, right, like how I feel like everybody asks a question like how long should you keep like your tax records and receipts? Mele? Do you know?

Melelani Oshiro:

I've always had the the number of seven years in my head for some reason. And I don't even know if that's true or not.

Shannon Sand:

So depending on what you're doing, like if it's related to health care stuff, they can do like a seven year look back in some states 10 In some states infant like it can be again, it depends on state to state. But for ag related stuff. Oftentimes the answer is it depends. So it's not a really good. But generally, again, depending on the data, like anything employee related at least four years, at least four.

Melelani Oshiro:

And so it depends on what the what you are recording or what it's the transaction was on how long you probably have to keep those records for

Shannon Sand:

Yeah, so like employment taxes, assets, and then records for non tax purposes, you think, Oh, I don't need to keep it up. Because it's not related to whatever you might need to you really should look, again, we will link the tax guide. And the nice thing is with the IRS is website is it auto updates to whatever the newest version is available. And when we're recording this, only the 2021 was available. The IRS likes to like really make push you down to the wire when stuff is too so like to are the downline members have

Melelani Oshiro:

similar though like when every year right there sort of it is

Shannon Sand:

it isn't it doesn't change too much. But that being said, actually, for the last two years since 2020, we've had quite a few because we had the Cares Act in the CIF app. And those do actually have certain things that pertain and are particular to like egg producers if you receive payments for stuff. So sometimes you have to claim that as an income sometimes you don't have to. Either way again, keep those records because if you get audited, you really want to have all of your ducks in a row as much as possible. So you know, but

Melelani Oshiro:

I just want to say to like as far as records like for me, that's the hard thing, right keeping track of all those receipts and forms. So I want to just share like I've been using the Adobe scan app on my iPhone, which has been absolutely amazing. It turns any thing you can turn any document and you Have into a PDF, it stores it in there, you can share it. So if you have things backing up on your phone to like your Google Drive or Dropbox, it will put it directly into that folder and you can literally file it away and don't have to worry about losing it and you just name it, whatever it is, it's easy for you to search and you can search your files that way.

Shannon Sand:

Yeah, just, I email myself receipts a lot. And then I have a folder for like receipts tax deductible year,

Melelani Oshiro:

that's another good way, because they're Tronic form because you can always reprint it.

Shannon Sand:

And we talked to one producer a couple of weeks ago, Alex, and he actually set himself up a Google forum, which is phenomenal, because he actually put in different categories that are related to his scheduler. And I was just like, that's so smart. And then it populates like a Google Sheets for him. And then he just downloads it as an Excel file at the end of the year. So again, there's lots and that's

Melelani Oshiro:

all all the things that you can do from your smartphone or whatnot. So I am a big fan of using my smartphone just to try to hit my like,

Shannon Sand:

cash flows ins and outs. And it's Yeah, yeah,

Melelani Oshiro:

yeah. So Adobe scan, that's an easy one to use. Even I just, I've even just done pictures. I mean, you don't want to always but it's, uh, you know, the Adobe scan, I feel is a little more secure. So, but yeah, that's

Shannon Sand:

when I really need to try out. I feel like I haven't tried that one yet. Yeah. Okay, go ahead. I know a lot of people like it. No, it's good. It's good. So some other reasons that you want to keep all these records are related to things like your cash flows that to equity ratios and your asset valuation. We'll talk a little bit more about, like, just very, we're tip very tippy top of the iceberg. Here, well, I

Melelani Oshiro:

think, right? Yes. Yeah.

Shannon Sand:

The last one of these I did. It still was really I would say, like, tip of the iceberg. And it was two hours, but we're not going to be that long today. But yeah, so it's just there's there's a lot of information. And, you know, like, when our taxes do mele, yeah, April 15. Yeah, so our personal taxes, everybody seems to know that date. But there are other really important dates, particularly for those working in the ag industry. And that is January 17, where I want to say if it's to about two thirds of your income is from farming or farming related activity could be phishing, to by the way, your payment, your your tax free payment is due then. And then if your your Schedule F is due March 1, so like a month and a half, before your personal taxes are due, you're like farming tax stuff is due. And then like I said, the, you pre pay on a lot of it. So like the payment is due, even before then in January. So that's the other reason we're trying to really get some of this tax prep stuff out. So that you can start thinking about it now and making sure you have those receipts gathered, and some of these things, you know, yet or deadlines are a lot sooner and sooner than we think. Yeah, Texas, I mean, unfortunately, the other thing is, is that oftentimes, the updates to these IRS manuals don't come out until like December. So again, if your payments due January, you have to do the best you can with the information you currently have. But might have to pivot pivot and swerve a little bit there to the best bet is really to talk to your ag tax professional, egg tax professional. And so you make sure you're getting like maximum benefits. So now I know, that's a question we've had a lot too. And there are, there are a few, like accountants in the state that have some specialty and AG is my understanding.

Melelani Oshiro:

I was gonna ask you is there? I mean, how do you know that you go, just looking for tax matters and ask them or is there like a resource on like, certified list or something on note, oh, that

Shannon Sand:

would be wonderful. So there is what's called the if you're trying to like actually prep your own records. There's what's called the Center for farm financial management, and the farm financial Standards Council. So it's a group of people that basically get together and kind of define, and a lot of them are obviously like USDA and different accounting accountants, banks lender, like it's a lot of different people with various backgrounds, but kind of define, they actually like make a book every year and they are some of the ones that like contribute to the IRS farm farmers tax guide. And they basically kind of create a guideline of like, how to record all of your information so so but no, they don't have there's not that I'm aware of. There might be a list of professionals but your best bet is to ask your friends and family who they use if they doubt anyone local. So yeah, we met someone the other week. So yeah, I was like really excited and pleased. Yeah, yeah, yeah.

Melelani Oshiro:

So maybe something that we should have maybe talked about in the, in the beginning beginning is right is defining a farmer and defining Are you a farmer? Should you

Shannon Sand:

be? Yeah, so glad you brought that up. So the IRS is definition of a farmer, again, it's way more generic than we think. Because I was like, where I'm from a farmer or rancher, landscape person and a nursery person. It's all different industries. I mean, they're all related in a way, because it's all part of the Ag umbrella. But again, the IRS, very, very generic umbrella term, a farmer, according to the IRS, I'm going to read this verbatim from them, because I don't want to get this wrong. You are in the business of farming, if you cultivate operate or manage a farm for profit, either as an owner or tenant, and you make $400 in income from that farm from that operate from that operation. Now, that is very different than USDA is standard definition, right? Which is what $1,000 in sales. So

Melelani Oshiro:

the big difference between USD and IRS definition of a farmer is just the amount of income in general the

Shannon Sand:

match. Yeah, I mean, they both use it as a very generic term, rather than, like egg producer, which I

Melelani Oshiro:

say that because how does that impact a person then why how does that matter? Well, I guess when you're filing your taxes, so I mean, the USDA value of $1,000, define you as a farmer, that's gonna apply only if you're applying for a USDA program. Yeah, correct. Yes, but like your taxes are due every year. So

Shannon Sand:

you might not be someone might not be defined technically as, as a farmer by USDA standards, but they may meet that as an IRS and or within the IRS definition. And it could be vice versa. You know, if you have a real low level of like profitability related to or a low margin, I should say, then you might, it might classify it as a hobby. So the other thing is, is the IRS has a lot of very specific, like definitions and tests, it does related to whether something is classed as a farm or a hobby, one of those and I think it's also pretty general amongst lenders as well, is that three out of five years need to show profit. Okay, so because otherwise, if you have less than that, like, you know, that's certainly 60% of the time and show him brother, right. And my understanding is, is obviously, if you're starting out, there is some leeway for it to be a slightly longer period of time. That's my understanding. But that being said, on average, in general, you need to show three out of every three out of five years that you're making a profit. So of some sort, it doesn't mean it has to be a lot, you just need to be making something. And I know a lot of us, like no one likes to pay taxes. I don't like paying taxes, no one, you know, it's not an enjoyable thing, right? But it is important, you know, and then they have another thing they call like, the nine factors of like, whether defining something is like a business or a hobby, basically. And it's like, is it running a business like manner? Do you have expertise on the part of the producer or someone you're working with? What's your time and an effort? Or your assets potentially valuing, like gaining value or devaluing? And then have you done something like this before? Have you been able to show that like you, you couldn't be an entrepreneur or business? And again, like historical information of like, income and loss, so and then how again, has money been made? That's a big one, they asked. Come up? And then are we making money which like, those sound like very similar things, but like, they have pretty, like slight definition differences between them. And then is it fun? So it was like, which, you know, you think like, little if I'm enjoying it, so but they're very specific, again, you can be enjoying it, but like, it's only one part of the like, weight factor this and this is stuff they use in court. So keep that in mind. You can enjoy it, but it was like you need to like kind of be doing all these other things too. Because obviously, like I enjoy my job, but it's still my job. You know. It's just really important, you know, make sure you're checking the IRS as farm tax guide, because they change that every year. It's very similar every year. It's really usually things like the 179 deduction increasing or decreasing by a little. But for the last two years, we've had the CIF app and the cares right off so we've had additional payments to producers and stuff. And was it a year or two years ago that we had the drought so bad that it triggered payments, so some of that for the livestock producers again, that may count as income? Oh, I know you would think I'm just trying to keep them alive. But

Melelani Oshiro:

yeah, accounting. Oh, that's

Shannon Sand:

such a big part of it. Everything's right. Yep. So

Melelani Oshiro:

you want to talk a little bit about the difference between the different types of way you can.

Shannon Sand:

Yeah, I'll go a little bit into cash versus accrual. But I did also want to talk about financial account statements as proof of payment. Because again, this is one of those things that like we don't necessarily think about like, oftentimes, we're not necessarily getting checks anymore. We're getting like a PayPal or Venmo card, ie an electronic funds, transfer, EFT, all that stuff. So again, the IRS has really specific like, what they're looking for and what you need to keep track of. So for credit cards, you the statement has to show things like the amount charged the pays name and the transaction date. And for EFTPS, obviously, the amount transferred the pays name, the date, the transfer was posted to the account by the financial institution, proof of payment of an amount is like really important to have. Because it doesn't necessarily establish that you're entitled to a tax deduction. But you do want to have all of that stuff so that you can keep track of it. You know, some of that that's going to be really important for you. Because if you get I hate to say it, I don't want to like keep scaring people. I was like, if you get audited, that's a big thing. Yeah. So now how you keep track of that, that's the counting portion of this. There's actually several different methods. The main two, particularly used by AG is cash and accrual. So that's what we're gonna really focus on today. A lot of producers when they start out, they want to do cash because it's easy, right?

Melelani Oshiro:

So that's what you want to defy what's in a explain a little bit what the differences are, what cash and accrual accounting.

Shannon Sand:

Yeah, so under the cash method, included in your gross in your gross income, all items of income that you actually or constructively received during the tax year. So I'm going to use mele here, because we're here together, we're in it together. As an example, let's just say that mele is an Oulu farmer, I don't know, I'm just making stuff up as we go. And you use the cash method of accounting. So let's say, I am like the buyer of your ooo, I'm a restaurant, I'm a co op, not a co op, but a food hub or something along those lines, right? As someone who uses the cash accounting method, you're entitled to receive, let's say, a $10,000 payment on a contract that we have, right? In December 2021. You deliver it, you got it. But you tell me in December, even though I say, hey, it's December 21, the payments available? You say, Oh, you know, thank you, but like, let's wait till January, so I can use that, you know, then to pay off Christmas, or whatever you want to say. But you're like, I would like to wait till until January, you still have to claim it on your 2021 taxes. Does that make sense? Because it was available in 2021? Oh, I say versus 2022. Yeah. So even though you pick the checkup in January, because I made it available to you in December, that's when you got to claim it.

Melelani Oshiro:

I know anything that's that's received by the end of that year, essentially needs to be that's what that Okay.

Shannon Sand:

Hmm. So and there's lots of different ways you can look at it, I've got different examples of deferred payment contracts. And they all again, go back to even if it's deferred, but if you were offered the payment in that year, if you declined to take it, that's fine, but it's still income. So and then in regards to examples, you know, like with insurance and stuff, it's broken down by so if you get like a three year like you, because we all need insurance, right? So let's say you prepay, you signed and paid for $3,600.03 year contract over 36 months, then it's only during those years, right. So but you did it say October of like 2021. And so it would be two out of that 36 times the 3600. That's all that you can deduct or a tribute to that $3,600 policy, even though you paid it in that year. Does that make sense? Oh, following year, you would take the 12. You take the 12 divided by 36 times 30. So you can deduct the full year in 2022. And then the full year in 2023. And then 2024, you only have 10 months in your 36 month contract because we started in October. So we and I say yeah, does that make sense? Yeah, whatever a page or years ago, which is great. Yeah. You still have to deduct it or I mean, whatever attribute those expenses. Yeah, so yeah. Again, it's cash accounting is an easy one and a lot of people like that one. But the accrual accounting is the one that is suggested by the firm financial Standards Council and the Center for foreign financial. A bunch of them basically the Ag tax preparers. That's their suggested one is the accrual accounting. With that being said, it is a little bit more challenging to do an under the accrual accounting method, you generally report income in the year it's earned and you deduct or capitalize expenses in the year it's incurred. So the purpose of an accrual method of accounting is to correctly match income and expenses in the correct tax year. So, again, it sounds almost it's a sound very similar, but there are subtle differences related to it. So certain large farm businesses must use an accrual accounting method. So I would imagine that some of the really large livestock producers probably already use that format. Because usually when you're hitting larger numbers of cattle in particular, or livestock, because I was like, there's a lot of large sheep producers on the mainland or goat and stuff, and I was like you, that is the one that is definitely that is most suggested by again, accountants, it's like an in some cases, the IRS requires it. No. So here's like an example of an expense via the like accrual accounting method. So if Leilani uses a tax, a calendar tax year, so like January to December, right, and an accrual method of accounting to take advantage of early payment discounts, she paid for seed in October of 2020. The seed was delivered in March of 2021. But economic performance, and that's a big thing with the accrual accounting, right, it didn't occur until the seed was delivered and planted. So even though you paid for it in October, you therefore incur the actual expense of 2021. So again, it's it's real subtle differences between the two of them, you know,

Melelani Oshiro:

so if you are using one method, you have to stick with that or what is, so your options

Shannon Sand:

is really important that you stick and pick with it, pick it and stick it, pick one and stick with it. I would say at least five years, because again, you have to show profitability throughout the five. That being said, depending on the size of your operation and stuff, if you start out cash, which a lot of people do, and let's say 10 or 15 years down the road, you grow enough, and you're like, wow, I really need to switch to accrual. In some cases, you have to go to the IRS to ask for permission to change it. Oh, yeah. So I was like, that's why it's like, it's really important to start out with like, what is the best option for you? So, and again, it is highly suggested by basically most accountants and most bookkeepers that you do and accrual method, it is ever so slightly more challenging. But it is the one that is preferred by a lot of tax professionals and including the IRS. So, you know, like if you're a farmer, and you use the accrual method of accounting, you keep your books on the calendar basis. Let's say you sell ginger in December of 2021. But you're not paid until January, right? 2022. So because you use the accrual method, you actually report the sale and 2021 because that is when the income was earned, even though the dollars weren't given to you till 2022. Versus if you did the same thing with cash accounting, you would actually report it when you got the money money recorded in January. Does that make sense? Yeah, like they're real subtle differences between the two. But those differences can make, you know, and again, it just depends on how your books are set up and how you want to like go forward

Melelani Oshiro:

with your operation. Hmm, okay. Yeah, yeah. Okay. No, I

Shannon Sand:

know. And it's like, it's really hard because cash and accrual, like the definitions are literally almost the same, right? It's just a couple of flip flops of words and locations. And then like, but I, I really liked the example of the ginger because I'm like, oh, to me, that's like where the light is. It's just like, Oh, it's just flipped. Right? So with the cash, I always think it's when you get the cash in hand or you're offered the cash, that's when you have to report it, right? Mm hmm. Versus like, a cruel, you know, it's slightly different.

Melelani Oshiro:

So you want to talk a little bit about the Ag tax calculator and how

Shannon Sand:

folks can use that. Yeah, so that literally just came out a couple of weeks ago, that was released by the IRS and the rural tax.org. Group. And FYI, rural tax.org is actually under the IRS. So it is like, fully legit, and it's based off of their information. It is a really cool calculator that it was created, I want to say buy an extension person from Clemson and somewhere else, but the really nice thing with that one is and again, I'm going to give the caveat that they did the best they could and they're planning on keeping this up. But it basically is a nice way for you to put in your information, your W two information and all of that stuff and calculate out and it will estimate I should say as they say the words estimate very heavily in there. It will estimate basically the taxes that you owe based on your income. Now, it does not include things like deductions, and depreciation and some of that. So again, that will go in your Schedule F. And from there, you'll find out, you know how it all balances out at the end of the day, so to speak. But it will do a lot of the calculations for you. And it does take into account for each of the 50 states. So you just has a drop down menu, and you click Hawaii. And then it's got the estimates for like our state income tax. But it's also got like your federal Medicare, Medicaid, I can't remember them all. But basically all your federal taxes and it gives you an idea, like at least a ballpark of potentially what your payment should be. And again, like you'll put the rest, you put all that into your schedule F and then based on your deductions and all of the other expenses. That'll be obviously how much you owe. But at least it gives you kind of a rough idea of like, the money you made, and then what you potentially owe, which is really, really great. We will link that below is a whole webinar on how to use webinars 50 minutes long, it's really, really good, though, I will say they did a really good job with it. And I rural tax.org has a lot of great information for like ag producers in general. That's, that's what it's mostly geared towards. So they have a lot of really great like webinars and different like just information of fact sheets. So and they like I said they they keep it up to date really well. And it's it's in conjunction with the IRS. So you know, it's, it's a legit website. And it's, it's, it's up to date as they can make it anyway. So, but it's a good resource out there, for sure. But yeah, and I also saw because I know, when you download the egg tax calculator, it is it is an Excel sheet. And I recognize that not everybody has access to Excel. So I went and I uploaded it as a Google a Google sheet. So it does work that way if you need to be able to do that. But it is really nice. I mean it, it is a great decision tool, just to help estimate your like tax liability, you know, at least it gives you an idea. It doesn't take into account the deductions and a lot of that. But at least it gives you an idea how much you owe, which is always nice. And it's real simple. It's just two pages and like, very, like very easy to do here. I'll show you really quick Melly

Melelani Oshiro:

I actually just Yeah, pulled it up. Did you pull it up? Yeah.

Shannon Sand:

So yeah, so it's, it's really nice. You can choose your married status. So it's just got dropped down menus. And if this is something y'all are interested in, we could contact JC and Adam so and see if they'd be willing to do something. But it's really a nice and nice thing where you can go in, choose your filing type, you choose your state, which were Hawaii, I already have that one picked your state income tax rate, and anything in gray, you can actually alter that if you need to. So again, it's really nice. And then you just go in, you can tell I use this one yesterday, because I was adding things from my w two, that's not real. So, you know, I mean, it's just really great that you can add in it estimates, like your Social Security and Medicare long term capital gains, all of that stuff is really, really nice. So it's a pretty snazzy little tax estimator. So, and it's free, so and they literally just came out with it, like a few weeks ago. Very exciting.

Melelani Oshiro:

Very good. That's always good. I think some of those things are just helpful to kind of, you know, get your head around what's going on and what's coming.

Shannon Sand:

Yeah, I mean, cuz taxes are one of those things that like, we all know, we need to do it, but is not the most fun. I know, this isn't the most exciting like topic, but it is really important one and if we can go ahead and start like at least prepping, and like you said at least start getting those pictures filed away. Those Yeah, yes, filed away where they need to go, then it just makes our life easier when we're ready to like, do our taxes. So if you're doing Turbo Tax or HP or any of those other ones, I don't remember all the names of the tax software anymore. I you know, so?

Melelani Oshiro:

Well, I feel like it's important if we have, you know, smaller farmers that are starting out and, you know, understanding that, you know, getting this stuff, what you need, where you can go for resources, I mean, the rural rural tax that org itself has like so much resources on there.

Shannon Sand:

And I liked that format and their setup of their websites really, to me it's a lot easier to use than the IRS website very honest very easy.

Melelani Oshiro:

Yeah, here you are easy to find what you're looking for on there so

Shannon Sand:

nice. I really like it. That's how it's like he's a lot of their information for stuff know

Melelani Oshiro:

it. Well thank Shannon huh? for sharing all the tips about getting yourself prepared for the Ag tax season, you know, that's I swear tax season comes up way too quickly. So good. Yeah,

Shannon Sand:

paired. Yeah. So and if you guys have any questions, feel free to reach out to me, you know, happy to talk to you some about whatever you know, are trying to help you locate the right person one or the other. Yeah, so, but all right. We hope our listeners found this informative and that it'll be useful for your plans now and in the future. Also, if you have not already done so please be sure to fill out our feedback fest form links below to let us know your thoughts about this podcast. So we know what you would like to hear more of in the future.

Melelani Oshiro:

Yeah, so make sure to follow us on our social media pages the livestock PA and livestock extension group, if you haven't already, and be sure to visit the U H. CTAHR. Extension website and our YouTube channel listed in show notes.

Shannon Sand:

Yes, and for additional information about this, be sure to see the show notes, the description box of our YouTube page, all that drive. And thanks for listening to the livestock Walaau And before we go show some love to your favorite podcast that's us by the way by leaving us a review on Apple podcasts or anywhere you listen to this and then stay tuned for next month.

Melelani Oshiro:

Thanks again to our sponsors the Western extension Risk Management Education Center, Western Region agricultural stress Assistance Program, farm and ranch stress. Thanks again to our sponsors W E RME. Ras up far said network USDA NIFA the livestock extension group and CTAHR malo Philistine Hohoe