Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old school business practices and their traditional business suit culture. I’d like to welcome our listeners into the Thanksgiving edition of unsuitable on Rea Radio. We’ve got a great famous guest today. Today’s guest has built his career specializing in tax, business, and estate planning for family farms, sometimes leading from generation, to generation, to generation, and also leaders in the agribusiness sector.
Dave: Brian Kempf, a principal in Rea’s Millersburg office, regularly works with clients to develop tax planning strategies designed to protect their wealth and sustain their businesses. Additionally, since the Tax Cuts and Job Act took effect, Brian has studied each provision in search of growth opportunities to help his clients. Welcome back to unsuitable Brian.
Brian Kempf: Thank you, Dave.
Dave: Good. You getting ready for Thanksgiving?
Brian: We are starting to get ready for it. Planning out who all’s coming and how much food we’re going to have.
Dave: I know you’re a tremendous chef, and you will play a role in that.
Brian: I sure will.
Dave: Are you carving the turkey?
Brian: I’ll carve a turkey, make mashed potatoes, anything.
Dave: Any tips for carving the turkey that you want to share?
Brian: Nothing for carving the turkey, just don’t overcook it.
Dave: Just don’t overcook it.
Brian: Yeah.
Dave: Good. Hey, since we last got together about a year ago, I know we were talking about some tax planning tips with the new Tax Act. I want to kind of continue that conversation but maybe switch gears a little bit and talk about business planning in the agribusiness and farming community. I know you’ve put together many programs for your clients. When we were talking ahead of time, you were talking about some of the dairy farms you work with, and maybe the loss of business in that sector. Can you maybe share a few facts before we get moving?
Brian: Yeah. I’d love to. The dairy industry and the farm industry, in general, has struggled for the last year, and even dairy longer than that. They’ve been in kind of a price slump for the last couple of years, and it has brought some hard times and has forced a lot of families to make a lot of very difficult decisions. Ohio has lost about 7.5% of their dairy farms over the last year, which is a pretty significant amount, about 172 farms in the last 12 months have closed. It’s always hard to close a business, but it’s especially hard for farmers because it is such a way of life that’s sustained from generation to generation. Yeah, it’s extremely difficult. It is.
Dave: It’s tough. We’re going to talk about some ideas and some events that are going on in the agribusiness and farming community. Again, a lot of the things we’re going to touch on today you could also use these same planning techniques with any kind of business.
Brian: You sure can.
Dave: We’re going to kind of stick in the agribusiness. We had talked about, maybe in your lead, where a business is struggling, or a farm is struggling, and you have to ask yourself some serious questions. You shared a few of those with us, can you kind of expand on those?
Brian: Yeah. Probably the biggest one is how long do you continue to burn through your hard-earned equity that’s been built up over 20, 50, 70 years, depending on how long your business or your farm has-
Dave: Generational equity.
Brian: Yup exactly. Because the reality is, at some point some farmers have decided to close up shop and sell because it’s too hard to see their hard-earned equity, a lot of times which is not in cash, it’s inland, it’s in buildings, it’s in cows, equipment, they see it hard to part with that piece by piece, not knowing when the economy, or when the market is going to recover. It’s well known, there’s a surplus of milk out there right now, there’s a surplus of cows, and so far no one has projected in the short term how soon that’s going to recover.
Dave: You know Brian, you had mentioned about, how long do we continue to burn through this family equity? How about going into debt? What’s the debt structure picture look like?
Brian: That’s the other consideration is if you do have a lot of equity, are you willing to take out a loan against that equity? If so, how far do you go? Do you continue to get loans in hopes that the economy recovers and that land prices don’t decrease in value? Yeah, how much risk are you willing to take on, based on that equity you have on your farm?
Dave: You’re faced with some pretty significant decisions. Again, as we outlined, do you burn through the equity? That’s your cash, your savings, your retirement plans, do we go into debt? Obviously the decision to sell, those are all things that are at the forefront. Before you get there, what are some of the decisions, some things you’d like to talk about with your clients in your planning community?
Brian: Yeah. Probably the number one thing that I see lacking is estate planning. Some farmers will have a basic estate plan, but they may have started it 15 years ago, 20 years ago, when their kids were young, and haven’t updated it or considered what’s going to happen when they eventually retire or are unable to continue farming. A lot of farmers want to pass their land along to their kids, to the next generation, which is a great plan if done well. If done poorly, can tear families apart.
Dave: Sure.
Brian: Some people think, “Well, I’ll die. There’s no estate tax. I don’t have that big of an estate. All my land will just go to my kids.” Without thinking about, well I have four kids, what if some of them want to keep it, what if some of them want to sell? What if someone gets divorced? What if someone dies? What options do the kids have to buy each other out? Can one of them force a sale and all of a sudden no one’s getting together for Thanksgiving dinner anymore?
Dave: Sure, and you talk about estate planning, and you had mentioned, hey, under the new tax law the estate tax is less, but I think you’re referring to kind of estate business planning in general, not just estate tax.
Brian: Correct.
Dave: What are we going to do? Are we going to try to pass this equity that we’ve earned to grandkids, great grandkids, and keep it in the family?
Brian: Yeah. That’s a good point. It’s definitely estate and succession planning all kind of wrapped into one.
Dave: When do you get into a decision to invest more in the business or the farm to reduce your cost?
Brian: One thing that technology is coming to farms in the way of computer programs, ways to track costs, ways to track milk generated by a cow. There are robotic milkers coming into play more and more often. All of which cost significant dollars to invest into. While it’s sometimes counterintuitive or hard to say, “I’m going to borrow or spend a million or two million to invest in a farm that’s currently losing money.” It may be the thing that’s required in order to get your costs down to an acceptable level, where you can at least break even at this point, and when prices finally do recover, allow you to make money.
Dave: Right. Let’s sprinkle in a little bit of the tax law with this business planning conversation. You had mentioned these losses. If I have a farm, a dairy farm, and I do have some losses, can I generate a net operating loss and take that backward in time to regain some refunds and some needed cash flow? What are the rules on the net operating losses, or the NOLs?
Brian: Yeah. Yup, there are some new changes. In general, NOLs are not going to be allowed to be carried back, but farms are still allowed to carry back two years now. It used to be-
Dave: Two years. Okay.
Brian: They could carry back five. Now they are limited to two years, and there’s limitations on how much you can carry back. You can only carry back, I think it’s $250,000 in a year, to go back to recover taxes that you may have paid in the past. In general, though, I would rather see people, from a long term standpoint, reduce their loss in the current year than create a loss and take it back against prior year taxes.
Dave: Right.
Brian: You’re going to save approximately 15% right off the bat of any amount that you can push off, loss wise, to future years, rather than create a loss and carry it back, just because of the social security and Medicare savings.
Dave: Right. I’m sure this is a difficult part of the conversation, is that we have to raise cash. Maybe borrowing money is not the answer. Maybe selling off equity, land, timber, or other assets is … You know. Take me behind the scenes. One, is that a difficult, emotional conversation?
Brian: Land is probably the most difficult conversation because your blood, sweat, and tears are poured into your land for years and years. It also helps you generate revenue or cost savings if you’re growing your own crops. The land is probably the most difficult one. What we’ve seen a lot in the last year is creating income through selling off investments, or something like that, in order to generate gain so that you can use that farm loss to offset the gain this year. We’ve done that in a number of instances this year, because the losses from, especially dairy farms, are going to be substantial this year.
Dave: You need to dig deep, look at every angle, nook, and cranny, as you put together a plan, a business plan.
Brian: Correct.
Dave: When I sell, if I own a farm and it’s a fairly successful farm, doing some things, had a turn for the worse, but I need to sell timber or minerals, or land, will I get a capital gain for that?
Brian: Yes, you’re correct. Those would all be capital gain producing sales, all of which present some really nice tax planning opportunities as well. We’ve had a number of instances where we can generate up to $100,000 of income in a year and have no federal or state taxes due on that $100,000.
Dave: You’re a genius.
Brian: Yeah.
Dave: I’m hiring you.
Brian: It feels pretty good when you can do that.
Dave: Will you get me an engagement letter out today? I’d kind of like that.
Brian: We’ve been able to do that year over year for some people, keeping taxes significantly low by using capital gains, both for federal and state purposes.
Dave: These planning techniques that you’re talking about, and we will talk about some more, those just don’t start the last week of December to wind up the year. Those are year-round discussions, is that correct?
Brian: You’re exactly right. That goes back to how important it is to have your records up to date throughout the year. Don’t wait until February 15th to put everything into your QuickBooks or your farm software, and generate your P&L for your tax return. It makes it very difficult, if not impossible, to do tax planning after the end of the year.
Brian: We really like to start looking at it in the summer. Start working with clients to project your income or loss, and then allow you to have three, four, five months to make decisions between then and the end of the year, as to, do you need to sell something? Do you need to buy something? Do you need to invest somewhere else? Allow as much time as possible to make those decisions so that it’s not a last second decision. Last-second decisions usually end up poor and not with the best result tax-wise or cash wise.
Dave: Right. Well, you certainly can get your arms around the numbers, what the liabilities are, what the cash flow. How do you coach through the emotional part of having to sell off a significant part of your business? How do you do that?
Brian: That’s probably one of the most difficult things. Unfortunately, a lot of people have been there before. You can go out and read blog posts, you can read stories online of people that have done it before. Knowing that you’re not the only person in that boat sometimes makes it slightly easier. It’s never going to be easy, but the biggest thing is to have, at a minimum, have your accountant and your attorney by your side to help you make well thought out rationed decisions. We work with attorneys a lot in this area because it’s a difficult decision emotionally, but it’s also a difficult decision financially that may impact your family as well.
Dave: You know, what we’re talking about here is a reality, planning for reality. Even if you know these things may exist down the road two, three, five years from now, if you notice that now, you can maybe begin to do some things differently to try to head that off at the pass.
Brian: Exactly.
Dave: You know, how about, you had mentioned to me, maybe take an off-farm job and use your skills in that. Are you seeing that?
Brian: Yeah, we’ve seen a lot of people try to supplement their farm income. We’ve seen, I mean anymore a lot of people there’s at least one family member that will have an off-farm job, oftentimes it’s to provide health insurance. Everyone knows how expensive health insurance is. Oftentimes a spouse will take an off-farm job solely for the fact that they can provide health insurance that way.
Brian: We’ve also had a lot of people start complementing businesses, equipment repairs. Hauling manure is a pretty profitable business. Custom harvesting is another one that we’ve seen a lot of people do. Trucking, if you have a CDL, you may not realize how valuable you are in the marketplace right now. Because trucking is probably one of the industries that has the hardest time finding good employees, good drivers. Your skills are very valuable out in the marketplace. Sometimes people tend to sell themselves short, but if you grew up farming, you have a lot of skills.
Dave: You do.
Brian: There is no doubt about that.
Dave: A lot of resiliency as well.
Brian: Yes, exactly. If you can show up on time and pass a drug test, you’re already in the top 75%.
Dave: You’re good. You’re hired.
Brian: Yeah, exactly.
Dave: I understand your team has developed some marketing materials, a new newsletter. Can you tell us about that?
Brian: Yeah. We just started to develop, we developed the Rise and Shine newsletter. The intention is to help out farmers with some of these difficult decisions. If nothing else, just bringing up some of the issues that need to be discussed. Sometimes, I would say even oftentimes, people know they need to do something, but until you keep asking them, and bringing it up, and sometimes forcing the issue, they may not take hold of it. Estate planning is one of them. Most people know, “Yeah, I need to take care of my estate planning. I need to update it. It’s been 20 years. But, eh, I just don’t want to go in and talk to the attorney.” We really do need to be talking to clients, talking to people and saying, “You need to have this done.” It’s partially for your benefit, but it’s largely for the benefit of your family and keeping siblings talking after you’re gone.
Dave: How about an additional plug for your newsletter? How can I get a copy of that? You know, we’ll cover a little bit at the end, but never, you know, we can always do it a couple times.
Brian: You can email me. We can put you on the list. Is there a way to do it online as well?
Dave: We can. We’ll go into that.
Brian: We’ll make sure that we have an online avenue to sign up for that as well.
Dave: Our listeners can go on our website and check out your bio, that’s Brian Kempf, Millersburg, Ohio, which is located in Holmes County, as we mentioned. You’ll see his bio and you’ll see a very famous young man there that has great skill in business planning.
Dave: I want to go back to estate planning considerations, again, kind of tie this together. Kind of keep it out of the … We’ll talk some tax, but I want to kind of keep it in the higher level, the planning, the emotional stuff that’s very difficult to do. How do you have that conversation about, does the next generation really want to own this land? Does the next generation really want to farm?
Brian: Yeah. I would say the first thing that I tell people is starting to bring kids in on the discussion early on. Oftentimes people wait to start telling their kids what their estate plan is until they’re in their late 20’s, 30’s, 40’s in some case. It’s always going to be better if you lay out your estate plan and tell them what your plan is, get their input, ask them, what do they want to do? Start to bring them in on the discussion early on, even if you don’t give up ownership. Getting an idea, do your kids want to own the farm or the business? Are they willing, and are they ready, and do they understand risks involved and some of the difficult decisions that have to be made along the road? That’s probably the first thing, is starting to involve your kids in those discussions early on.
Brian: The farms and businesses that do it the best, they meet on a monthly basis at least, just to talk about decisions that are made, go over financial information. Just talk through things that you don’t always talk about when you’re wrapped up in your daily work. Everyone is busy. Everyone’s got 1000 things to do. Unless you’re intentional in meeting and talking about these things, it can go years between meetings.
Brian: That’s probably the first thing. There is also a fine balance between when you allow your kids to get into the business. We don’t like to see it done too early before someone has really made up their mind that they want to get in and stay in, because it’s easy to get in and it’s not so easy to get out.
Dave: Check in, never check out, huh?
Brian: Exactly. We don’t like to push people to get in too early, but we also don’t like to see people wait until they’re 75 or 80 before they pass their farm along to their kids that are in their 50’s, because at that-
Dave: Might be a little late.
Brian: Yeah. At some point, the next generation is going to say, “Well why do I want to take on this risk if I’m going to retire in 10 years?”
Dave: Are you saying a 50-year-old plus is old? Is that what I hear you saying? We need to talk.
Brian: That’s not exactly what I’m saying, no. It happens. It happens with some regularity, and you even see sometimes it skips from grandparents to grandkids because the parents now say, “I don’t need to take on the risk. I’m not going to be doing it for another 35 years.” You don’t want to wait too late to do that either.
Dave: Well let’s do a side by side comparison along that discussion. Okay, choice A is I’m the owner of the land, I want to sell the land. You’ve already told me I’ve got capital gain. I’ve owned that land, or that land has been in the family for 50 years, or I’m going to gift it or put it into my estate to pass it along to my heirs. What would your advice be to me?
Brian: We would always advise, in general, I should say, pass land through inheritance when you pass away because you’re going to get that step up in basis. Your children’s basis in the land will now become whatever the fair market value of that land is when you pass away. If they would sell it, let’s say a year later, there would be little to no capital gain. Whereas, if you purchased that land 40 years ago, or your grandparents bought it and gifted it to you, it may have a basis of $200, and it could produce a $30,000 gain per acre. That can be an enormous tax saving, or tax cost if you do it incorrectly.
Dave: Sure. Well, there is the benefit of having those family meetings and bringing in the family sooner than later, and often, even though those are difficult conversations.
Brian: They are. Yup.
Dave: Will you lead those kinds of conversations?
Brian: Yup. We love to lead those conversations, and we’re lucky to have some great attorneys that we work with side by side on these discussions as well. Because there’s often tax and estate planning considerations that we both, us and attorneys, work off of each other very well.
Dave: Right. In the time we have left, we’ve got to do a little encore, a little quick cleanup here. Of course, we were talking about some tax planning tips. We didn’t dive too deeply into that, but estate planning strategies and unique challenges facing the ag industry, I think we’ve covered those pretty well in the time we have.
Dave: On tax planning tip, and along the land, we talked about 1031 exchange or like-kind exchange for land. I want to trade my land for something else. Can you give us a high-level overview? You could give a seminar on this, an eight-hour seminar.
Brian: Exactly.
Dave: You’ve got one minute to describe what a like-kind exchange and how that can benefit me.
Brian: Yup. High level. If you sell your land and you don’t need or want the cash out of that land, you can do a like-kind exchange. You can sell your land and defer all of the gains by purchasing a like-kind property. That could be land. That could be commercial real estate, a rental building, any type of capital asset. You cannot buy personal property, which would be tractors, cars, equipment, anything like that. As long as it is a like-kind property, you can defer all of that gain. Where it can really come into play is if you then pass that property along to your kids through your inheritance, there is no tax on that sale ever.
Dave: Good. You know, we’ve kind of painted a picture of some tax techniques and planning techniques for a struggling business, but by any means, what we’ve talked about can be for a very thriving business.
Brian: That’s exactly right.
Dave: All of this works either way. I think sometimes the businesses that are not doing as well are the agribusinesses, you may hear about it more often than not. I think we want to point out that these are planning techniques for all levels of business.
Brian: That’s exactly right.
Dave: You know, as we run down, again this is going to be quick hits. We like to do a little quick hitter on the tax tip. Depreciation write-offs, still a good thing happening?
Brian: Big depreciation write-offs this year. A million dollars of 179, unlimited bonus depreciation. You can pretty well write off almost everything.
Dave: You have some planning techniques there to defer if we don’t need it?
Brian: That’s exactly right. You can also, tractors, they put in a new provision, you can lengthen the amount of time you can depreciate them if you want to.
Dave: Sure. Can I change my accounting method for tax purposes?
Brian: You sure can if you want to. You can switch from cash to accrual. Most farms are all on a cash basis.
Dave: Cash anyway. Okay.
Brian: Yup, exactly.
Dave: They probably stay that.
Brian: Yup.
Dave: Filling deadline, what do we got in front of us? Are the tax forms going to be available? What’s going on there?
Brian: Yeah. Farmers still can file my March 1st and not have to pay estimates, but the IRS is going to be very delayed on coming out with new forms this year because of all the new tax changes. It may benefit some farmers to make a small fourth quarter estimated payment, which would allow them to file on April 15th instead.
Dave: When are my 1099s due to the IRS?
Brian: Still, January 31st, and file your 1099s. It is no longer something to ignore, the fines are rather large for not filing them if you get caught.
Dave: As an aside, we’re dealing with a client now that received a notice with a $20,000 plus penalty for failure to file 1099s correctly, so we wanted to throw that out.
Brian: Yeah. That is very serious.
Dave: Our guest today has been Brian Kempf from our Rea & Associates office in Millersburg, Ohio. I think you can tell by the conversation, this guy is plugged in on the planning side on agribusiness. The agribusiness is thriving here in Ohio, and Brian’s planning activities are thriving as well. We have the pleasure as a firm of working with so many family farms, many of them generational from generation. You and your team in Millersburg do a great job educating clients on the importance of tax and estate planning.
Dave: In fact, I’d like to encourage our listeners to check out and subscribe to Rea’s newest quarterly print newsletter that you mentioned, called Rise and Shine, which features tailored articles and insight for farmers and agribusiness leaders. You can find a sample of this newsletter on our website at reacpa.com/rise-and-shine. I was told to put those dashes in. Let me give it to you again. reacpa.com/rise-and-shine. Rise and Shine. While you’re checking out the Rise and Shine article, see I’m giving you a publication there.
Brian: Thank you, Dave.
Dave: I’m giving you some pub. Why not check out our past podcast episode and resource pages at reacpa.com/podcast. Until next time, I’m Dave Cain, encouraging you to loosen up your tie and think outside the box, double the stuffing recipe.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own, and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.