Consider Every Option
Years of slumping milk prices, rising input costs, and a surplus of cows (thus a surplus of milk) have triggered today’s dairy farm crisis. As a result, many family farms have had to make some very tough decisions. Here in Ohio, more than 170 dairy farms – about 7.5 percent – have already disappeared in recent years.
While it’s always hard to close a business, it can be tougher for farmers because theirs is more than a business; it’s a way of life that’s likely endured for generations.
If you’re a dairy farmer who has had to confront the many challenges of the industry, you likely have a lot of questions. This article will help you identify your options.
First Thing’s First
The first thing to consider is whether you’re able to (and want to) hold on to your family’s farm. If your plan is to stay the course, you’ll need to begin by asking yourself the following questions:
- Are there ways to reduce your costs or overhead?
- Do you need to sell cows that aren’t producing what they need to be producing in order to break even?
- Do you need to consider taking on an additional job outside the farm?
- Do you need to sell assets to generate additional cash to keep the farm functioning?
- If you have a lot of equity in your farm, do you want to take out a loan against it? If so, how far do you want to go? This could be hard-earned generational equity that has built up over decades.
Although it may seem counterintuitive to invest in your farm when you aren’t making any money, it may be necessary to help reduce your overall costs.
Listen to episode 160, “It’s Planning Season,” on Rea’s award-winning podcast, unsuitable on Rea Radio, to hear Brian Kempf talk about how farmers and landowners can get ahead.
Look Beyond The Farm
In some cases, a family member will take an off-farm job to make extra money or to obtain health insurance, which can otherwise be a costly expense for the farm to absorb. We’ve also seen clients complement their businesses with extra services such as equipment repairs, hauling manure or custom harvesting. Trucking is also a viable option if you have a CDL as the industry has a hard time finding dependable drivers. Most farmers have a lot of great skills that they can put to work; don’t sell yourself short.
When Selling Makes Sense
While making the decision to sell the farm is an extremely difficult decision to make, it shouldn’t be disregarded as a viable option. In fact, depending on your financial situation, it may be the only option that will allow you to continue on without going further into debt. But if you do make the decision to sell, be aware that there are significant tax consequences you’ll want to be aware of.
Have A Plan (Or Several)
When times are tough, it’s even more important to plan to help propel you in the right direction. Having a tax, business, estate and succession plan are good ways to obtain some peace of mind as you continue to look toward the future.
Some farmers might have a basic estate plan, but it might be decades old. It’s important to have an updated plan that factors in what’s going to happen when you retire or are unable to continue farming. The majority of farmers make plans to pass their land to the next generation, which can be great if it is done correctly. If executed poorly, it can tear families apart.
Many farmers think, with the estate tax exemption now at $22 million for married couples, they don’t need an estate plan because the land will simply pass on to their kids when they die. But, what if you have several kids and only one wants to keep the land, and the others want to sell? Factors such as divorce, death or buyouts can have unforeseen consequences and do irreparable damage to a family. Estate and succession plans can spell out everything and eliminate uncertainty and confusion.
Strong tax and business plans can ensure that you’re doing all that you can to maximize your dollars and minimize your risk. Tax
planning during down times can help save taxes now, as well as save tax in the future. When selling assets, it’s important to consider the 0 percent long-term capital gain rate in order to maximize the amount you can sell with little to no income tax consequences. Some families have been able to generate up to $100,000 of income in a year and still pay no federal or Ohio taxes through careful planning.
Turn To The Experts For Guidance
Regardless of your course of action, having your accountant and your attorney by your side to help make well thought out, rational decisions is the best way to make it through this crisis. Contact Rea & Associates to learn more. I would be happy to sit with you and discuss your options for getting through today’s dairy farm crisis.
By Brian Kempf, CPA (Millersburg office)
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