This month, we’re diving into a fun topic that all farmers like to talk about: bookkeeping!
…Wait, don’t everyone head for the exits at once!
We get it. You didn’t go into farming to spend your days in front of a spreadsheet. Kirsten’s farm desk has a pile of receipts from 2022 tucked behind the monitor that she’ll get to… someday. But if you’re not in a position to hire someone to handle the books (or you don’t have a spouse willing to step up to the task) there are a few things you can do at the end of each year to make your life about ten thousand times easier when tax time comes.
Organize Transactions
Sometimes it’s easy to categorize a transaction. If it’s from the feed mill, it’s animal feed. A bill from the John Deere dealership probably involves equipment. But will you remember everything you pick up at Tractor Supply a few months from now? Try to take the time to sort through your transactions and income on a regular basis. The longer you put it off, the worse it gets, so bribe yourself with a drink if you have to and knock the task out quickly.Distinguish Between Business and Personal Expenses
Do you have a separate bank account for your farm? You ought to. Even with separate accounts, it’s far too easy for an expense to end up on the wrong card. Sometimes money doesn’t get moved around fast enough, other times you’re moving fast and things get confused. When that happens, make sure you flag those transactions when you’re sorting through them.And take some steps to keep personal and business separate. It’s not silly if it works. At the moment, Kirsten has a monthly reminder to “Pay the damn dental insurance bill that can’t accept autopay” and a personal debit card colored with blue sharpie because both her personal and business debit cards were white.
And don’t forget to add in your “personal” expenses that are really farm expenses! If you use live on the farm, make sure you count part of your mortgage/lease, utilities, and insurance toward the farm. If you ever drive a personal vehicle for farm duties, count (or estimate) your mileage.
Categorize Expenses Appropriately
When it comes to tax time, you’ll be filling out a Schedule F form. What that means is that you can save yourself some time by using the same categories for transactions that the Schedule F form uses (and they’re actually pretty useful). Those categories are … (warning, dry government language incoming):
What if you want to track more categories? Use the “other” categories to track things like software, advertising, and animal processing that don’t fit any of the existing Schedule F categories.
Track Income Sources
You made money this year, right? Add it up, baby! Did it come from multiple places? It’s worth breaking down what you made and where it came from, if for no other reason than to know what makes you the most money. If you want to get fancy, you can try to coordinate your expense sub-categories with your income categories and figure out if you actually make a profit on each category.Understanding Financial Statements
Profit and Loss! Cash Flow! Balance Sheets! They aren’t bogeymen, though it does feel like they sometimes coordinate with each other to trip up the unwary.
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- Profit and Loss – Often referred to by those in the know as a P&L or an income statement, this is a way of looking at the overall finances for your farm. What money did you make, what did you spend, are you operating in the black or the red? (And that Schedule F you had to fill out? That’s a Profit and Loss statement!)
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- Cash Flow – Do you have money when you need it? Cause if you need money in February and your crop doesn’t come in until April, and you don’t have a plan to cover expenses between February and April, you’ve got yourself a problem. Cash flow statements help you predict and plan for the lean times.
- Balance Sheet – This one is all about assets, liabilities and equity. It’s less of a tool to use in the moment than something you track over time to ideally see how your business is thriving.
These aren’t the easiest to create on your own, but once you sort out your transactions, any accounting software (like QuickBooks or Xero) or accounting service (like Good Agriculture!) will create these automatically for you. If you’re handling your own books it may or may not be worth it to you to maintain each individually. That said, if you ever want to get a loan or any outside investment in your farm, you’ll need all of them.
Depreciation and Loan Management
Now we’re getting to the advanced stuff! You might be thinking “my Profit and Loss Statement shows I’m making a profit, so why do I need a cash flow statement? Shouldn’t my cash be good to go?” but it’s actually quite common for farmers to be profitable AND struggle with cash.
Why is that? Farming requires a lot of upfront investment — big mortgage payments for the land, lots of expensive equipment, big investments into breeding stock if you’re raising livestock.
The last thing you need to do for your year-end finances is calculate your depreciation and loans. “Depreciation” is a five-dollar word that means your equipment, infrastructure, and breeding stock have useful lives longer than one year, so you take a little bit of the expense every year. For example, if you buy a $70,000 tractor you expect to last you 7 years, the depreciated expense would be $10,000 per year for the seven years. You’ll calculate your depreciation on IRS Form 4562.
We’re not going to lie, the calculation can get complicated, and there’s lots of legal ways you can do the math. If you’ve got a lot of equipment, infrastructure, or breeding stock purchases, we recommend you work with an agriculture CPA to optimize your tax return.
Loans are easier. The only trick is that only the loan INTEREST goes on your profit & loss. The principal counts as an “investment” and shows up on your cash flow statements. So every time you make a loan payment, split it into two transactions, the interest and the principal.
So let’s take an example farmer here. Say our farmer sells $500,000 in produce, spends $50,000 building a new wash-pack space (expected to last 10 years), has a $4,000/mo mortgage payment ($2,000 interest, $2,000 principal), and has $400,000 in other expenses. This farmer would show a $71,000 profit ($500,000 minus $400,000 minus $5,000 for the wash-pack space depreciation ($50,000 divided by 10 years) minus $24,000 in mortgage interest). However, this farmer would have a NEGATIVE $3,000 cash balance (since the farmer still has to pay money that year for the $50,000 wash-pack space and the $24,000 in mortgage principal, so we subtract another $74,000 from the $71,000 in profit).
Tax season is almost no one’s favorite time of the year, but it is a good reason to slog through your farm’s financials and see how you actually did last year. And of course, us at Good Agriculture love doing the books (well, maybe not Kirsten) and are here to help you with your finances. Why is that? Farming requires a lot of upfront investment — big mortgage payments for the land, lots of expensive equipment, big investments into breeding stock if you’re raising livestock.
The last thing you need to do for your year-end finances is calculate your depreciation and loans. “Depreciation” is a five-dollar word that means your equipment, infrastructure, and breeding stock have useful lives longer than one year, so you take a little bit of the expense every year. For example, if you buy a $70,000 tractor you expect to last you 7 years, the depreciated expense would be $10,000 per year for the seven years. You’ll calculate your depreciation on IRS Form 4562.
We’re not going to lie, the calculation can get complicated, and there’s lots of legal ways you can do the math. If you’ve got a lot of equipment, infrastructure, or breeding stock purchases, we recommend you work with an agriculture CPA to optimize your tax return.
Loans are easier. The only trick is that only the loan INTEREST goes on your profit & loss. The principal counts as an “investment” and shows up on your cash flow statements. So every time you make a loan payment, split it into two transactions, the interest and the principal.
So let’s take an example farmer here. Say our farmer sells $500,000 in produce, spends $50,000 building a new wash-pack space (expected to last 10 years), has a $4,000/mo mortgage payment ($2,000 interest, $2,000 principal), and has $400,000 in other expenses. This farmer would show a $71,000 profit ($500,000 minus $400,000 minus $5,000 for the wash-pack space depreciation ($50,000 divided by 10 years) minus $24,000 in mortgage interest). However, this farmer would have a NEGATIVE $3,000 cash balance (since the farmer still has to pay money that year for the $50,000 wash-pack space and the $24,000 in mortgage principal, so we subtract another $74,000 from the $71,000 in profit).
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