We recently interviewed Kurt Beshore, loan officer with Horizon Farm Credit. Kurt discusses prepayment penalties, including what they are and how to avoid the hidden costs associated with them.

Let’s start with the basics. What is a prepayment penalty, and how does someone know if they have a prepayment penalty condition on their loan?
A prepayment penalty is a clause in the mortgage contract that states a penalty may be assessed by the lender if the borrower significantly pays down or pays off the mortgage before the term of the loan. 

Typically prepayment penalties occur during the beginning of the loan and also during a time where interest rate is fixed for a set period. There's typically a section in the note that the borrower signs that lists the clauses, and there's typically section in that, that spells out specifically what the prepayment penalty is, whether it's a percentage or fee in a set period of months that the prepayment penalty can be assessed.

If there is a prepayment penalty on their loan, what is important for the borrower to know? 
The two big things I'll discuss are the cost and the options that you have. 

First on cost – I’ll talk about three common approaches that we see to prepayment penalties:

• Step down: It starts as a 5% fee in the first year, 4% in the second year and so on until you get to 0% after the fifth year. Normally, that is in conjunction with a five-year fixed interest rate. 
• Percent balance: Typically, it's 2% of the principal balance of the loan. 
• Straight fee: We don’t see this very often, but it is a straight dollar amount associated with prepaying the loan early.

Now let’s talk about options for borrowers. There are a few options you have in terms of prepayment penalties:

• You can simply just ride out the current interest rate you have. It's not going to cost you anything to do that. I know you're going to be stuck there, but it's one of the options you have.
• Refinance with your existing lender. Sometimes they might be willing to waive or reduce the prepayment penalty. 
• Refinance with another bank. Run the numbers and make sure it's cost effective for you to do so. 
• Ask the lender you're refinancing way if they have any sort of creative solutions to help with the prepayment penalty. There could be options out there from other lenders who may be willing to help you through that situation.

Is there anything else you’d like to share with listeners on this topic? 
A prepayment penalty is a true cost to the borrower, so when you're considering interest rates and there is a prepayment penalty, there needs to be some sort of cost associated with that. Typically, we say it does add a premium to the rate just because it limits the flexibility that you have as a borrower if you're locked in on terms and rates. 

We don't know what the future holds, and the prepayment penalty could be a limiting factor for your borrowing capacity moving forward. When you are looking through your loan documents, if you have a prepayment penalty, make sure you fully understand it.

Know that you don't have to accept prepayment penalties. There are lenders out there who offer loans without prepayment penalties. You can ask your lender to exclude prepayment penalties. 

Understand the true cost of what the prepayment penalty does for you, and also understand that you have options to not include a prepayment penalty in your note.

No matter if you are a full- or part-time farmer, agricultural producers have a number of capital needs to make their operations successful.

At Horizon, we understand the ins and outs of farming and can offer you a variety of financing options and solutions to best meet those needs such as leases for agricultural necessities like vehicles, tractors, equipment (mobile or fixed), buildings, barns and more.

While often overlooked, leases can be a valuable option. A leasing company allows the use of equipment or machinery while you pay a periodic lease rental or payment. In essence, you only pay a usage fee for the equipment as it is used rather than pay interest on a loan.  Leases may provide tax advantages, little or no down payment and lower monthly payments.  When structured correctly, lease products can allow a customer an alternative capital pool to pull from while providing flexible and unique benefits.

Farm Credit Leasing Services Corp., funded by parent company CoBank, specializes in lease financing for the nation’s agricultural producers, agribusinesses and other rural businesses. Horizon Farm Credit is pleased to partner with Farm Credit Leasing to provide leases on a wide range of equipment and facilities, from new or used agricultural production equipment and irrigation systems to transportation and buildings. Horizon's partnership with CoBank and Farm Credit Leasing, provides professional guidance in structuring your lease, a necessity for receiving the full tax benefits of a lease. Horizon offers specification and pricing comparisons, volume purchasing discounts, equipment protection and selection assistance on transportation and material handling equipment.

Benefits of leasing with Horizon Farm Credit

• Financial Flexibility – Leasing can provide 100% financing, which allows you to preserve working capital and your operating line.
• Customized payment structures - Cash flow is improved with the possibility of lower payments and flexibility to schedule payments.
• Tax Benefits - Due to possibility of lease payments being fully tax deductible as a business expense on a properly structured true lease.
• Knowledge and Expertise – The Horizon Farm Credit leasing team, which includes decades of experience working with agricultural and rural businesses like yours, makes leasing easy. We learn your needs and customize a lease for your business.

Our team understands your business needs, our rates are competitive, and our terms are flexible.

So next time you are thinking loan or lease? Call Horizon to learn more about comprehensive leasing solutions that are available to you.

To learn more about Farm Credit Leasing solutions, please call your Horizon officer or visit www.farmcreditleasing.com.

We recently interviewed Joel Semke, REAP coordinator for the Pennsylvania Department of Agriculture and State Conservation Commission.

The Resource Enhancement and Protection program (REAP) allows farmers, landowners and businesses to earn tax credits for implementing Best Management Practices to enhance farm production and protect natural resources. The program has been in place since 2007 and has been an excellent resource for the agriculture community while protecting our air, land and water. Joel discussed REAP and common questions about the program.

Could you give a quick, high-level overview about REAP and how farmers utilize the REAP program?
REAP started in 2007 with a partnership between Chesapeake Bay Foundation and some other state agencies to help farmers fund water quality projects with the goal of reducing nitrogen, phosphorous and sediment runoff to local streams, and ultimately the Chesapeake Bay. 

REAP is a statewide program. Every year our funding covers about 350 applicants, so we have many people across the state applying and getting approved for REAP credits. 

Each year there is a $13 million annual allocation of income tax credits. The program reimburses farmers in PA state income tax credits, which they can use dollar-for-dollar to pay that PA income tax bill over the course of 15 years. The program has another option where farmers can sell them or transfer them to other members of the business, family members or other individuals. 

The program has been very sustainable. We use up all of our allocation each year, and it's proved very popular farmers, the PA legislature and others. 

Moving forward, we hope to continue to reach out and get new farmers into the program, especially with certain communities that don't use traditional funding programs.

When working with our Horizon customers, we often get questions related to the tax treatment of the REAP tax credits. Specifically, what happens when let’s say an LLC (which is treated tax-wise as a partnership), is awarded the credits?
REAP tax credits are awarded to either an individual social security number or an EIN for the business, which could be an LLC, a partnership, an S-corp, etc. Many of family farms are set up as a business such as an LLC, and we get lots of REAP applications in the form of an EIN. The tax credits are awarded to that EIN and then come tax time, they're passed through to the individual members of that entity, just like the income is. 

Farmers can use credits over the course of 15 years, so the 15-year carry over stays at the LLC level in this example. The credits stay sort of parked, so to speak, in that EIN account. Every year the business entity has to dictate to the Department of Revenue, how they're going to be passed through to the individual members and that happens on the PA REAP claim form. The first step is to figure out what the tax bills are going to be for the individual members, and then pass through that amount. The individual members can pay 100% of their PA income tax bill with the credit. 

I’m not an accountant, but I’m trying to provide a broad overview on some general concepts here. Farmers should always reach out to their accountant or financial advisors when discussing tax credits. 

As I was saying, the credits get passed down just like income. What happens if the individual members of that business entity have dramatically different tax bills? Let's say one member has their PA income tax ending up being zero. That could potentially impact how the other members can use the tax credits, because they're passed down according to membership stake. If somebody owes zero to the state, they can't have credits passed to them, and so then the other members will be impacted by that. 

In transferring or passing through any credits like this, those credits can't be rolled over. You can only pass down what a person can use for that tax year. That's very important to remember when you're talking to your accountants. 

Come April or March, I'm very glad that I'm not an accountant trying to deal with all those calculations. It is a factor that folks in LLCs, partnerships and S Corps need to remember when they're figuring out how much to pass through to individual members.

A key part of the program is that REAP tax credits may be sold to individuals or corporations wishing to reduce their tax liability by purchasing the tax credits. First, if a farmer is interested in transferring credits to other friends or family members, how does that work and are there any considerations to keep in mind?
Credits can be transferred down to other family members or friends, or whoever really. Or they can be sold. 

Two things have to happen first before a farmer can transfer or sell credits. First, the farmer or the primary recipient of this credit, needs to use that credit in the year that it's issued first. Even if you only owe $10, you need to use that credit to pay that $10. Then that frees you up for the second part where you need to wait one calendar year. 

For example, if a farmer in 2020 had a credit awarded sometime during the year in 2020, the 2020 tax year is the first time that they can use that. Right now they want to claim this credit to pay that 2020 bill, if they owe anything. If they don't owe anything, that requirement is waived, and you move on to the second requirement, which is to wait one calendar year.

Whether you're transferring it or selling it, you have to wait until the date of issue is on their credit plus one year, and then you can submit an application to sell it or transfer it. That application to sell it or transfer it is the same. When you're transferring it to a family member, you're just selling it to them for $0. 

It’s important for farmers to remember that the sale or transfer has to happen before December 31 of whatever tax year we're talking about. Therefore, farmers and family members need to do tax planning the year before. They’ll need to think ahead and figure out how much they're going to owe (or what they think they're going to owe). Then, they need to get that application to me prior to December 31. 

For the recipient of the transfer, they can only pay 75% of their PA tax bill with the credit so that's one further calculation that you need to do before you submit that application with the amount. Because again, if you transfer more than the person can use in any given year, that unfortunately is lost. There's no ability to roll that over for next year or put it back into the account of the primary recipient. The big thing is to plan ahead. 

I recommend that farmers get me those applications to me by December 1, because really that gives them a chance, if something goes wrong at Department of Revenue, they have a chance then to correct that issue and get it done prior to December 31.

Next, tell us more about the “sponsorship” option for tax credits. How does that process work, and are there any tips you have for farmers who may take this approach?
Sponsorship was included in 2007 with the original REAP law. It was envisioned as a way for businesses or other individuals to get involved with their local ag community to help farmers implement water quality conservation practices on their farms. 

The way it works is the sponsor is the applicant to REAP. The credits go to that sponsor for their input, and their funding that goes to the farmer. For the farmer, they submit the application based on their eligibility. The eligibility for REAP is based on the farmers' compliance with the law, but the sponsor is the applicant and the credits go right to that applicant. 

In the last two years we’ve had about 50 sponsors of REAP. There's really very little restriction on who can be a sponsor, and this could be an opportunity area for the future.

The only restriction is that that sponsor has to be liable to pay some sort of PA income tax. So any business, individual, trust or bank can act as a sponsor. The rules written right into law back in 2007 are intentionally vague about sponsors. A sponsor helps fund the project. There has to be a written financial agreement between the sponsor and the farmer. However, the state, myself and the State Conservation Commission, don't ever see that agreement.

It’s wide open what the farmer and sponsor agreed to in terms of details. It’s up to the farmer and the sponsor to determine how everything will work. A question might be if a sponsor going to fund things upfront and then receive the credits after the project is done? Or is the farmer going to take care of all the business, pay all the bills, and then the sponsor's going to reimburse them and get credits at that point? Again, it’s up to the agreement between the farmer and the sponsor.

The things that I need to see on a sponsorship application is just the check box that there is a financial agreement and then also addendum agreements to make sure that everybody understands who's responsible for maintaining that project. The farmer is the one that has to maintain it, even though they didn't get tax credits for it. Instead, they got cash. 

Let me clarify, the sponsor gets the tax credits. The tax credits can use them for up to 15 years, and they can carry them over year-to-year. 

For the farmer, they just see cash because of the involvement of the sponsor, which might be better for their current operation. It gives them a bit more flexibility in dealing with cash rather than PA REAP income tax credits. 

Another aspect of sponsorship that's beneficial to farmers is that there's no cap. When farmers apply on their own, there is a limit - a $250,000 credit limit that they can receive in any seven-year period. With sponsorship there is no cap.

When farmers are working on really big projects, such as a project that is $500,000 or more, sponsorship can be a great option because the sponsor can receive that entire amount as tax credits whereas if the farmer had applied on their own, it would be capped out at $250,000. 

Other key benefits are all the rights and privileges of getting that credit. The sponsor gets the 15-year carryover of that credit to use it. There's no cap. They can pay 100% of their tax bill with that credit, rather than in contrast to what I said about selling and transferring instead of that 75% rate that they could have if they bought the credits.

We've been working hard the last two years to try to ramp up the use of sponsorships, to make sure farmers are aware of it and understand it. It can help with the immediate cash flow of a farm's operation. The downside is the farmer gets cash from the sponsor, which is reportable income rather than a tax credit, which is not reportable income. Additionally, they don't have that flexibility of a tax credit over the course of 15 years. When a farmer receives cash, that's all in one year, and one time to deal with all the bills and whatnot. Whereas with a tax credit over the course of 15 years, a farmer could use that for unforeseen circumstances. In certain years where you sell a lot or the economy is great, the tax credit can be very useful in those years. 

Another concern to consider is that farmers are not always fully in control of the timing because the credit is issued after Department of Revenue does a compliance check on that sponsor, which you, as a farmer, you can't control the tax compliance status of the business down the street.

However, in general, the 50+ farmers that have used this process over the last few years have generally been pleased with it and feel that more farmers across the state could take more advantage of. 

If you have questions or concerns, or want additional details, please reach out to me. I can help answer questions as best I can.

What other common questions do you get from farmers about REAP?
We’re in the midst of tax season, so one common question I get is about claiming credits. 

We have about 300 to 350 farmers that use the program every year, so while it can seem daunting at first, many farmers are getting good at using tax credits. At this point, the state has awarded almost $105 million worth of tax credits to farmers all across the state. About 60% of those credits are being used year-to-year on PA income tax returns. I say that to encourage farmers. It might seem like a daunting process at first, but plenty of people are doing it. Also, man accountants around the state are getting used to the system, so it can be done. 

This time of year, claiming this credit is really a two-part process for the paperwork. The first step is figure out how much you owe on your PA income tax. The second part is to fill out the REAP claim form with that amount. You figure out how much you owe and then you claim it on the REAP claim form, which gets faxed to the number at the bottom of that form.

This is a key misstep. The claim form has to be submitted to a separate address. If you don't do both parts of this process, that can hinder the use of these credits.

To wrap it up, know that there are many farmers who are taking advantage of this program. Accountants are certainly getting more familiar with REAP, and I’m here to help too. 

We will accept fiscal year 2020 applications until March 1. Our funding for this fiscal year is almost gone, but there is no harm in submitting an application. If you're hearing this and you have a project in mind, please submit an application. If we don't have funds for you, you just get rolled over to next summer, 2021 summer, for our next pot of funding. You don't have to resubmit new paperwork or anything like that. If you have something in mind, please apply.

Are there any thoughts you would like to share with our listeners today?
I'm always happy to hear from farmers and help them learn more about REAP. Feel free to call me at 717-705-4032 or email jsemke@pa.gov. 

To our customer-owners and friends,

During this evolving coronavirus pandemic, our priority remains to safely serve you. In following the Centers for Disease Control’s (CDC) guidance, we’re limiting our in-person interaction between our customers and employees for the next two weeks. Our branch offices will operate with limited staffing and the majority of our Horizon team will serve you from home offices.

Our team remains committed to helping you over the phone, via email or text and will send documents electronically or through the mail to you to continue business. As a reminder, you also can access your accounts and services without needing to visit a branch by using our digital banking platform, Digital Banking, or by calling us at 1-800-998-5557 for assistance. While our staff is dedicated to serving you, please afford us some extra patience in our response times. 

We understand these are stressful times for your families and businesses. Our member assistance program (MAP) offers support and resources to address personal or work-related challenges and concerns. It’s confidential and free. Help is available 24/7, 365 days at 800.633.3353.

While we’ve canceled our patronage parties in response to coronavirus prevention, your patronage checks will mail in early April. We hope the check’s arrival will be a bright spot in the coming days.

We’ll keep monitoring the situation and changing our approach as needed. You depend on us and we’ll continue to serve you.

No matter if you are a full- or part-time farmer, agricultural producers have a number of capital needs to make their operations successful.

While often overlooked, leases can be a valuable option by providing tax advantages, little or no down payments and lower monthly payments. Oftentimes, the real value for a farmer lies in the use of the asset and not the ownership. But conventional loans also have their benefits, most notably being that the asset is owned and can be reflected on your balance sheet. Other benefits of loans and leases include:

Benefits of a loan

• Payment timing and terms are structured to fit your operation
• Owned facility/equipment are your assets
• Asset is depreciated on your tax return
• If you are an Horizon Farm Credit borrower, patronage can be earned based on the amount of interest you pay

Benefits of a lease

• Working capital and your operating line is preserved
• Cash flow is improved with lower payments
• Tax benefits are maximized with accelerated write-off
• 100% financing is available

For your next equipment or building need, in addition asking your lender about a conventional loan, ask about a lease as well.

Depending on your unique situation, one option may be more favorable than the other, and you may want to consult with your accountant or other tax advisor to get his/her opinion, too.

We recently interviewed Ryan Davis, director of credit administration with Horizon Farm Credit. As the third podcast in the series The Country Life: Buying Land, Ryan discussed the basics of credit scores and why they are important from a lender’s perspective.

First, could you help us understand what is a credit score and why is it important?
A credit score is a numerical representation of the creditworthiness of an individual based on statistical analysis of their credit files. Lenders use credit scores to help determine the likelihood of timely loan repayment. Credit scores are utilized in lending decisions for various types of loans, from a store credit card to your home mortgage. At Horizon, we review credit scores as one component of our lending process. 

Everyone should know and understand your individual credit score so any time you need to borrow money, you have a good idea of your likelihood of approval. Credit scores are calculated using the Fair Isaac Corporation credit-scoring model (or “FICO model”, if you’ve heard that acronym). Credit Scores are published by each of the three major credit reporting bureaus: Equifax, Experian and TransUnion. FICO scores can range from 300 to 850. The higher your score, the better, as high scores typically represent a lower credit risk to the lender.

Now that we have a better understanding about what a credit score is, what factors impact a credit score?
Your credit score is constantly changing based on a variety of factors. Fair Isaac doesn’t provide the exact formula, but the five areas that impact your credit score include:

• Payment History – Have you paid your loans or credit cards on time? If delinquencies occurred, the amount past due and the severity have an impact. If you miss a payment, get current and stay current.
• Amounts Owed – What is your total amount of credit outstanding, the number of accounts you have and the balances of those accounts relative to the maximum limits? If you have credit cards or a line of credit, keep your balance low. Having credit accounts and owing money doesn’t necessarily mean you are high risk. In fact, if managed properly, debt can actually improve your credit score.
• Length of Credit History – How long have your accounts been open with creditors? Maintaining a proven track record and long-term relationships with creditors makes it easier to identify payment patterns.
• Types of Credit – Do you have multiple different types of debt? Having a good mix of debt can improve your credit score (for example, an auto loan, a credit card, a home mortgage). However, don’t open accounts just to have a good mix! Specifically, having credit cards and managing them responsibly boosts your score. 
• New Credit Applications – Have you had a lot of recent credit applications? Or for large amounts? There is a window of time to “shop around” for the best deal, but a lot of new credit applications can negatively impact your score.

Out of these factors, Payment History and Amounts Owed impact your score the most, and represent roughly 65% of your score. 

What steps can a person take to improve their credit score?
First, it’s important to monitor your credit report, on at least an annual basis, to ensure the information is accurate, and you know what’s being reported. Errors are not uncommon on credit reports because of similar names or social security numbers, medical billing errors or even a lender typing in information incorrectly. You can pull your credit report for free every 12 months at annualcreditreport.com from each of the three major credit bureaus, though this does not include your FICO score.

In terms of actually improving your score, I would focus on two primary factors: always make your payments on time and keep your utilization rate low. Delinquent payments and collection accounts can have a major impact on your score. Late payments or other credit issues will remain on your credit report for up to seven years.

Be sure to maintain low balances on credit cards or other revolving accounts and manage them responsibly (keep your utilization rate low). You should only open new credit accounts as needed; having too much available credit can also hurt your score.

Is there anything else you’d like to share with our listeners today?
I would emphasize the importance of communicating with your lender if you are having problems making your payments or anticipate problems in the near future. Many times your lender can work with you to ensure your credit is not adversely impacted if you are proactive in your communication with them. This is especially true in the current environment as many lenders have developed programs to help their borrowers through any negative impacts from the current pandemic.

The Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) and Coronavirus Food Assistance Program (CFAP) – you have likely heard about or encountered these programs, and maybe even applied for them, received funds and aren’t sure the tax implications. 

First, it’s important to remember that the year isn’t over yet - who knows what will come next? As accountants, we want to help you tax plan as accurately as possible and consider the best available options. The reality is that the details on how these programs will be treated are still unclear.  That said, let’s break down what we know and can work with for now, starting easy and working our way to the more complicated.   

CFAP is technically a “disaster” payment, similar to crop insurance. For that reason, we question whether it can be deferred for one year like crop insurance. One clear detail points to a “no” answer: only proceeds that are related to damage can be deferred, not proceeds related to price (CFAP is price-based).  Since there is no final IRS ruling, the deferment door might remain open for specialty crops that go straight to market at harvest. To be safe, don’t count on deferring CFAP round 1 or the recently announce CFAP 2 payments.  Application for CFAP 2 is open through Dec 11, 2020.  CPFAP payments are treated like Ag Program Payments that are taxable in the year received, and look out for a 1099 from the USDA/FSA.

EIDL will have a relationship with the PPP if your PPP loan is forgiven. Loan proceeds are not recognized as income, and principal repayment is not an expense. Part of the EIDL program included an “advance,” or a grant that does not require any repayment. A number of folks decided take the grant and forget about the additionally approved loan funds (which are not income, to clarify). By itself, without any PPP loan funds in the picture, the “advance” EIDL funds received will be considered taxable income.  

If PPP is in the picture and loan forgiveness is granted (most recipients aren’t at that point yet), the “advance” portion of the EIDL program will count against your loan forgiveness amount (think of it as not being able to double dip on free money). The issue then shifts to the taxable treatment of the PPP forgiveness amount. For example: You received $10,000 in EIDL advance funds (no repayment required) and $100,000 in PPP loan funds. When you apply for PPP loan forgiveness, the most forgiveness you are eligible for is $90,000. The remaining $10,000 stays as a PPP loan. There are two parts to dealing with EIDL “advance” funds:  they are taxable income and they will lower your PPP loan forgiveness dollar for dollar.  

Congress passed the CARES Act with clear intent that PPP loan forgiveness would be excluded from gross income for the recipient. What was not addressed in the CARES Act was whether payroll and other expenses covered by PPP funds would follow Internal Revenue Code (Code) or not. To summarize Code as plainly as possible, if you are not going to claim the income (forgiven debt), you can’t claim the associated deductions. At this writing, without action from Congress, you can’t claim your payroll expenses up to the amount that your PPP loan is forgiven.  

This is a challenge for accountants because we want to make sure your gross wages expense on your tax return matches your W3 Wage Transmittal (the form that summarizes all your W2s for the Social Security Administration). With a longer period allowed (up to 24 weeks) to use the PPP funds, it makes sense to wait until early 2021 to apply for PPP forgiveness and use those 2020 payroll forms to further document the forgiveness application. The big question is whether we can use this inconsistency between Code and the intent of the CARES Act to benefit us in tax savings by (1) maintaining/carrying the PPP loan into 2021, (2) claiming all the payroll/other eligible expenses for 2020 and (3) applying for debt forgiveness in 2021 and showing that income in 2021.

Potentially, there is room for interpretation. It is similar to the strategy many farmers use of prepaying next year’s crop inputs in December, but not selling last year’s crop until March. There are many pieces to consider around the timing of PPP loan forgiveness, and everyone’s situation is unique. You should seek guidance from a tax professional on when to file your PPP loan forgiveness application and stay tuned for any post-election changes from Congress before year-end. 

Does your head hurt yet? There are many variables here with different sources of funds in 2020 that are new to businesses and farms. On top of that, how they are treated (income or non-income) depends on even more variables. These “Big Three” are the obvious to consider during tax planning this year with your accountant, but how they work together with the other moving pieces of your business or farm is just as important to understand. While 2020 has had enough surprises already, you don’t have to let your tax situation be another.   

We recently interviewed Larry Labowski, a Farm Credit loan officer. A year-end financial check-up has many benefits for farm businesses.

Larry discussed what should be included in a year-end check-up and resources available to help.

Could you share the couple of key items that you feel are important for farm businesses to update during this time and why they are important?
Understanding the current state of your business helps you understand your performance and make a plan for the next year. I’ve found that farms and businesses that take the time for a financial review are better prepared for what may impact their operation in the future.

The first step of a year-end financial checkup is to update your balance sheet, both a personal balance sheet and business balance sheet. A balance sheet is a snapshot of your business at a point in time. Creating a balance sheet on Dec. 31 each year enables you to see how your farm operation has changed. Did your net worth grow or did it regress? If it grew, was it from earnings or asset valuations? If equity is trending downward, how much is the business and/or family willing to lose? Keep in mind that a balance sheet to monitor your operation’s performance may be different than your balance sheet to secure a loan, which often includes your personal assets and liabilities. To measure a business’s performance, the balance sheet should include assets and liabilities only for the business. This requires you to consider who owns each piece of equipment and parcel of land and then determine if it goes on a business or personal balance sheet. These values impact many indicators that are important to evaluating financial performance.

Profitability is critical to the success of any business. To best assess your profit from the previous year, create an accrual-adjusted income statement, which adjusts for items including inventory and prepaid expenses. An accrual-adjusted income statement allows you to generate a cost of production on a per unit basis to use in other areas of decision-making, including the use of risk management tools such as crop insurance. Understanding your income and expenses is important for tax planning purposes, and especially in a year like 2020 where we’ve had many unexpected factors impacting both. Many times, farmers avoid paying taxes at all costs, but don’t make a tax decision that puts your business in a worse position down the road.

Lastly, take time to complete an operating and capital expenditure (CAPEX) budget for the coming year. Remember that failing to plan is planning to fail. Review your income and expenditures from the past year and put together a monthly budget for your business. For your CAPEX budget, consider the capital investments you will make in the next year and how you will pay for those investments. Budgets are never 100% accurate, but they provide a starting point for planning for the upcoming year. As the year progresses, review and adjust your budget often to reflect what is happening in your business.

Those are some important aspects that farm businesses should consider this time of year, but many operations might be concerned about how to accomplish all of these items. What resources are available to help? 
Yes, tackling all of these items with a year-end financial check-up might be intimidating, especially if you haven’t done them in the past. I encourage you to involve your operation’s key advisors in helping with you. 

Lenders like Horizon are particularly interested in your balance sheet to see how your business fared in the prior year and your budgets for the upcoming year. We have a number of resources including forms and instructional guides to give you background on what to include in these areas. In good and bad economic times, it is always a good practice to maintain open lines of communication with your lender about anticipated capital needs. 

I also encourage farms to engage additional advisors, such as the accountant, feed consultant, crop insurance agent and others who are willing to help. All have a vested interest in the success of your operation and can best advise your business with accurate and up-to-date information.

Is there anything else you’d like to share with our listeners today?
I would like to add about the importance of knowing your own records. At year-end, when you are calculating your accounts payable and accounts receivable, be sure to be as accurate as possible. The most common error that I see is reporting an accounts payable when in fact the expense was deducted in the prior year because they signed a promissory note. In this case, you would be overstating your accounts payable and increasing your accrual adjustment to your expenses and then understating your accrual-adjusted net income. 

But that’s getting pretty deep into the weeds, and it is a great discussion after you start your annual financial check-up.

As the year winds down, now is the time to review your year-to-date records with your accountant to discuss tax projections and options for reducing your tax liability.

One of the tools that may be an option for you is leasing. Leasing can provide an efficient cash flow and serve as a tax management tool.

Machinery, equipment, buildings, grain bins and fleet vehicles are examples of the types of assets that are generally leased. Below are a few benefits of leasing:

Accelerated write off. For example, when you purchase a piece of equipment that would normally be depreciated for seven years, leasing provides an accelerated deduction by allowing the amount of lease payment as a deduction against income. The 4th and 40 rule does not apply to leased assets. The 4th and 40 rule means that when 40% of the assets for the year are purchased in the 4th quarter, the law requires that all assets purchased in the year be depreciated using the mid quarter convention method, which results in a minimal deduction.
Leasing allows for preservation of section 179 for other purchased assets that would qualify for the section 179 expense. The current section 179 expense is limited to $25,000.

Saving cash. Leasing saves working capital that would otherwise be used to purchase assets.
If you have already made your capital purchases for the year, don’t fret, leasing is still an option using the lease buy back option.

If you are interested in more information regarding a lease, please contact your loan officer or local Horizon branch.

To our valued customer-owners and friends,

Horizon Farm Credit would like to take this opportunity to inform you of the steps we’re taking to keep our customer-owners and employees safe, and our systems and services running, in response to the new coronavirus (COVID-19).

We have activated our Business Continuity and Disaster Recovery Plan, which includes a comprehensive response that follows guidance from the Centers of Disease Control and Prevention (CDC) and state and local health agencies in the areas we serve. Our ultimate goal is to ensure that we have a dynamic and appropriate response to the risk caused from this virus.

While the following is not a comprehensive list, our plan calls for:

• Increasing our supplies of disinfecting products, and implementing enhanced sanitizing and cleaning protocols at all of our branch locations.
• Keeping our products and services fully available to you.
• Supporting our customers and employees that are at-risk or have special needs.
• Monitoring the financial markets and discussing options for customer-owners to meet their changing financial needs. 
• Limiting business-related employee travel until the end of April. Instead, we will utilize our teleconference and video conferencing capabilities. 
• Modifying, postponing or cancelling large internal and external meetings until the end of April.
• Postponing events scheduled until the end of April. This includes our planned patronage parties, April 1 – 8, and AgBiz Masters meetings.
• Mailing all patronage checks the first week of April from our headquarters office.
• Monitoring and reducing our on-farm travel as business permits to keep our customer-owners and employees safe. Our staff will be conducting more business over the phone and by mail.
• Enhancing our risk monitoring and management protocols.

During this time of stress and uncertainty, we want to make sure you have access to all the financial services we offer. You can access your accounts and services without needing to visit a branch by using our digital banking platform, Digital Banking, or by calling us at 1-800-998-5557 for assistance.

You can find the latest information on the coronavirus and how to limit your risk of infection by calling the CDC hotline at 1-800-232-4636 or by visiting the CDC website. 

As always, our highest priorities are the health and safety of our customer-owners and employees, as well as the communities we serve. If there’s anything that we can do to assist you, please don’t hesitate to reach out to your loan officer. 

Thank you for the opportunity to serve you. Remember: We’re in this together.