March 24, 2021
In a recent webcast, I mentioned that the Schedule F tax form is one of the worst management tools in 21st century agriculture. An agricultural lender from the eastern Corn Belt asked me to elaborate on this statement.
Both the Schedule F (Profit or Loss from Farming) and Schedule C (Profit or Loss from Business) tax forms are often completed on a cash basis, which means that income and expenses are reported when cash changes hands. The Schedule F and Schedule C forms can be valuable to comply with tax authorities and to illustrate sources of revenue and categories of expenses.
However, a cash basis Schedule F often does not depict what is truly occurring in the business from a financial standpoint. This is because revenues and costs can be adjusted to reduce profits for a given tax year. The amount of depreciation reported can also distort net income. Accelerated depreciation and other allowed adjustments, such as the Section 179 depreciation deduction, can distort the depreciable life of an asset in an attempt to reduce taxable profits. The issue with accelerated depreciation schedules is that after the asset is fully depreciated, the principal and interest payments still must be made over the extended life. This is sometimes the case with poultry houses, hog facilities, and equipment.
If a Schedule F tax form is used to determine the cost of production, changes in revenue and prepaid expenses can alter the calculated cost of production and break-even points. Another element that creeps into a Schedule F is the co-mingling of personal and business expenses. Some anecdotal evidence suggests that personal expenses reported on a Schedule F can be as high as 30 percent of the total expenses.
Studies completed at Purdue University and the University of Illinois have found the difference in net income between cash basis and accrual-adjusted income statements to be as much as 50 to 70 percent. These differences are a result of adjustments in accounts receivable, accounts payable, inventory, prepaid expenses, and accrued expenses. If management and marketing decisions are being made based on the Schedule F break-even points and profit objectives, the old adage of “garbage in, garbage out'' applies.
Financial systems and transparency of numbers will become an increasingly important component for the economic and financial divide that is occurring in the decade of the 2020s. Building off the Schedule F with accrual adjustments and separating business and personal expenses can go a long way in keeping your business out of the potholes of business decision-making.
Source: Dr. David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
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