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Agribusiness Update for 2014

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Heartland Ag Group, Sikich, Advantage Capital, The Climate Corp presented in Decatur and Springfield Illinois to give an update on where agribusiness was in 2014 and where it is going for 2015

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Agribusiness Update for 2014

  1. 1. 2014 Agribusiness Update ©2014 Sikich LLP. All rights reserved. December 4, 2014
  2. 2. Agenda 3:45 p.m. – 4:00 p.m. Welcome Time & Registration 4:00 p.m. – 4:10 p.m. Sikich LLP » Introduction 4:10 p.m. – 4:30 p.m. Dale Aupperle, President, Heartland Ag Group Ltd. » Current Issues in Agriculture – Leases and Land Values 4:30 p.m. – 5:10 p.m. Anthony Metzner, Vice President, Advantage Capital Partners Timothy Hassler, Principal, Advantage Capital Partners » Investing in the Future of Agribusiness 5:10 p.m. – 5:25 p.m. Break 5:25 p.m. – 6:05 p.m. Nick Braden, Regional Sales Manager, Climate Corporation » Using Precision Ag for Field and Yield Insights 6:05 p.m. – 6:25 p.m. Tom Bayer, Partner-in-Charge, Agriculture Services, Sikich LLP » Current Issues in Agriculture – Tax Update 6:25 p.m. – 6:30 p.m. Q & A Join us for cocktails and hors d'oeuvres following the seminar.
  3. 3. Riding the Agricultural Super Cycle!! December 4, 2014 By: Dale E. Aupperle, AFM, ARA President- Heartland Ag Group Ltd. 1401 Koester Drive, Suite 100 Forsyth, IL 62535 ****** Phone: (217) 876-7700 Fax: (217) 876-7724 E-mail: dale@heartlandaggroup.com Web: www.heartlandaggroup.com Sikich Agribusiness Seminar
  4. 4. Current Ag Trends Note some of the following general observations regarding agricultural conditions throughout our respective agricultural areas:  Declining Grain Prices  Expensive Farm Inputs  Squishy Farmland Values  Ongoing Weather Concerns  Planted Acreage Shifts  Cash Rent Concerns  Technology Advancements  Uncertain Global Demand  Crop Insurance Safety Net  Increased Sensitivity to Farming Risk  Relatively Low Interest Rates  Outside Capital on Sidelines  Larger Farming Units  More Absentee Ownership  Threat of Inflation/Deflation  Global Financial Quagmire  Uncertain Ethanol Prospects  Fear of the Future
  5. 5. Thoughts on a Sunday Evening All of us gather our thoughts - - and keep our eye on the ball in different ways. Here is a collection of charts I look at every Sunday evening - - the big picture is wonderful!
  6. 6. As of December 4, 2014 13 Year Uptrend Broken Correction Over?
  7. 7. Downside breakout negative for grains!
  8. 8. Be careful if an uptrend develops.
  9. 9. Stock market is looking good on the Dow Jones.
  10. 10. Historically high prices are over!
  11. 11. Critically important uptrend line gives way.
  12. 12. Tile Drainage Systems (are becoming prevalent)
  13. 13. 2014 Illinois Farmland Values & Lease Trends ▼ 19th Annual Report ▼ Covers Calendar Year 2013 ▼ Lots of Farm Real Estate Transactions ▼ Updates on Rents & Leasing Trends ▼ A Team of Over 70 Professionals - Professional Farm Managers - Accredited & State Certified Appraisers - Licensed Farmland Brokers www.ispfmra.org
  14. 14. All Categories of Farmland The Great State of Illinois These (rounded) figures are the average as reported by each region on the categories shown. Excellent Good Average Fair Recreational Transitional Region 1 $12,700 $9,100 $9,300 - - $6,000 $25,400 Region 2 $12,900 $10,000 $7,100 $5,900 $4,300 $17,500 Region 3 $13,600 $9,500 $6,900 - - $3,400 - - Region 4 $12,300 $9,500 $7,600 $8,700 $4,500 $25,000 Region 5 $11,500 $9,100 $7,000 $4,400 $3,100 $7,500 Region 6 $12,600 $9,900 $8,100 $7,200 $2,900 - - Region 7 $12,900 $10,000 $6,800 - - $3,300 $37,600 Region 8 - - $10,300 $9,200 $7,500 $3,900 $10,100 Region 9 - - $9,400 $7,900 $5,900 $3,000 $16,300 Region 10 - - $10,000 $5,600 $4,200 $2,700 - - Average $12,600 $9,700 $7,500 $5,850 $3,700 $19,900 Averages are dangerous - - but they give us a snapshot of each category (for comparison).
  15. 15. Buyers and Sellers • Buyers: Local farmers 64%, Local investors 14%, Non-local investors 9% • Sellers: Estate sales 52%, Individual investors, 14%, Retired farmers 11% • Reasons for Selling: Settle estates 50%, Received a good price 22%
  16. 16. Comparing Farmland to other Financial Assets Here is a quick comparison of how farmland compares in its overall return - - it’s the best! Asset/Index 1970 – 2010 Average Annual Return 1990 – 2010 Average Annual Return Farmland 10.77% 10.80% Mtg./REITS 9.09% 9.49% Aaa (Bonds) 8.24% 6.85% 10 yr Treasury 7.20% 5.45% Dow Jones 6.52% 6.84% S & P 500 6.24% 5.75% CPI 4.29% 2.63% PPI 4.03% 2.47% CRB Spot Index 3.25% 2.40% Note – From Bruce J. Sherrick, PhD at the University of Illinois.
  17. 17. Uptrend Interruptions In the last four decades the Illinois farmland uptrend was interrupted on three occasions: Years 2008 – 2009 Sideways for a year - - after doubling in value from 2001. Years 1998 – 2001 A 15% correction - - after an eleven year uptrend from 1997 with farmland values rising by 92% Years 1980 – 1987 A 50% correction - - after farmland values advanced nearly 500% from 1982. This one was a bubble. In summary – Perhaps history gives us some guidelines for our current thought processes. It doesn’t look like a bubble to us!
  18. 18. 2013/14 Illinois Farmland Sales Here are several representative top quality land sales that have occurred throughout the central part of the state during year 2013 and into 2014 (to date): 2013 County Date Acres Price Per Acre DeWitt Apr 2013 66.50 $13,600 Shelby May 2013 134.00 $13,150 Moultrie Jun 2013 160.35 $12,473 Christian Jun 2013 120.00 $15,300 Piatt Jul 2013 281.35 $13,050 Macon Aug 2013 160.17 $13,000 Douglas Nov 2013 960.00 $14,583 Logan Nov 2013 80.00 $12,200 2014 County Date Acres Price Per Acre Christian Nov 2014 40.00 $12,400 Macon Oct 2014 120.13 $12,750 Moultrie Oct 2014 62.15 $12,100 Coles Nov 2014 73.60 $13,300 Shelby Nov 2014 52.00 $11,100 Piatt Aug 2014 80.00 $12,550 Logan Oct 2014 103.37 $12,500 Sangamon Oct 2014 40.00 $13,500
  19. 19. What is a Farm Lease? • Method to divide annual farm income and expenses • Rewards investor for owning land • Compensates farmer for operating the land • Reflects the risk taken by both parties
  20. 20. General Types of Farm Leases • Cash Rent – Fixed payments to landowner • Flexible Cash Rent – Bonus rent paid to landowner • Crop Share – Share of income/expenses by both parties • Modified Crop Share – Deviations from historical sharing of income/expenses • Custom Farming – Landowner hires farmer to operate the land
  21. 21. Incomes from Alternative Lease Types, 2013 Land Quality Lease type Excellent Good Average Fair ------------------ $ per acre --------------------- Traditional crop share 320 270 230 186 Cash rent 347 281 242 197 Custom farming 394 344 279 226
  22. 22. Historic Cash Rents, Midpoints Land Quality Year Excellent Good Average Fair $ per acre 2007 183 164 144 120 2008 241 207 172 138 2009 267 221 187 155 2010 268 231 189 156 2011 319 271 220 183 2012 379 331 270 218 2013 396 339 285 235 2014 375 323 277 219
  23. 23. Farmland is what it earns! Let’s look at three scenarios which help forecast the 2015 land value trend (using 75% corn and 25% soybean rotation). It will take a combination of good yields and reasonable prices to have stable land values! Stable Net Income Declining Net Income Corn Beans Corn Beans Yields 210 58 210 58 Grain Prices $4.25 $11.00 $3.50 $10.00 Govt. Payment $0 $0 Gross Income $840 $695 Projected Cash Rent $335 $285 Operating Expenses -$35 -$35 Net Income $300 $250 Investor Return 2½% 2½% Projected 2014 Land Value (per acre) $12,000 $10,000
  24. 24. Heartland Outlook December 2014 Agriculture is experiencing incredible forces from every angle. At Heartland Ag Group Ltd., we are watching the following key areas:  Commodity Prices – My friend Richard Brock calls this the biggest bear market in history. Let’s hope we can average $4.00 for corn and $10.00 for soybeans as minimum prices in our future!  Bushels Per Acre – Rain makes grain - - and our 2014 El Niño season is forecast to repeat itself next year! Trend line yields should increase going forward.  Weather Trends–Worldwide weather is crucial - - it has minimized our global stocks. But it looks like we will rebuild them quickly with good global weather.  Interest Rates – We are at historic lows - - attractive for farmland mortgages. Slowly rising long term interest rates are suggesting a change is coming.
  25. 25. Heartland Outlook December 2014  Alternate Investments – Agriculture is always competing with other financial opportunities. As farmland’s performance levels off - - the competition from other financial assets is enhanced. Money could leave agriculture.  Investor Demand – Our current farm earnings outlook is discouraging some investors who are now on the sidelines. That is a significant but temporary change.  Farmer Demand – Our neighbors are spending their high commodity prices and crop insurance proceeds. When that dries up - - look out.  Net Farm Income – is the primary driver of farmland values - - and projections are dropping 20%! Don’t forget - - farmland is what it earns!
  26. 26. Don’t Forget  Farmland is a growth stock!  Farmland is what it earns!  Farmland is a hedge against inflation!  Farmland is the new world currency!! At Heartland Ag Group Ltd. - - the upcoming pressure on farmland earnings and declining number of investor and farmland buyers will put pressure on land values. 2015 will be a year of squishy land values! Save your money - - to Buy a Farm!
  27. 27. One Last Thought: “If you eat - - then you are a part of Agriculture.” Leland Glazebrook Farm Broadcaster WDZQ Radio
  28. 28. Advantage Capital Partners Presentation for Sikich Agribusiness Event December 4, 2014
  29. 29. Advantage Capital Partners Summary Advantage Capital Partners provides equity and debt financing to established and emerging companies located in communities underserved by conventional sources of capital. Since 1992, the firm has invested more than $1.9 billion in companies from a diverse array of industry sectors including manufacturing, technology and business services, among others. The firm has offices in New Orleans, St. Louis, New York, Austin and other locations. Advantage Capital Partners is an investment adviser registered under the Investment Adviser Act of 1940. Registration does not imply a certain level of skill or training. This release is not intended to be an advertisement subject to the rules under the Investment Advisers Act of 1940. Proprietary and Confidential.© All rights reserved 2014 37
  30. 30. Advantage Capital Agribusiness Partners, LP Summary  $154.5 million fund size; 5 year investment horizon; 12 year life  Formed through Rural Business Investment Program, as a Rural Business Investment Company (“RBIC”)  Nine Farm Credit banks represent limited partner group  All investments must be Farm Credit eligible  Max investment size of $15.45 million per company (10% of fund)  Target portfolio mix of 50% mezzanine debt/50% equity  Within equity component, targeting 50% minority equity investments and 50% control investments  At least 75% of investments (by dollars and number) must be in rural areas  Seeking growth stage or mature businesses  No startups or project finance Proprietary and Confidential.© All rights reserved 2014 38
  31. 31. Why Agribusiness?  Backbone of rural America  US farmers provide 18% of world’s food supply on only 10% of the world’s farmland  Long term market dynamics very favorable  Global population increase; rising incomes resulting in changing diets (particularly more protein)  Crop yield improvements not keeping pace with global demand increase  Trends require more capital for infrastructure, soil fertility, seed technology, crop chemicals, water conservation and other productivity/yield enhancement  Continued strong demand for healthy, natural, organic, traceable and functional foods  Average age of farmers and agribusiness owners continues to grow; will require significant capital and operating expertise for wealth transfer and succession plans Proprietary and Confidential.© All rights reserved 2014 39
  32. 32. RBIC Fund: General Areas of Investment Inputs  Agricultural Machinery and Equipment  Animal Health and Nutrition  Fert / Chem  Seed  Water  Biotechnology Distribution / Retail Agri-Retail Specialty Retail Food Services Bulk Distribution Primary Production Local / Organic / Natural Specialty Crops Botanicals / Spices Grain Storage and Handling Infrastructure Greenhouse and Nursery Processing Consumer Food Functional Food Pet Foods Food Packaging Food Safety Rendering Waste Water Recycling Proprietary and Confidential.© All rights reserved 2014 40
  33. 33. Key Investment Characteristics  Lower middle market companies (generally $10-125 million of revenue)  Target investment size range of $3-15 million  Strong, experienced management team  Growing revenue or poised for growth  Serving attractive, large markets  Generally, cash flow positive  Reasonable financial leverage  Proprietary or defensible product line  Ability to protect margins  Diversified customer/supplier bases and continuity of both  Clarity on exit mechanics  Repayment/refinance for debt investments  Reasonable, identifiable universe of acquirers for equity investments  Co-investors with relevant investment or industry experience a strong plus Proprietary and Confidential.© All rights reserved 2014 41
  34. 34. Case Study: Cage Free Egg Production Company  State of the art egg production facility  600,000 layers  5.3 million eggs  Introduced through private equity firm focused on agribusiness Capital Need  To convert facilities to a cage free environment Our Interest  10 year contract in place with established, safe customer  High quality management team  Exceptional board/co-investors with deep experience in the industry  Opportunity for follow-on Financing  $2.1 million preferred equity  Minority position  LLLP structure Key Points  State specific farming statutes added complexity  Environmental concerns  Employee base  600K chickens are loud  Chickens poop a lot! Proprietary and Confidential.© All rights reserved 2014 42
  35. 35. Case Study: Botanicals Company  Process and supplier of bulk herbs and botanicals  90% collected in the wild  400+ customers  Health food, cosmetics, flavoring, spices, etc.  Introduced through Senior Lender Capital Need  Owner was ready to transition into retirement  Required capital and fresh ideas to grow Our Interest  Niche product and industry  Highly fragmented with room for consolidation  Growth market  International reach Financing  $2.6 million equity  Control position  LLLP structure Key Points  Control deals are always more complex  Entrepreneurs need hand-holding throughout the process  Transition plans are critical  Key employees are critical  Use 3rd parties Proprietary and Confidential.© All rights reserved 2014 43
  36. 36. Case Study: Manufacturing Company  Producers of heat exchangers, pressure vessels and tanks  80% revenue from agribusiness clients  Introduced through Private Equity Group Capital Need  Owner was ready to transition into retirement Our Interest  Large available market  High quality production capabilities  Opportunities for expansion  Opportunities to improve processes and market penetration  Large, long-term customers Financing  $10 million one-stop  Control position  Senior debt, sub-debt, equity  Revolving line of credit Key Points  Be prepared to weather economic downturns  Transition plans are critical  Excellent support staff go a long way in small businesses  Be creative and nimble  Be patient Proprietary and Confidential.© All rights reserved 2014 44
  37. 37. Questions and Answers Thank You
  38. 38. The Climate Corporation Agribusiness Update Seminar Precision Ag for Field and Yield Insights December 2014 46
  39. 39. Disclaimer Certain statements contained in this presentation are "forward-looking statements," such as statements concerning the company's anticipated financial results, current and future product performance, regulatory approvals, business and financial plans and other non-historical facts. These statements are based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, the company's actual performance and results may differ materially from those described or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits and agricultural chemicals; the company's exposure to various contingencies, including those related to intellectual property protection, regulatory compliance and the speed with which approvals are received, and public acceptance of biotechnology products; the success of the company's research and development activities; the outcomes of major lawsuits and the previously announced SEC investigation; developments related to foreign currencies and economies; successful operation of recent acquisitions; fluctuations in commodity prices; compliance with regulations affecting our manufacturing; the accuracy of the company's estimates related to distribution inventory levels; the recent increases in and expected higher levels of indebtedness; the company's ability to obtain payment for the products that it sells; the effect of weather conditions, natural disasters and accidents on the agriculture business or the company's facilities; and other risks and factors detailed in the company's most recent periodic report to the SEC. Undue reliance should not be placed on these forward-looking statements, which are current only as of the date of this presentation. The company disclaims any current intention or obligation to update any forward-looking statements or any of the factors that may affect actual results. © 2014 The Climate Corporation. All rights reserved. Trademarks Trademarks owned by Monsanto Company and its wholly-owned subsidiaries are italicized in this presentation. All other trademarks are the property of their respective owners. © 2014 Monsanto Company
  40. 40. Our History 2006 2013 Today Founded by Dave Friedberg Acquired by Operationally independent, wholly owned subsidiary © 2014 The Climate Corporation. All rights reserved.
  41. 41. The Climate Corporation Today SOFTWARE INSURANCE HARDWARE © 2014 The Climate Corporation. All rights reserved.
  42. 42. How we fit within Monsanto’s Vision © 2014 The Climate Corporation. All rights reserved.
  43. 43. Monsanto’s Mission © 2014 The Climate Corporation. All rights reserved.
  44. 44. Monsanto’s Technology Leadership © 2014 The Climate Corporation. All rights reserved.
  45. 45. Our mission Helping Farmers Sustainably Protect and Improve Their Operations • Protect against what growers can’t control (insurance, marketing) • Improve the decisions growers can control (agronomic services) © 2014 The Climate Corporation. All rights reserved.
  46. 46. Integrated Solution: The Climate Corporation Targets Farmers’ Most Critical Decisions © 2014 The Climate Corporation. All rights reserved.
  47. 47. Technology Trends © 2014 The Climate Corporation. All rights reserved.
  48. 48. We are building the OS for the farm One System Across All Your Devices and Equipment © 2014 The Climate Corporation. All rights reserved.
  49. 49. The OS for the farm includes several components • Software & Data Science • Software platform for farm management • Unique agronomic insights & advisory • Hardware integration • Leading the industry in yield enhancements • Unrivaled precision & accuracy of data • After-market add-ons (any brand) • Deep integration with software systems • Field level data & analytics • Industry leading soil analytics • Evolving strategy to collect other field level data and insights © 2013 The Climate Corporation. All rights reserved.
  50. 50. How we will deliver • Integrated services: Deep integration with Climate ecosystem • Software (Climate Basic & Pro), Hardware (Precision Planting), Field © 2013 The Climate Corporation. All rights reserved. (Solum) • Software expertise: World class talent, modern technologies • Development team centered in San Francisco, heart of Silicon Valley • Modern technologies and agile development processes • Data science: Data & models build unique products & services • Data driven scenarios analysis and planning
  51. 51. Winning with software • Only few eventual winners: Software gravitates to a few compelling offerings – expertise and scale start a flywheel of innovation that leaves others behind • Must be a core competency: Software needs to be a core competency – Top developers don’t work for companies that consider software ‘an IT function’ • Speed matters: Think weeks and months, not years • Legacies hurt: It is much harder to innovate on a shaky, rigid foundation • Future is in the cloud: Web, mobile and cloud solutions • Migrations are painful: Trying to move to web, mobile and cloud from 90’s © 2013 The Climate Corporation. All rights reserved. technology is daunting
  52. 52. Climate Corporation Ramp UP: Opportunities with Product Upgrades and Market Expansion © 2014 The Climate Corporation. All rights reserved.
  53. 53. Climate Technology Platform
  54. 54. The Climate Technology Platform Unique and proprietary technology powers Climate’s products to deliver value for growers Weather Monitoring | Agronomic Modeling | Weather Simulation © 2014 The Climate Corporation. All rights reserved.
  55. 55. Climate Basic Climate Advisors and other tools are designed to assist with farming decisions, and do not substitute for in-person monitoring and sound farming practices. Data and recommendations are estimates based on The Climate Corporation’s and third parties’ statistical and agronomic models, research, and data. Individual results may vary, as weather, growing conditions and farming practices may vary across growers, locations and years. Data and recommendations do not modify any rights under insurance policies purchased through The Climate Corporation’s affiliates.
  56. 56. Climate Basic optimizes daily decisions and is available for free at climate.com Make more informed production decisions and save time with: • Information customized to each field • Information updated as it happens • Integrated weather, tracking and scouting information Field Workability Weather Field Alerts Reports Details Scouting & Available for 2015 for corn, soybeans and wheat Notes © 2014 The Climate Corporation. All rights reserved.
  57. 57. Climate PRO Climate Advisors and other tools are designed to assist with farming decisions, and do not substitute for in-person monitoring and sound farming practices. Data and recommendations are estimates based on The Climate Corporation’s and third parties’ statistical and agronomic models, research, and data. Individual results may vary, as weather, growing conditions and farming practices may vary across growers, locations and years. Data and recommendations do not modify any rights under insurance policies purchased through The Climate Corporation’s affiliates.
  58. 58. Climate Pro builds on Climate Basic to optimize profitability per acre Increase per acre profitability • Plan with confidence • Helps anticipate issues before yield is reduced • Supports optimizing your response to events as they happen • Assists with maximizing efficiency of time and budget Planting Advisor Nitrogen Advisor Pest & Disease Advisor Field Health Advisor (FHA) Harvest Advisor Revenue Advisor Available for 2015 for corn, soybeans and wheat © 2014 The Climate Corporation. All rights reserved.
  59. 59. Precision Planting
  60. 60. Precision Planting © 2014 The Climate Corporation. All rights reserved.
  61. 61. Precision Planting Roadmap • Continue to build easy to use tools to have our platform in more cabs • Develop tools that continue to measure and execute recommendations • This feeds Climate PRO Advisors • Develop robust distribution network to support hardware sales and service • Signed an OEM agreement with CaseIH for factory integration of equipment
  62. 62. Climate Insurance
  63. 63. Risk Management from the farm OS • Insights and advisory: Help growers plan risk management and execute in-season • Leverage field level data to inform financial planning – insurance, financing & marketing • Help farmers track and manage their operational plan – yield & revenue forecasts, marketing advisory & execution, claim alerts • Automated reporting & claims • Automated acreage & production reporting direct from field data • Instant claims identification and adjustment • Endorsements tied to farm practices • Provide insurance cost savings for employing optimal farming practices Climate Agent Portal © 2013 The Climate Corporation. All rights reserved. Financial & operational advisory Automated reporting & claims Endorsement s tied to farm practices OS for the Farm
  64. 64. Why now? What has changed? • Hardware: Precision hardware is finally here • Software: We now have an OS for the farm • Data: Silos are good for farms, not data – Open Ag Data Alliance • Expertise: Software problems, are best solved by software companies © 2014 The Climate Corporation. All rights reserved.
  65. 65. Data Privacy
  66. 66. Guiding Principals On Data and Privacy The data created by a farmer, or generated from equipment the farmer owns or leases, is owned by that farmer and should be easily managed. • It is the grower’s choice to share their data and with whom to share it Basic data services should be free. • We shouldn’t charge for online storage of data but rather for the value we can provide from analysis of the data Farmer’s data should be easily shared across systems. • Farmers should have flexibility and communication amongst their operating systems to gain additional insight and maximize profit potential The Climate Corporation will regularly utilize third party audits to ensure we are adhering to our Guiding Principles on Data and Privacy. • Transparency and integrity are our guiding principles © 2014 The Climate Corporation. All rights reserved.
  67. 67. American Farm Bureau Federation On Wednesday November 12th, the American Farm Bureau Federation announced an industry-wide data use and privacy agreement among agriculture technology providers. Climate signed that agreement along with John Deere, Dupont Pioneer, National Corn Growers Association and other industry organizations. Farmers own the data created by their farm equipment. This agreement will make it easier for farmers to embrace new technology. Articles: Wall Street Journal: Agricultural Firms, Farm Groups Strike Deal on Crop Data. Reuters: Farm Groups, Ag Tech Companies Agree on Data Privacy Standards www.climate.com/principles © 2014 The Climate Corporation. All rights reserved.
  68. 68. Thank you! QUESTIONS?
  69. 69. 2014 Agribusiness Update Seminar: Tax Update ©2014 Sikich LLP. All rights reserved. Tom Bayer, Partner Springfield, IL December 4th, 2014
  70. 70. Why are we here? ©2014 Sikich LLP. All rights reserved.
  71. 71. Extenders: Will They Get Passed? • November 26, 2014 Update: An agreement has been reached that 10 provisions previously expired on 12.31.13 would be made permanent. Significant business and individual provisions include: • Increase in expensing of asset purchases to $500,000, with a phase-out for businesses that purchase more than $2mm • Research Credit made permanent • Built-in Gains period for S Corporations is permanently reduced to five years • Enhanced charitable deduction for food inventory • Tax-free distributions for IRA account holders if directed to charity ©2014 Sikich LLP. All rights reserved.
  72. 72. Extenders: What Does it Mean if the Changes are Enacted? ©2014 Sikich LLP. All rights reserved. • Asset purchases made, or to be made in 2014, will create immediate tax benefit • Later filing season: IRS and software companies update • Reduced planning uncertainty going forward
  73. 73. Extender Opportunities in Ag: Research Credit • Remember this is a credit, not a deduction, so the credit amount calculated reduces your federal tax liability, dollar-for-dollar • In general, time spent developing and testing a new business process or product may qualify • Wages for personnel, supplies and outside expenditures for contractors all constitute qualifying expenditures to compute credit • General rule of thumb: Credit nets to about 10% of qualifying expenses • Significantly underused: Administrative burden is the biggest obstacle ©2014 Sikich LLP. All rights reserved.
  74. 74. Affordable Care Act Provisions • If you have employees, know the rules! • Reimbursements of employee health insurance for individual plan may invoke penalties in 2014 • Solution: Pay additional comp but don’t tie it directly to health plan cost ©2014 Sikich LLP. All rights reserved.
  75. 75. 2014 Individual Tax Brackets ©2014 Sikich LLP. All rights reserved.
  76. 76. 2014 Planning Thresholds – Individual Return – Adjusted Gross Income (AGI) • Phase Outs of itemized deductions and personal exemptions begin at $305,050 for Married Filing Jointly • There is a 3.8% tax on Net Investment Income for all filers with Modified AGI of over $250,000 • NII is generally derived from passive income from investments, rents, etc • NII is not income from active businesses, i.e. S Corp earnings on K-1 if shareholder is active, sale of ownership in active business • For Married Filing Jointly, the tax on $226,850 of income, which is the top of the 28% bracket, is $50,765―a combined federal rate of 22% • Consider managing income to lower brackets if possible, but not to zero! ©2014 Sikich LLP. All rights reserved.
  77. 77. Traditional Strategies: Cash Basis Taxpayer ©2014 Sikich LLP. All rights reserved. • Prepay expenses: Farmers can prepay for up to 50% farmer expenses of current year • Deferred payment contracts: Enter into smaller increment contracts to allow flexibility • Farm income averaging
  78. 78. CPA humor….. ©2014 Sikich LLP. All rights reserved.
  79. 79. Property and Equipment: “New” Rules in Effect in 2014 • Commonly referred to “Repair Regs” or “Cap and Repair Regs” • IRS regulations: No new law; regulations draw a line in the sand • Document tax accounting method for various repair costs, materials and supplies used in the business, equipment purchases and improvements to buildings • May require some additional filing requirements for 2014: Form 3115 and some election statements • Opportunities with new rules • Review depreciation schedules for one-time write-offs • Buildings placed in services: May have some opportunities to accelerate write off or deduct repairs previously capitalized ©2014 Sikich LLP. All rights reserved.
  80. 80. Retirement Plans • I401(k) for sole proprietors • Employee deferral amount up to $23,000 • Employer match of 25% of wage • Max amount at $52,000, plus catch up for over 50 • Set up by year-end; fund when you file your return • Roth IRA • $5,500 per year can be contributed, plus catch up ©2014 Sikich LLP. All rights reserved.
  81. 81. Retirement Plans (continued) • Roth IRA • Contributions can be withdrawn at any time, without penalty • Earnings and rollover contributions subject to more stringent withdrawal requirements • Qualified withdrawals are tax-free • For younger taxpayers, Roth IRAs provide a more favorable option for retirement savings, based on assumptions • No RMDs from Roth IRAs • SEP (Simplified Employee Pension) • 0-25% of wages up to a maximum contribution of $52,000 ©2014 Sikich LLP. All rights reserved.
  82. 82. Domestic Production Activities Deduction • Deduction is computed as 9% of income from Qualifying Production Activity • This is a deduction that doesn’t require you to incur an expense • Deduction limited to 50% of wages: Generally is the most significant limiting factor for small agribusiness • For retail agribusinesses, a portion of their activity may be defined as “production” activity • Rule of thumb: • Income, after allocating overhead costs, exceeds $100,000 from a line of business, and • Wages exist • Consider taking a position on deduction • $100,000 of income may yield a 2-$3,000 tax benefit (9%*100,000* applicable tax bracket) ©2014 Sikich LLP. All rights reserved.
  83. 83. Non-Cash Wages and Gifts • Grain or livestock wages • Must follow the rules: VERY IMPORTANT • Avoid SSI and Medicare tax • Savings to employee (no withholding of 7.65%) and employer match of 7.65% on amount provided • Grain or livestock gifts • Gift to a charity is a way for farmer to reduce tax burden • Net gift, when considering tax savings, is less than fair value of gift • Unsold grain valued at $5,000, transferred to charity, is an after tax gift of $2,700 • Best to gift prior year crop in subsequent year • For high income earners, has same impact as directing IRA RMDs to charity! ©2014 Sikich LLP. All rights reserved.
  84. 84. Final Thoughts on Taxes • Ensure you keep your tax professional informed of business changes • Bracket planning: Paying taxes at lower rates may make sense • Reducing taxable income to - 0- can “cost” opportunities ©2014 Sikich LLP. All rights reserved.
  85. 85. ©2014 Sikich LLP. All rights reserved. Questions?

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