Handling CCC Crop Loans In FINAN

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1 11/18/2005 Handling CCC Crop Loans In FINAN Entering CCC crop loans in FINAN can be confusing for even the most seasoned analysis veteran. CCC loans pose a special problem because IRS allows two alternative tax treatments and producers are not always sure how to handle these transactions in their accounting systems. Most FINAN users find it easiest to try to follow the producer s tax treatment when entering data into FINAN. IRS allows producers to: 1. Delay taxation of the proceeds from new CCC loans until the loan is repaid and the crop is finally sold (in FINPACK this is called Loan treatment), or 2. Include proceeds from new CCC loans as income in the year the loan is received (in FINPACK this is called Income treatment). This second option causes additional problems because, if the crop is finally sold for more than the loan amount, the extra income is taxable in the year of sale. 3. To make matters more confusing, in periods of low prices, CCC marketing loans can be repaid at the Posted County Price, which may be lower than the loan rate, in which case additional income (in effect the amount of the loan forgiven) is triggered. This is called Market Loan Gain. FINAN is designed to enter the same data whether the CCC loan is treated as income or loan. The resulting income statement will display the results differently, depending on the treatment. Below are examples and resulting income statements. Note that with each approach, the bottom-line Net Farm Income is the same. Example Transactions: 1. The beginning balance sheet shows CCC loans for 1,000 bushels of corn at $1.80 loan rate and 1,000 bushes of soybeans at $4.80 loan rate. 2. During the year, the producer liquidated the corn loan at the Posted County Price of $1.70 and sold the corn for $2, They also liquidated the soybean loan but the soybean price was above loan rate so they had to pay principal and interest of $5,000. They sold these soybeans for $5, During the year, they took a new CCC loan on 2,000 bushels of soybeans with a loan rate of $4.80 for a total loan amount of $9,600. Note: In this example, the producer put crop under loan before year-end in each year. In that case, FINAN automatically lists the loans from the balance sheet entries and automatically treats new loans as cash inflows. If loans are borrowed and paid off in the same year, the loan information and Loan Amount must be entered manually. Center for Farm Financial Management University of Minnesota

2 Treatment as Loan This is the case where the operator does not include income from crops under CCC loan in taxable income until the loan is repaid and the crop is sold. Results: 1. New-crop soybean loan of $9,600 is treated as money borrowed and does not impact the income statement. 2. Principal payments are calculated to pay off $1,800 old-crop corn loan and $4,800 old-crop soybean loan. 3. Since the corn loan was repaid at the Posted County Price, the difference of $100 is automatically included as a Market Loan Gain on the Income Statement. 4. The $5,000 repaid on the soybean loan includes interest so $200 of interest is automatically included in farm expenses. 5. Sale proceeds are treated like any other crop sale. 6. The market value of the crops is included in the crop inventory change since the operator still owns the crop. Accrued interest on the loans is also included. 7. Result Net Farm Income = $10,375. Note--The producer will receive an IRS 1099 form for the $100 market loan gain on the old-crop corn. Do not include this in government payments or it will be double counted. Also, do not double-enter the $200 interest expense. 2

3 CCC Example 2005 Analysis Page 2 10/13/2005 2:48:15 PM INCOME STATEMENT CASH FARM INCOME Quantity Value CASH FARM EXPENSE Corn 1,000 bu. 2,000 Soybeans 1,000 bu. 5,500 CCC market loan gain 100 Interest 200 (C) Gross cash farm income 7,600 (D) Total cash farm expense 200 (E) Net cash farm income 7,400 Crop Receivables & Prepaid Payables & & Market Other Income Expenses & Accrued INVENTORY CHANGES Feed Livestock Items Supplies Expenses Total Ending inventory 10, Beg 55 Beginning inventory (-) 7, End 80 (F) Inventory change (=) 3, ,975 (G) Net operating profit (E+F) 10,375 DEPRECIATION AND OTHER Breeding Machinery & Buildings & Other CAPITAL ADJUSTMENTS Livestock Vehicles Improvements Assets Total Ending inventory Capital sales (+) Beginning inventory (-) Capital purchases (-) (H) Depreciation / cap adj (=) (I) Net farm income (G+H) 10,375 FINPACK Center For Farm Financial Management University of Minnesota Prepared by: Dale Nordquist Center for Farm Financial Mgt 3

4 Treatment as Income This is the case where the operator included the money borrowed on CCC loans as taxable income in the year the loan is taken. When they repay the loan and sell the crop, any net proceeds over what has already been taxed is then reported as additional income. Results: 1. The new-crop soybean loan of $9,600 is treated as income on the income statement. 2. The difference between the sales proceeds and the amounts repaid on the old-crop loans is include as net govt sale income on the income statement. 3. No Market Loan Gain is included on the income statement since the full difference between the sales proceeds and repayment amount has already been included in income. 4. No interest expense is included because there are no loans. 5. Since the crop loan amounts have already been treated as income, the inventory change includes only equity in the crops (Market Value Loan Amount). 6. Result Net Farm Income = $10,375. Note--The producer will receive an IRS 1099 form for the $100 market loan gain on the old-crop corn. Do not include this in government payments or it will be double counted. 4

5 CCC Example 2005 Analysis Page 2 10/13/2005 4:12:19 PM INCOME STATEMENT CASH FARM INCOME Quantity Value CASH FARM EXPENSE Corn (net gvt sale) 1,000 bu. 300 Soybeans (net gvt sale) 1,000 bu. 500 Soybeans (govt loan) 2,000 bu. 9,600 (C) Gross cash farm income 10,400 (D) Total cash farm expense - (E) Net cash farm income 10,400 Crop Receivables & Prepaid Payables & & Market Other Income Expenses & Accrued INVENTORY CHANGES Feed Livestock Items Supplies Expenses Total Ending inventory Beg 0 Beginning inventory (-) End 0 (F) Inventory change (=) (G) Net operating profit (E+F) 10,375 DEPRECIATION AND OTHER Breeding Machinery & Buildings & Other CAPITAL ADJUSTMENTS Livestock Vehicles Improvements Assets Total Ending inventory Capital sales (+) Beginning inventory (-) Capital purchases (-) (H) Depreciation / cap adj (=) (I) Net farm income (G+H) 10,375 FINPACK Center For Farm Financial Management University of Minnesota Prepared by: Dale Nordquist Center for Farm Financial Mgt 5

6 Sales Proceeds are Co-Mingled With Other Crop Sales Some producers will co-mingled sales of CCC crops with other crop sales. In this case, the sale of CCC crops were included with normal sales on the on the Crop Sales page (not shown). Results: 1. For Loan treatment, the results will be exactly the same. 2. For Income treatment, the amount repaid will be included as CCC Buyback expense. So, instead of just showing the net additional income, the gross is included in income and the CCC Buyback offsets the additional income. 3. Use this approach if the grain was bought back for feed. 4. Result Net Farm Income = $10,375. Note This has the effect of artificially inflating both income and expense and will therefore impact some ratios. Note Use this approach if the grain was bought back for feed. 6

7 CCC Example 2005 Analysis Page 2 10/13/2005 4:13:58 PM INCOME STATEMENT CASH FARM INCOME Quantity Value CASH FARM EXPENSE Corn 1,000 bu. 2,000 Soybeans 1,000 bu. 5,500 Soybeans (govt loan) 2,000 bu. 9,600 CCC buyback 6,700 (C) Gross cash farm income 17,100 (D) Total cash farm expense 6,700 (E) Net cash farm income 10,400 Crop Receivables & Prepaid Payables & & Market Other Income Expenses & Accrued INVENTORY CHANGES Feed Livestock Items Supplies Expenses Total Ending inventory Beg 0 Beginning inventory (-) End 0 (F) Inventory change (=) (G) Net operating profit (E+F) 10,375 DEPRECIATION AND OTHER Breeding Machinery & Buildings & Other CAPITAL ADJUSTMENTS Livestock Vehicles Improvements Assets Total Ending inventory Capital sales (+) Beginning inventory (-) Capital purchases (-) (H) Depreciation / cap adj (=) (I) Net farm income (G+H) 10,375 FINPACK Center For Farm Financial Management University of Minnesota Prepared by: Dale Nordquist Center for Farm Financial Mgt 7

8 What If the Producer Received Only the Net from the Elevator? In this case, the producer should have a statement from FSA indicating what portion of the payment was principal and interest. They should also have a statement from the elevator indicating if other expenses were deducted from the proceeds, such as storage and drying. The goal in analysis is always to sort this out as accurately as possible. To reflect these transactions accurately, make the following entries: 1. Enter the total principal and interest in total repaid. This may be less than the loan amount if the crop was redeemed at the posted county price. 2. Enter the gross proceeds from sale of the crop in sales proceeds. 3. If other deductions were taken from the proceeds enter these amounts in the proper expense categories. If all else fails and the proper documentation is unavailable, enter the Amount Repaid equal to the Loan Amount. Then enter the sum of the Loan Amount and the net proceeds received under Sales Proceeds. This approach will provide the correct Net Farm Income and will balance cash without dotting the i s and crossing the t s on allocation to specific income and expense categories. 8