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 Special feature from the 2013 Farm Outlook magazine

The evolution of farming from accounting to accountability

By Nila Smith

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[November 07, 2013]  Robert Klemm is known in Lincoln and Logan County as the owner of Klemm Tax Service. He has been in the tax accounting business for the past 38 years.

Fresh out of school, Klemm began doing farm income tax preparation in a back office of the DeWitt County Farm Bureau. He later joined a partnership with Charles Engelhart, who was retiring from the Logan County Extension. From there, Klemm Tax Service has evolved into what it is today.

Klemm is also a farmer. He grew up on the family farm in DeWitt County, just a stone's throw away from the Logan County line. The base of his 1,000-acre operation is the few hundred acres his grandfather purchased in 1905. Klemm's father farmed the ground, and now Robert does.

Today, Klemm's son John works for Farm Credit Services in Sherman and helps out on the farm as he can. Daughter Olivia teaches in Clinton. Farming is dear to her, and she comes home once in a while to get her "farming fix." Youngest son Aaron is a junior at Monmouth College, studying sports business. He works on the farm during the summer months. Wife Patty is an on-the-farm wife and helper who works beside Robert to keep all the family businesses going.

In addition to grain production, the Klemms have a cow/calf livestock operation.

Back in the day, the software of the grain farmer consisted of a ledger book, a No. 2 pencil and some type of container to hold all the receipts, check stubs, scale tickets and fertilizer bills. But time has changed everything from the means in which we keep records to the records we keep.

"I can remember the two weeks or so, growing up as a child, my dad's record keeping in January or February," Klemm said. "Everything was laid out on the dining room table in appropriate piles, and you didn't walk through the dining room quickly for fear of disturbing the piles. And it worked!"

Klemm noted that in his business he still sees the farmer with his ledger and stack of receipts, and as long as the records are accurate and honest, it really doesn't matter to him as a tax professional how the producer came up with his numbers.

But using computer technology can make things easier for the producer and can also add some interesting and vital twists to accounting and accountability.

"The thing that needs to be identified more than anything is that we now have to know where we are financially at all times," Klemm said. "And that can be accomplished in many ways, but it is the details that are the important things."

Klemm said the pencil-and-paper method is still fine if it works for the producer. The advantage with the computer is the capability to do more detailed analysis quickly.

"When I write a check on the computer, it automatically changes my bank balance, my cash flow, my inventory and more. For the producer, this is more conducive to keeping a constant, accurate detail of the farm finances," he said.

Another key to managing the farm is the technology in the combine or tractor as the farmer moves through the field. For tax purposes it has no real value, but what it does do is help the farmer monitor productivity of his acreage in more finite sections.

Klemm said this can be especially important for those who are acquiring land on a regular basis through ownership or rent agreements.

"My dad and I have been farming the family acreage for our entire lifetimes, and we know and can share the history of the fields," he said.

But that family acreage is only a portion of the whole farm today. Klemm said that as he takes on new acreage, he doesn't have that history in his head. Instead he has it in his computer.

He noted that as he goes through the field, he uses "tags" in his software to note specific field conditions. This benefits him in the fall when he goes to harvest and sees a significant change in the yield in a specific area.

"I can look at my data and see what went on in this field in the spring," he said.

Klemm said this starts the creation of a history that can be tracked on the computer, just like he tracks the family farm in his head.

In addition to being of value to the owner, it could also be of value to the buyer of a piece of land. This documented history can help a land buyer or even a renter to gain an understanding of what might come out of that field. For a buyer, this is important because he wants to invest dollars into productive acreage. For a renter, this can help determine whether the land is worth the cash rent, whether the rent should be on some other basis such as sharecropping, or if he should just say "pass."

Klemm said another asset of the data tracking system is in the stewardship of the land. Farmers today are environmentally aware. They don't want to produce chemical runoff in our waterways. Knowing and understanding the natural drainage of a field can help determine what type and how much chemical they should use for the field and the crop, with as little waste or residue as possible.

The physical landscape of the central Illinois farm has changed over the years, Klemm noted. He said he has spent a great deal of time traveling within his accounting service area. He noted that in the earlier days of his travels, he could visually notice the difference in farming practices in the field. Those practices related directly to how the farmer was managing his business.

Today, one sees a great deal of consistency in the fields. One can seldom quickly identify where one farmer stopped and another began.

This is a sign of the progress and change in farmers' management skills. Many times this goes back to the records and how the farmers are doing business. The records reflect what is going on in the field, and the producers need to be constantly watching the changes in the field and adjusting their management program accordingly.

This is the same change, Klemm said, that has taken central Illinois farmers away from the livestock industry and alternate crops. He remembers the day when baling hay was a big part of the farm business, and now it is not. Wheat has also gone to the wayside in many rotations. Cattle farms are dwindling, and hog operations are becoming more like manufacturing plants than just a matter of a few hundred head on the family farm.

He said one of the big differences between now and then is the size of the family farm. Back in time, the family farm was 400 to 500 acres. Today's farms are 900 to 1,800 acres and even larger, and they are much more of a full-time job.

"That is why they have to analyze their business continually and make sure they are profitable," he said.

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Klemm said safeguards are also an important part of the farm today.

For the farmer, the statistics of bushels per acre or price per bushel are significant, but not necessarily the key to success. The reason being, when yields are high, prices per bushel will go down, and when yields are low, the price will inch up. During harvest, prices typically drop; but in the spring, depending on the weather, prices can take some big jumps. Therefore, the farmer doesn't look only at what the price per bushel will be, nor does he consider what he hopes the yield will be in bushels per acre.

The secret is to know and understand what the profit per acre needs to be on the family farm, and to use whatever options are workable in order to protect that needed profit.

Klemm said the profit need is beneficial in choosing the right hedging options. Those options could include crop insurance, or contracting or actually hedging on the market. He said each person is going to consider this and decide for themselves what options they want to use. And, the bottom line is, as long as it is successful, no one can really say that one method is better than the other.

Klemm said that as a tax accountant, doing clients' taxes is perhaps the easiest and simplest part of his job. The real challenge is to know, understand and share effectively the changes that are coming down through the government on tax laws and other issues that will affect the Midwest farmer.

Hot-button words right now in Illinois and all across the country are "Obamacare," or the federal health insurance plan. Klemm said he has spent many hours studying this and trying to translate it into how it will affect his clients.

He noted one point that few may know. He said it is his understanding from what he has read that the health care laws, while not specifically a tax issue, will be monitored by the Internal Revenue Service for compliance.

He said in most cases, this is going to have little effect on the family farm. The exception will be for the producers who hire more than 50 full-time or full-time-equivalent employees. Full-time equivalent basically means that every employee could be a part-timer, but if there are enough of them that the hours they work equal 50 full-time employees, then that farm will have to comply with health care mandates.

What may change, though, is the ability of the producer to afford health insurance for himself and his family. While Klemm said he has yet to see anything concrete on what the insurance rates are through the Illinois Health Insurance Marketplace, the idea behind the health care law is to make private ownership of health policies affordable for everyone.

On the family farm, up until now, many times a spouse will go to work for a firm or company that can offer affordable insurance through a payroll deduction group plan. These changes could mean that the spouse could have the option of staying on the farm and becoming a more integral part of the operation.

Klemm said producers in the higher income brackets will have some new taxes to deal with effective Jan. 1, 2014. One will be a 0.9 percent additional Medicare tax, and another is an increase in the tax on net investment income.

Klemm said the tax on net investment income is for the very high-income brackets. It won't affect a large number of farmers, but the real concern might be for those who are entering retirement and see lower input costs in the last year or two, greater income due to the sale of equipment no longer needed, and even land sales.

Klemm said those who are looking at retirement down the road in a few years should be looking at this now, evaluating what they have and how they will manage their exit from farming.

How the farmer addresses this, Klemm said, is going to be a personal decision. There are options to begin prior to retirement to spread out the income. He said that in the later years of life, one thing that changes could be that the on-the-farm debt falls, leaving more cash on hand. Instead of pocketing that profit and paying the taxes on all of it, an option could be to invest a portion of the profit in a retirement plan for future use and future tax obligations.

So, in the end, does Klemm have a crystal ball? Can he tell you what to do to be profitable? Can he tell you how to prepare for every contingency that may come along?

No, he doesn't have a one-size-fits-all system to help make a farmer profitable, but he does know this:

"Things are going to change. I don't know what the changes will be, but I know they will come. You have to be willing to look at the options and evaluate how they could fit into your operation," he said.

"Does that mean you have to change? Not necessarily, but you have to be able to maintain the competitive edge. And that is where it goes back to the necessity of evaluating those records, looking at your true net positions and what your true net income is."



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