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Financial Access for Off-Farm Owners

How can an off-farm owner convince her sibling partner she
has a right to farm financial information and a say in financial goals?

 By Dr. Donald J. Jonovic

SUBMITTED BY Q.V., VIA EMAIL

My father suffered from prostate cancer many years before
dying of the disease four years ago at age 90. At the encouragement of his
attorney, he decided to get the farm shares out of his estate by passing them
to me and my sister, Lynn. She and her husband, Bob, have operated the farm for
years. My husband, Jack, and I have never farmed and made our own lives in
Chicago, 500 miles away. Dad kept a couple of shares of our S corporation and
split the rest between us. Believe me, we were all surprised by what Dad did.
Now, Mom has the swing vote, though she will always vote the way Lynn and Bob
want. Our problem has to do with information or, more accurately, the lack of
it. The accounting information we get is almost nonexistent. Lynn seems to
think it’s enough just to let us know that “the farm has broken even again this
year.”

Jack and I aren’t accountants, but we know that we are part
owners in a beautiful, prosperous farm that is no benefit to us. Lynn and Bob
are good farmers, and we can’t understand how they always “just break even.”
Jack thinks they run all their living expenses through the farm, and at the end
of the year they do always seem to have plenty of cash to buy more equipment.
Even I know that you don’t build up cash by breaking even. We’d like to see
their accounting system.

My sister and I get along, but we have never talked
business; I never did with Dad, either. Now that part of this asset is ours, we
want to get more involved. My sister just stonewalls. Mom says nothing.

Shouldn’t we have some rights to information and to some say
in the decisions about the farm?

THE SOLUTION:

Our tax laws and cash basis accounting have undermined the
need to truly understand operating profit and business value on many farms.
Instead, accounting clarity has been replaced by an obsession with breaking
even higher and higher every year.

This strategy has its advantages, but it also leads to
secrecy like Q.V. is seeing with her new partners.

It’s likely, for example, Lynn and Bob aren’t reporting
personal benefits from the farm as income, and they are prepaying next year’s
inputs and also buying equipment needed next year to save on current year
taxes.

Unfortunately, this approach encourages imprecise accounting
and terrible cash management. This can lead to chronic cash droughts and,
worse, unexpected disaster as the piper demands his pay during business or
market reversals. Cash may be king, but cash basis accounting can too often be
its assassin.

Cash basis accounting offers much flexibility through the
cycles of agriculture, but using it resembles flying a glider. You’d better
know what you’re doing, because you just might lose that wind beneath your
wings.

Playing this cash/tax roulette as a single owner-operator is
an exciting (if dangerous) sport, sort of like kayaking Class VI rapids. When
you have fellow rafters, as Lynn and Bob now do, this heady imprecision and
extravagance with cash can, for those partners, look very much like a selfish
rip-off.

It’s too late to second-guess dad’s decision to make Q.V.
and her sister partners, but the inevitable has now happened: Q.V. is looking
for some return on her ownership. Those tax savings gained through cash
starvation provide only a thin gruel.

Off-farm owners bring a new reality. They don’t have a legal
right to cash returns, but they do have a right to know what the return is.
Only by shifting from cash basis to accrual accounting can they know for sure.

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