While this large amount of food and fuel may not be consumed by today’s farm household, separating these expenses can be helpful to understand what it might cost to live without including the farm expenses. As the owner generation considers a farm transition, it will also be important to differentiate these expenses. The farm business may or may not be able to pay for more than one family’s household expenses. Determining how much will be needed for household costs would help to estimate the income needed.

A farm household spending plan is an estimate of how much is needed for farm household expenses. However, this spending plan can be a difficult task to complete if you are not tracking your expenses. Having separate bank accounts for both farm business expenses and family household expenses can make this separation and tracking of costs easier. When it comes to farm versus household accounts, separate checking, savings, and other accounts can safeguard business funds from personal ones, allow farms to monitor farm spending more easily, and assist with recordkeeping of the farm’s finances.

While tracking your expenses may be time-consuming, it will be necessary to complete the Monthly and Annual Spending Plan worksheets. The Monthly and Annual Spending Plan worksheets can be used to attribute expenses to the household and farm business. In a farm succession, these worksheets can be used by both the owner and successor generation. The worksheets are sorted into three sections: “Household Expenses Worksheet,” “Debt Worksheet,” and “Household Net Income Worksheet.”

Household Expenses Worksheet

The Household Expenses Worksheet will review your monthly costs related to the farm household and assist you in determining what percentage of these costs are being paid by the farm business as compared to family living or nonfarm income sources.

The two columns “% Family Living” and “% Farm Cost” will assist you in allocating percentages of an expense that may be combined and currently paid as a total cost. Think about what percentage of an expense is personal and what percentage is farm related. You may not have a split percent for every expense as this may apply for only a few spending categories. Total these expenses on this worksheet to determine your annual living expenses and what may be your annual family living cost. As you complete this worksheet, think about which expenses may go up or down as you transition the farm business to the next generation.

Spending Categories

Housing: mortgage/rent

• Mortgage or rental payments are examples of fixed payments. This type of expense is not likely to adjust over the year or multiple years. For many farm families, a farm mortgage may encompass the house and farm buildings, farmland, etc.
• Who will be making this loan payment? Are you planning to move off the farm and have a separate mortgage or rental expense?

Property taxes

• Farmers must pay real estate and personal property taxes on farm business assets, such as farmland and farm buildings. They may be able to deduct these expenses from earned farm income. However, this deduction should not include property taxes from a house or land with a house on it. To determine the amount of property taxes that are allocable to a house that is on a farm or farmland, you should work with a tax preparer or accountant.
• Who will pay the property taxes on your home in the future? Are you planning to move off the farm and have property taxes on this new property?

Insurance: home/auto

• Property insurance can provide coverage for the structures on your farm along with farm equipment, machinery, livestock, and farm products. The farm business may also be paying the insurance premiums for your house and your personal vehicles. Your insurance agent can help with attributing property and auto insurance costs for the household separate from the farm buildings/property.
• Who will pay the insurance premiums on your house and vehicles in the future? Are you planning to move off the farm and require a new insurance policy on this new property?

House repairs/maintenance

• Repairs are a straightforward concept. According to the IRS, routine maintenance keeps your property in good working condition without increasing its value or prolonging its useful life, and these expenses can be deducted in the year they occur. The IRS defines routine maintenance as something that “keeps your property in a normal efficient operating condition.” Also, the average homeowner can’t generally claim a tax deduction for the cost of repair and maintenance of their home. However, farmers and rental property owners may be able to deduct these expenses.
• Who will pay for the repairs and maintenance of your home in the future? Are you planning to make repairs or improvements to your home? And who will pay for this expense?

Utilities: electric/LP/gas/water/sewer/garbage/recycling

• If you receive a single bill from your electricity, LP, natural gas, water, and sewer company or cooperative, you should allocate the expense between your farm business use and the residential use. Your tax preparer or accountant may have a formula or percentage for separating the bill. If possible, you may consider getting two separate electric meters for the farm buildings and the house. Separate accounts may need to be set up for the farm business and your farm household with your provider.
• Who will pay for these bills for your home in the future?

Utilities: phone/cell/satellite/internet

• Farm families are like nonfarm families in their desire to consume luxury items, such as travel, vacation homes, recreational vehicles, etc. Where these families differ is the distinction between personal vs business consumption, such as with a set of smartphones requiring data plans for the entire family and high-quality internet. While these might be viewed as personal “wants” from some perspectives, many farmers rely on their cell phones to call, text, or use smartphone apps and features to conduct their business. The same can be said for the personal computer use and the internet. Your tax preparer or accountant may have a formula or percentage for separating the bill. Separate accounts may need to be set up for the farm business and your farm household.
• Who will pay for these utility bills for you and your family in the future?

Auto maintenance/fees/gas or fuel for auto

• Farmers can either deduct the actual cost of operating a car or truck or deduct the standard mileage rate for each mile of business use from earned farm income. When vehicles are used for both personal and business purposes, you may take deductions only for the percentage of use attributable to the business, which requires detailed recordkeeping. These auto expenses may include gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits).
• Who will pay for these bills for your vehicles in the future? Will the farm business own the vehicle? Will you need to purchase a new vehicle?

Groceries/eating out/clothing/entertainment/pets/gifts/donations

• Flexible expenses are those expenses that change from month to month or week to week. Some examples are food, clothing, hair care, gifts, recreation, and donations. Flexible expenses are often easier to adjust depending on your activities, lifestyle, etc.
• Will personal expenses, such as travel and meals, be paid by the farm business? What will be your need for these flexible expenses in the future?

Farm animals (for eating/meat)

• Farmers may utilize gardens, homegrown meat, and their own produce to trim grocery bills.
• Will you continue to have access to these resources in the future? What will be your need for these expenses in the future?

Household supplies/adult education/professional or service fees

• Oftentimes, you may be purchasing household and farm supplies in a transaction, such as toilet paper, cleaning solutions, etc. You should allocate the expense between your farm business use and your personal/household use. The same can be said for adult education or professional development that you may be pursuing.
• Will these expenses be paid by the farm business? What will be your need for these flexible expenses in the future?

Health insurance/co-pays (e.g., medical, dental, eye, pharmacy)

• Nearly one-third of farmers lack health care benefits, or spouses/significant others may be providing some or all these benefits. Insurance and health care costs can be high. There may not be an employer to pick up part of the cost of employee insurance plans in a farm business. The farm family may not participate in a group insurance plan. And the need for insurance is magnified because farmers face a greater risk of injury, disability, or death. Such benefits provided by the farm or spouses/significant others may be inaccurately missing from a farm or household budget and may significantly increase expenses if they were appropriately budgeted. Medical expenses include out of pocket expenses for medical, dental, and vision care as well as the premiums for any health, dental, or vision insurance products purchased.
• Will these expenses be paid by the farm business? What will be your need for these flexible expenses in the future?
• For those who do not have access to health insurance through employment, www.healthcare.gov, commonly referred as “the marketplace,” is the government-based program designed to help those without insurance find affordable coverage. In Wisconsin, Covering Wisconsin is a program of the University of Wisconsin–Madison Division of Extension. This Wisconsin program helps connect Wisconsin residents with health insurance and other programs that support health.

Child costs (e.g., care, school, clubs, lunches)

• The cost of raising children has increased in recent years. Childcare is a fixed expense that stays the same every month, while the cost of school lunches and supplies, extracurricular activities, etc., are flexible expenses since those costs fluctuate over time. Costs such as hiring a childcare provider may increase the hours of labor available for farm work.
• What will be your need for these flexible expenses in the future?

IRA/retirement savings/emergency savings

• According to a USDA report, only 40 percent of farm households participate in some type of retirement account, compared with 60 percent of all U.S. households. Retirement planning is a critical step in preserving the assets that have accumulated over the working years. Many farmers may choose to invest surplus funds back into the farm business rather than saving for retirement. However, the strategy of holding wealth only in farm assets can add financial risk and uncertainty during challenging economic conditions. Diversifying an investment portfolio can help reduce risk in retirement and address some challenges that farmers face when they consider retiring, such as tax implications. There’s no one-size-fits-all retirement plan for farmers, but a financial advisor can help build a customized financial planning strategy.
• Will retirement and emergency savings be paid by the farm business? What will be your need for these savings in the future?

Debt Worksheet

The Debt Worksheet will examine your debt payments that are related to the farm household and assist you in determining what percentage of these payments are being paid by the farm business as compared to family living or nonfarm income sources.

This section of the worksheet assists in allocating the percentage of the payment that may be farm versus household expense. For example, debt payments may include an auto loan that the farm has previously made the full payment on; however, the vehicle is for both farm and personal use. The column “% Family Living” will assist you in allocating percentages of an expense that may be combined and currently paid as a total cost. Think about what percentage of an expense is personal and what percentage is farm related. You may not have a split percent for every payment.

If you have not listed the family cost of the farm mortgage payments on the previous worksheet, you may want to record it in this section. Also list loan payments for a personal residence and other nonfarm property, student loans, credit cards, and other debt payments.

Total these debt payments on this worksheet to determine your annual debt payments. As you complete this worksheet, think about which expenses may go up or down as you transition the farm business to the next generation.

Household Net Income Worksheet

As you consider who’s paying for farm and family household expenses and debt payments, you also need to review your income sources. You may be able to increase income if one of your family members enters the labor force. A family member might grow produce and vegetables at home and plan to sell this production at a local market. Additional income from selling or trading unused or unneeded items or receiving assistance payments are other ways to increase your income. Assistance payments such as food stamps, reduced or free school lunches, and other public and private assistance exist to help those farm families with temporary financial difficulties.

As you complete this worksheet, you can ask yourself the following questions:

• Is there off-farm income that you are or will be receiving?
• How much income do you expect (after deductions), and when do you expect to receive it?
• Are there social security or investment payments that you are or will be receiving as additional income streams?
• Are you receiving or going to require a draw from the farm business that would be on a monthly or annual basis?
  • Would that payment be irregular, or would it be regular, such as a land rental payment?
  • Are you able to reduce the amount drawn from the farm?
  • For example, rental payments may not be paid during years of reduced farm profits. As the recipient of that payment, would you be able to allow the farm business to defer the rental payment to another year until the farm would be more profitable? Depending on your family’s expense needs, this may or may not be an option for you.

Compare Total Monthly and Annual Spending, Debt, and Income

Finally, you should compare the total monthly and annual family household expenses and debt payments with monthly and annual household income. These worksheets will provide you with estimated family household expenses that will not be paid by the farm and income that may or may not support these expenses. If expenses are greater than your projected income, you can consider either reducing expenses or increasing income. Reducing household expenses may require your family to decide which expenses are essential for their physical and mental health and safety, and which expenses are nice but not essential.

Your next step would be to determine if your income and expenses will be increased or decreased during and after your farm business transition and how this may impact the farm business in the future. Separate accounts will make monitoring farm and household expenses easier. Deciding how income will be divided between farm and family expenses before it is received can reduce conflicts and confusion. Develop a system based on a careful evaluation of expected income and expenses as well as on your goals and priorities.

References