Each fall, the pace picks up in the K-Coe Isom offices. The company works to help clients assess their current financial performance, determine tax options and cash-flow impacts and plan for the new year. Ethanol producers would do well to zero in on those same issues in the fourth quarter, before closing the books on 2015. As an ethanol producer winding down from this year’s tighter margins, there are numerous end-of-year decisions to make.

Here are some key things to consider:

Taxable income
Since most ethanol plants are formed as a limited liability company and taxed as a partnership, with income passing through to members, knowing the year’s taxable income is important for a business and its membership.

Prepayments
Consider the impact of receiving prepayments from customers. For example, livestock producers may want to prepay for future distillers grains purchases. That means the company would receive the cash before it produced or delivered the product. It’s important to be thoughtful and proactive in this kind of situation. Forecast future distillers grain production as well as anticipated market prices. What terms will the company offer, such as discounts or cash price contracts upon delivery, if customers want to prepay?

Taking it a step further, careful thought should be given to whether it makes sense to prepay expenses, especially if a discount can be negotiated. Certain items can be prepaid in 2014 that allow the company to accelerate the deduction on its tax return while saving  the deduction for 2015 financial reporting. This could be the best of all situations: Defer tax payments and see a minimal adjustment in the timing of cash outlay since the company was going to prepay those expenses soon after year-end and it might actually reduce the cash outlay if discounts were effectively negotitated.
Depreciation

Pay careful attention to the expensing and depreciation elections you made on past tax filings as well as those available for the current year. Will the company accelerate deductions? Balance cash flow and taxable income based on your company’s goals.

Cash flow
End-of-year financial planning will almost certainly affect your cash flow: A question to ask: How much cash reserves does the company absolutely have to have at all times versus how much cash can be used in late 2015 for planning—to save taxes, defer taxes and, hopefully, net a larger cash balance than if no planning were done?

While reassessing 2015 and your tax-related decisions, think about the year ahead. Are the decisions made today simply kicking the can down the road? Will 2016 put the company in a different tax bracket? If there were a proverbial crystal ball to show where corn and oil prices were headed, if it were known what to expect from the gasoline and export markets, plans could be made accordingly. But it doesn’t exist. So it’s important to go through the end-of-year planning process. Carefully think through the pros and cons of your decisions and how they will impact taxes and cash flow this year and next.

Author: Donna Funk, CPA
Principal, K-Coe Isom
800-303-3241
funk@kcoe.com