By Starion Bank
When you hear about escrow accounts, you probably think mortgages. Home buying is where most of us encounter the concept. However, agricultural producers also use escrows, to reduce tax burdens and shore up their financial security.
How does it work?
The mechanics are complex, but here’s a good primer from The Balance: “An escrow is a financial agreement in which a third-party controls payments between two transacting parties and only releases the funds involved when all of the terms of a given contract are met.”
As a producer, that means you can sell your crops or livestock when the prices are to your advantage, then defer the income until later when you want to receive it.
Here’s an example:
- You harvest grain last year in Fall 2023, but due to weather or price fluctuation out of your control, you waited to sell the grain until 2024.
- This season, in the Fall of 2024, you harvest and sell before the end of the year.
- You’ve now collected two seasons’ worth of proceeds in one calendar year. You may risk being taxed in a higher income bracket.
- Alternatively, you sell the grain in Fall 2023 and then defer payment until January 2025. Now, your income is more even over the years, keeping your tax liability more manageable.
If you have sold grain or livestock through a deferred payment contract before, this may already be familiar to you. Farmers and ranchers often have close relationships with their local elevators and sale barns. Those businesses will buy the product but not pay out the proceeds until the producer (you) is ready to receive it. The caveat is that the buyer now has ownership of the product and is potentially holding tens of thousands of dollars (or more!) of your money.
Instead of a deferred payment contract, let’s check the benefits of a Starion Bank escrow account.
- We manage the transaction and administrative overhead, freeing both the buyer and producer to concentrate on their day-to-day business.
- Bank deposits, including escrows, are FDIC insured, affording you some protection for your investment. Some limits do apply to this, however, so please talk to your banker for details.
- The transaction is automatic. You don’t have to spend time transporting paper checks from the buyer to the bank. All you have to worry about is selling the product and choosing when to accept the income.
- If you already have operating lines of credit through the bank, you can choose to have the proceeds taken out of escrow and deposited directly into your business account or applied directly to your loans. This is a win/win because it’s fast and requires no extra paperwork!
The difference in security and convenience is clear. Letting your trusted community bank handle the paperwork and securely hold the funds helps you protect your operation from unforeseen circumstances. And you can still sell your products when the prices are favorable without wreaking havoc on your taxes.
To learn more about agribusiness banking through Starion, connect with one of our bankers today.
Greg Stemen, Business Banking Officer, VP
Fargo – Urban Plains
2754 Brandt Drive South
Fargo, North Dakota
701-281-5600
[email protected]
