CAIS and MAAO

[frustrated1]

Have any mixed farms gone through the MAAO applications in hopes of increasing your reference margins? Looks like it should help with the increase in breeding stock inventory but maybe offset slightly with the grain end staying steady? What if any are the longer term ramifications to going with the MAAO? Apparently you can't change back once you've started. Thanks.

[rrmoon]

Hi Frustrated1!
I think there would be an advantage if you have significantly increased your cattle numbers for example in the past 4 or 5 years. It is however, a lot of work, as you virtually have to do the equivalent of a current year production margin for each of the previous 5 years! I did the exercise on our operation, but found there to be no advantage. Also, as you made reference to, once you've gone accrual, there's apparently no turning back. I guess that could be either good or bad, depending on what the future has in store for you.

[kato]

Could anyone explain the ramifications of going accrual?

Does that mean we have to file our income tax under the accrual method? I think we would have an advantage this year if we did the MAOO thing, but I don't think I want to file taxes on an accrual basis in the future.

[counter5g]

Filing your CAIS return using the MAAO will not in any way affect the way you file for taxes. However, you are correct that you are locked in to the MAAO for the remainder of the CAIS program. The ramifications of this are complex, and difficult to determine ahead of time, but a good rule of thumb is that as long as you keep building your inventory, or remain static, there will be no downside. If, however, drought or other disaster depletes your inventory etc., or if you are contemplating downsizing or retiring, the decrease in inventories will draw down your reference margin faster than if you would not file the MAAO. It is worth taking a very close look at your future plans, i.e. the next 5 years before filing this schedule.

As to whether there will be a benefit or not, it will depend largely on he increase in your inventory quantities over the reference period. Deferred sales, accounts payable and prepaid fertilizer, feed on hand, etc. will also affect the calculation. However, even if you have had no increase in inventories, if you have one extremely high reference year due to sell-offs, etc., the MAAO may allow that year to be spread out so that you get some of that margin instead of it being kicked out. It is a very complex option, and cannot be explained in one post here, regardless how long that post is! However, I do believe that every producer who has increased inventory levels over the last five years should at least look at this option. We have been looking at this option for all our clients (I am an accountant) and have found some significant payments that would otherwise be missed. However, do not let your accountant file this form without having detailed discussions with you regarding the potential ramifications!

Garett

[frustrated1]

Thank you all, it does reaffirm I'm on the right thought process.

[farmers_son]

MAAO only affects previous reference year margins, not claim year margins. Claim year margins already use the exact same calculations as the MAAO option.

There is a built in advantage to going with the MAAO if your cattle numbers increased because using MAAO double counts any increase in cow numbers because of structural change adjustments. Once you go to MAAO your reference margin for 2004 will be your claim year margin for 2004. If you stay with CAIS reference margins, your reference margin will most often be different than your claim year margin as non MAAO reference margins are based on allowable cash income and expenses with no accrual adjustments.

As MAAO and the structural changes causes increases in cattle inventory to be double counted, it double counts decreases in cattle inventory so you would find yourself with exaggerated decreased reference margins after a few years if you were forced to sell down cattle inventories. When using MAAO, increases in year end receivables such as deferred crop or forage insurance will reduce your reference margins where without MAAO they would not. Be aware that while increases in cattle would increase your reference margins under MAAO, decreases in feed and grain on hand will have the opposite effect.

It is possible that if a producer opted out of CAIS and then opted back in that the MAAO requirement would be cancelled. Once you opt out you are out for 3 years.