Ignore or use small-biz incentives?
September’s hike of Section 179 enhanced depreciation and return of bonus depreciation (the Small Business Jobs and Credit Act) sounds enticing. Got any sage advice of benefit — other than spend, spend, spend? Would the exclusion of gains on small-business stock benefit our partnership or corporation?
Mike Evanish: Spend, spend, spend? In this economy? I don’t think so!
At present, corn, soybean and milk prices are looking pretty good through year-end. But how long will these prices last?
Our economy moves in unexpected ways, and does so very quickly. Corn, for instance, was expected to trade in the $4 range this fall. It’s now looking at $6 or more. It seemingly moved up overnight. Policy changes in Washington, D.C., could move it back just as quickly.
Beans and milk are much the same. Keep in mind that ethanol could lose its current preferred status. Favorable weather will return to Russia. The dollar will strengthen.
So why do I mix economics with a tax question? Simply because when assets are purchased for a tax write-off, the typical resulting liability must be paid back. That payback relies on future income.
Trouble is, prices are cyclic. Buying in high-income years has a nasty habit of having to be paid back in low-income years.
Sure, taxes impact cash flow. But at the most, taxes saved return 50% of equipment purchases. For some, it’s as little as 15%.
If the acquired piece of equipment doesn’t “earn” at least the difference between its cost and the taxes saved over its lifetime, it’s cheaper to pay the tax.
So, get your records up to date. Then sit down with your accountant and do tax planning. Simple tax planning isn’t enough. Once the accountant has calculated where taxes are expected to fall, expectations for the future of your business and tax law must be considered.
Look at whether tax rates will be higher, lower or the same in 2011. What are your long-term goals for the business? How much money can be saved (earned) through early payment discounts if needed supplies are purchased now rather than next spring?
George Mueller: I’m not knowledgeable about “small-business tax incentives”. So, I’ll let my partners handle that one. But I’d like to share some thoughts on year-end tax planning.
We have a tremendous advantage of being able to report farm income on a cash basis, as opposed to accrual. Don’t ever give up cash accounting! This enables us to even out our income — and our income tax liability! We can prepay expenses at year-end if we had a good year.
In a poor year, such as 2009, we were able to postpone some payments and end the year in the black. Those postponed payments that went into this year’s books will help slow this year’s profits this year, and even out our tax burden.
It’s very important to have enough income to use up all your exemptions each year. Otherwise, the benefit of your exemptions will be lost forever.
When I started farming, profits were so slim that I had to capitalize my big purchases, like a set of tractor tires, to have enough income to use up the exemptions allowed for my wife and children.
Last year, our milk co-op passed along a Section 199 exemption to be used by farmers at tax time. By careful planning and postponing expenses, we were able to use up every bit of that exemption.
If your business is profitable, you are going to pay income taxes. The object is to average out the bad years with the good so you’ll avoid high tax brackets in high-income years.
Paying a little income tax each year isn’t a bad idea. It’s kind of necessary if you’re going to pay down debt.
Glenn Rogers: I’m not a fan of using tax provisions to operate our businesses. The first financial goals are to: operate the business profitably, retain a profit sufficient to meet the needs of the family and prepare to make the farm profitable in future years.
If the incentives or tax provisions provide extra savings and incentives, great: Let’s use them. But don’t let tax provisions drive your decisions.
If [tax provisions] drive your decisions, eventually decisions made by others off the farm may lead to some decisions that aren’t exactly what you want for your farm or your individual goals.
These tax incentives are designed to put funds back into the economy, provide jobs for the unemployed and speed our economic recovery. This is admirable and certainly will provide more state and federal tax dollars.
If you have met your goals, and are still projecting profitability over the next year when the price of milk is projected to be in the $15 per cwt. range, then you might want to take advantage of the new levels for Section 179 depreciation and bonus depreciation. Chances are, these high levels of tax relief/economic enhancement won’t be there much longer.
However, it means that you must do the planning for 2011 now: NOT in Jan. 2011. The bonus depreciation is only good in 2010, whereas Section 179 is for 2010 and 2011. Work with your tax person to determine if there are advantages for your business; be sure set that meeting up this month. Get those information returns in the mail before the January 2011 deadline.
“Resist getting caught up in the fever of lowering taxes. Like all businesses, you must manage to maximize income — not minimize taxes.”
Pennsylvania Farm Bureau
Be careful about taking too much accelerated depreciation in one year. Hopefully, you’ll need some of that depreciation in future years.”
Clifton Springs, N.Y.
“Be aware that the bill also doubled fines for not filing the IRS information returns on time, and for intentionally failing to file information returns.”
University of Vermont
This article published in the December, 2010 edition of AMERICAN AGRICULTURIST.