Graphic owner: UKZN SAEES: school website
June 23, 2016 Volume 16, Issue 6 Edited by Will Snell & Phyllis Mattox
Economic & Policy Update
Is Tax Avoidance Holding Your Operation Back? The years leading up to 2015 were some of the most profitable times for production agriculture. Producers in the Kentucky Farm Business Management Program saw record profits. However, significantly lower commodities prices and a decline in farm income occurred last year. During the winter processing season I had a conversation with a local banker discussing the wide differences in both net farm earnings and balance sheet performance across the producers with whom we work. It would be easy to assume that most farmers would have a strong financial cushion in place to weather the recent downturn following the record profits over the last few years. However, this banker (and many other bankers) and I were realizing that there are some producers who are struggling with liquidity. There are producers who do not have money to pay current operating bills.
Is Tax Avoidance Holding Your Operation Back? - Rush H. Midkiff U.S. Ag Trade Balance Deteriorates - Will Snell Estimating Costs for Produce GAP Certification - Brett Wolff - Paul Vijayakumar - Mark Williams How Much Cushion is There in Corn, Soybean and Wheat Stocks for 2016? - Todd Davis
There are many factors that influence an individual’s balance sheet. Age is a big factor, since a balance sheet is a snapshot of what assets, liabilities and net worth are at a given point in time (usually December 31st of each year). A young producer simply has not had as much time during his/her life and business cycle to accumulate assets and retire debt. Family financials, off farm investments and income, or even a day at the horseraces can impact a balance sheet either in a positive or a negative way. However, we noted one thing in this discussion that many producers are doing regardless of their age or experience. Furthermore, unlike some of the others factors that are out of the individuals control (such as being born wealthy), the producer can control this practice. The issue is tax avoidance. Make note, this is not about tax planning but tax avoidance. The majority of taxpayers seek to pay as little tax as possible. I have yet to have a producer get excited during a tax planning visit when it was estimated that their tax liability was higher than they were expecting. Farmers using a cash basis accounting practice are fortunate to have tax planning tools available to prepay expenses and/or defer crop sales. These practices were put into place within our tax code for the simple reason that farmers historically have a lot of variance in their incomes. As many factors can influence yield and commodity prices, farmers can see themselves moving from no income tax liability following a disaster and then swinging to a high tax bracket the following year after a bumper crop. The point of tax planning is to avoid the ebbs and flows and average the liability to most efficiently use the tax brackets. Tax Code Section 179 and Bonus Depreciation are additional tools available to allow business owners (this is not specific to farmers) to accelerate depreciation on capital purchases. The idea behind the tax code here is to encourage businesses to make capital investments, not avoid taxes. Following a great year, a farm family is faced with a sizeable taxable income. They generally start looking at ways to lower their tax obligation. They realize they can greatly reduce their liability by purchasing more inputs, equipment or other farm expenses. However, they often forget these are not a dollar for dollar tradeoff. It is more often a $1.00 for $0.41 trade off. A dollar of additional deductible expense will only save you the marginal tax rate percent. So if you are in the 35% federal and 6% state tax bracket, your $1,000 dollar purchase saved you $410 dollars in taxes. PAGE 2
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Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, & KENTJCKY COUNTIES, COOPERATING.