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Be Careful with Excess Cash

October 5, 2011
By: Ed Clark, Top Producer Business and Issues Editor
 
 

There are worse things than paying taxes in a high crop income year

This is a great year for producers to grow their operations, whether that’s by adding land, machinery, grain bins, etc. The cash is available for many, providing they escaped the wrath of Mother Nature. Spending money on what they need definitely has tax advantages, too.

"If you’re trying to determine whether it’s time to pay down debt and income taxes or continue to grow both acres and debt, look at recent history," says Steve Johnson, farm management economist with Iowa State University. "Memories of the late 1970s and early 1980s are reminders of the last time the ag economy boomed and land values increased rapidly."

Thus far, producers have been prudent, experts say. For example, most land is being purchased with cash. In Nebraska, 50% of farmland sales were made with cash in 2010, even though values shot up more than 20%, a University of Nebraska study shows.

While credit for agriculture seems readily available, credit will likely become tighter should a hint of a downturn in crop prices and higher interest rates surface.

Johnson says that increased income taxes could emerge as an issue after 2012, when existing federal tax rates are due to expire. What happens if the federal government, in search of loopholes, reduces the Section 179 expense depreciation or eliminates other tax advantages that producers have enjoyed?

"Farmers playing musical chairs [shifting income forward] could be without a chair beyond 2012," he says.

At the moment, farmers can take advantage of several tax provisions to reduce their taxable income, says Phil Harris, a University of Wisconsin economist, attorney and tax law specialist.
For purchases made after Sept. 8, 2010, and before Jan. 1, 2012, Congress increased the first-year depreciation deduction from 50% of the purchase price of qualifying assets to 100%. Other options are prepaying inputs, rolling grain sales forward and income averaging.

Nontraditional Investments. Now is a good time to evaluate nonfarm investments to diversify a portfolio, advises Roger Wilson, an ag economist at the University of Nebraska. Such investments range as widely as the stock market and bonds to nonfarm real estate, even apartment buildings, Wilson says.

For the most part, Wilson sees producers making wise spending decisions compared with the 1970s, when purchases were made with mortgage debt. However, it’s important for producers to remember three moves to avoid:

  1. Paying more for land and machinery than you can afford.
  2. Increasing family living expenses on which taxes must be paid along with principal payments.
  3. Rolling income forward. "Interest and storage on the unsold crop becomes a financial drain," Wilson says.

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FEATURED IN: Top Producer - October 2011
RELATED TOPICS: Financial Management, Taxes

 
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COMMENTS (1 Comments)

PullMyFinger - Chappell, NE
Buying fuel, fertilizer and machinery will more than take care of any "excess" cash.
8:47 AM Oct 21st
 



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