Career High Incomes

Published on: 17:23PM Nov 03, 2008
Vance Ehmke

Old timers say there were two good years in farming: l947 and… year. Well, next year finally arrived.

In visiting recently with Rohn Shellenberger, our Scott City KS accountant, he said based on early looks at end of the year incomes, 2008 net farm incomes are a doozy. “Incomes are running two to three times normal,” Rohn says.

In a normal year, Rohn’s average self employed farmer has been clearing $50,000 to $60,000. “This year, though, it’s triple that. And a lot of that is because ’07 was also a pretty good year.

“To keep incomes down last year, farmers carried grain inventory forward into ’08. At the same time, grain prices had started an upward spiral. So here we are today—with huge net incomes. And if we don’t watch it, we’ll get crucified with income taxes.”

This is kind of fun—when a farmer’s biggest problem is trying to find the bank where CD rates are the highest. Or having to move money into multiple banks so you don’t exceed FDIC’s $250,000 insurance limits.

Of course, we all know good times like these don’t last forever. But they do need to be dealt with. For instance, Rohn obviously advises farmers to push all further grain sales and resulting income into ’09. At the same time, we need to pull all possible expenses into ’08. But herein lies a real problem.

When was the last time you looked at fertilizer prices? Or herbicides like Roundup? Items like these are major expenses…but unlike grain prices which have nosedived, these expenses are still at historically high levels. It’s like farmers are all dressed up and have nowhere to go.

Rohn says it would be nice to prepay $l00,000 on fertilizers and herbicides to reduce net income and, thus, income taxes. But here’s the deal: there’s a huge amount of very high priced inventory out there that has to be worked through before prices can go down. So you could end up spending $l00,000 on an expense that next spring may be worth $60,000. This isn’t end of the year tax planning—it’s end of the year suicide. So, be very careful on how you handle this.

In addition, another caution that certainly applies in today’s uncertain financial environment is who do you trust in doing business with-- prepaying expenses or cash forward contracting grain sales with? Beyond high net farm incomes, these are not normal times in a lot of other regards that deal with problems that could crop up because of credit availability or margin calls or people who want to break contracts or who knows what?

Rohn says you could also upgrade equipment as a way to reduce income. "Section l79 accelerated depreciation and the new 50% accelerated first year depreciation are pretty darned attractive. With section l79, you can write off up to $250,000 in equipment purchases in the first year. Also with newer equipment, you can increase efficiencies, reduce down time and repair costs and get better warranties. However, equipment prices are higher today."
Finally, Rohn says buying things you don't need just to reduce your tax load can be very dangerous--if not just plain stupid. "Those purchases may do you little to no good--and at the same time, they can cripple your cash flow. So at some point out there, you'll just have to pay the taxes."

And finally, your words of wisdom for the day come from a farmer I was standing next to at a recent land sale in Tribune KS when he mused, “Wouldn’t it be funny if wheat next year was $2.50 a bushel?”