Tax Breaks Coincide with Bumper Incomes
(DTN) The federal government's attempt to jump-start the economy through tax breaks couldn't have come at a better time for U.S. farmers. They are experiencing a 2011 net farm income total projected to be 31% higher than last year and the highest inflation-adjusted net farm income since 1974.
Farmers are finding huge tax breaks to invest in machinery, farm buildings and land improvements. It's one reason why the high-profit farmers enrolled in the University of Minnesota's Center for Farm Financial Management's database whittled average 2008-2010 accrual net farm incomes of $432,276 to an average of $210,595 on their Schedule F cash net farm income.
"We would pour more concrete if we could, but our local contractor is so busy, he can't meet all the demand," said Mark Mueller, a corn and soybean farmer in Waverly, Iowa. Mueller is one of the many farmers and ranchers taking advantage of the economy-boosting tax cuts that include "bonus depreciation," an unlimited 100% deduction on new (not used) equipment and farm building expenses, that expires on Dec. 31, 2011.
Across the state line, Brian Herbek and his business partner James Basset own a construction company in Deweese, Neb., that has built more steel buildings in the past seven months than the previous 10 years. "We could sell more if our crew had time to put them up," Herbek said, although he's realistic that Congress isn't likely to extend its extreme generosity into 2012.
Farm equipment is also a hot item. Like many farmers, Mueller is updating his equipment line. "I generally buy low-hour, used equipment in good shape and have bought a newer tractor, a disk ripper, a combine and corn head," he said.
Because the equipment is used, it doesn't qualify for this year's unlimited bonus depreciation, but it does qualify for the immediate expense write-off of up to $500,000 for Sec. 179 property, available in 2011. This includes new and used equipment, single-use buildings such as hog houses, grain bins and dryers, fences, corrals and tiling.
There are two separate depreciation tax breaks available to farmers and ranchers: The Section 179 expense deduction and the "bonus depreciation" deduction. Both are much more lucrative in 2011 than 2012. The half-million-dollar expense deduction in 2011 for Section 179 property drops back to $139,000 for property put in use after Jan. 1, 2012, explained Chris Hesse, agricultural tax expert and C.P.A. with LarsonAllen, LLP in Minneapolis. The other deduction -- the unlimited first-year bonus depreciation for purchases of new equipment and any farm building -- drops to 50% in 2012.
"There's a lot of profit right now in Midwest agriculture," said Steve Johnson, farm management specialist with Iowa State University. "On rented land, we've seen numbers where farmers are making a net over $400 per acre on corn ground and over $200 per acre on soybeans. The past three out of four years have been some of the most profitable Iowa farmers have ever seen," said Johnson. "And most are spending those profits three ways: Paying down debt, buying machinery and equipment to improve efficiency, and investing in storage for grain, fertilizer and fuel."
TAXES DON'T DRIVE ALL DECISIONS
In the highly volatile livestock industry, some operators are building their reserves rather than reinvesting. "My major objective is to pay down debt," said corn/soybean/cattle producer Dave Lubben, of Monticello, Iowa. "The world economy is on a bubble when you look at Italy and Greece. I think those problems are coming our way. I don't think the congressional supercommittee can get it all done. So, I want to be financially strong when the dominoes start to fall here," he said.
Lenders and farm financial consultants agree that reasonable debt and a healthy working capital is what producers will need when the farm financial cycle starts to rollercoaster down. "I recommend $300 to $400 per tillable acre in working capital. This allows you to pre-pay expenses if you can get a good deal and helps you weather volatile markets," advised Johnson.
"With these high cattle prices and feed costs, we're dealing with such large numbers; you need to be careful to keep your debt level manageable," said Lubben, whose cattle yards are full.
Upgrading equipment to improve efficiency is an attractive place to invest profits and save taxes. Mueller went from a John Deere 4650 to an 8200 for his main tractor "and this spring, I could plant 30 more acres per day with my 12-row planter just by turning around faster at the end of the row and having the automatic power row-unit shut-off. Also this fall, we normally use trucks to haul grain from the field. But if it's too wet, we'll use wagons. A tractor pulling a wagon down the road at 24 mph versus our old tractor at 19 mph increases our harvest efficiency," Mueller explained.
Mueller has also purchased a forklift and two used trucks. "In fact, I have been going through all our machinery and vehicles, replacing threadbare tires, old batteries and leaking radiators, as well as installing automatic shutoffs on my planter and sprayer."
Ultimately, it's more important to have a business reason for an investment than simply save taxes, said Johnson. "For those who are buying a lot of next year's inputs now or delaying income, just how much further forward does a farmer want to push income?" asked Johnson. "No one is predicting lower income tax rates ahead."
http://www.dtnprogressivefarmer.com
Farmers are finding huge tax breaks to invest in machinery, farm buildings and land improvements. It's one reason why the high-profit farmers enrolled in the University of Minnesota's Center for Farm Financial Management's database whittled average 2008-2010 accrual net farm incomes of $432,276 to an average of $210,595 on their Schedule F cash net farm income.
"We would pour more concrete if we could, but our local contractor is so busy, he can't meet all the demand," said Mark Mueller, a corn and soybean farmer in Waverly, Iowa. Mueller is one of the many farmers and ranchers taking advantage of the economy-boosting tax cuts that include "bonus depreciation," an unlimited 100% deduction on new (not used) equipment and farm building expenses, that expires on Dec. 31, 2011.
Across the state line, Brian Herbek and his business partner James Basset own a construction company in Deweese, Neb., that has built more steel buildings in the past seven months than the previous 10 years. "We could sell more if our crew had time to put them up," Herbek said, although he's realistic that Congress isn't likely to extend its extreme generosity into 2012.
Farm equipment is also a hot item. Like many farmers, Mueller is updating his equipment line. "I generally buy low-hour, used equipment in good shape and have bought a newer tractor, a disk ripper, a combine and corn head," he said.
Because the equipment is used, it doesn't qualify for this year's unlimited bonus depreciation, but it does qualify for the immediate expense write-off of up to $500,000 for Sec. 179 property, available in 2011. This includes new and used equipment, single-use buildings such as hog houses, grain bins and dryers, fences, corrals and tiling.
There are two separate depreciation tax breaks available to farmers and ranchers: The Section 179 expense deduction and the "bonus depreciation" deduction. Both are much more lucrative in 2011 than 2012. The half-million-dollar expense deduction in 2011 for Section 179 property drops back to $139,000 for property put in use after Jan. 1, 2012, explained Chris Hesse, agricultural tax expert and C.P.A. with LarsonAllen, LLP in Minneapolis. The other deduction -- the unlimited first-year bonus depreciation for purchases of new equipment and any farm building -- drops to 50% in 2012.
"There's a lot of profit right now in Midwest agriculture," said Steve Johnson, farm management specialist with Iowa State University. "On rented land, we've seen numbers where farmers are making a net over $400 per acre on corn ground and over $200 per acre on soybeans. The past three out of four years have been some of the most profitable Iowa farmers have ever seen," said Johnson. "And most are spending those profits three ways: Paying down debt, buying machinery and equipment to improve efficiency, and investing in storage for grain, fertilizer and fuel."
TAXES DON'T DRIVE ALL DECISIONS
In the highly volatile livestock industry, some operators are building their reserves rather than reinvesting. "My major objective is to pay down debt," said corn/soybean/cattle producer Dave Lubben, of Monticello, Iowa. "The world economy is on a bubble when you look at Italy and Greece. I think those problems are coming our way. I don't think the congressional supercommittee can get it all done. So, I want to be financially strong when the dominoes start to fall here," he said.
Lenders and farm financial consultants agree that reasonable debt and a healthy working capital is what producers will need when the farm financial cycle starts to rollercoaster down. "I recommend $300 to $400 per tillable acre in working capital. This allows you to pre-pay expenses if you can get a good deal and helps you weather volatile markets," advised Johnson.
"With these high cattle prices and feed costs, we're dealing with such large numbers; you need to be careful to keep your debt level manageable," said Lubben, whose cattle yards are full.
Upgrading equipment to improve efficiency is an attractive place to invest profits and save taxes. Mueller went from a John Deere 4650 to an 8200 for his main tractor "and this spring, I could plant 30 more acres per day with my 12-row planter just by turning around faster at the end of the row and having the automatic power row-unit shut-off. Also this fall, we normally use trucks to haul grain from the field. But if it's too wet, we'll use wagons. A tractor pulling a wagon down the road at 24 mph versus our old tractor at 19 mph increases our harvest efficiency," Mueller explained.
Mueller has also purchased a forklift and two used trucks. "In fact, I have been going through all our machinery and vehicles, replacing threadbare tires, old batteries and leaking radiators, as well as installing automatic shutoffs on my planter and sprayer."
Ultimately, it's more important to have a business reason for an investment than simply save taxes, said Johnson. "For those who are buying a lot of next year's inputs now or delaying income, just how much further forward does a farmer want to push income?" asked Johnson. "No one is predicting lower income tax rates ahead."
http://www.dtnprogressivefarmer.com
Posted by Colvin & Co. at 11/23/2011 5:30 AM 
Categories: Economic Growth
Tags: agriculture farmland corn commodities farming Iowa inflation
Categories: Economic Growth
Tags: agriculture farmland corn commodities farming Iowa inflation
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