By: Bob Kemble, CPA
Having too much income in one year is a good problem to have, as long as you have an operating plan and cash flow budget. If you have no plan, then it’s sadly an opportunity wasted. Many cattle related operations will have excess income problems this year due to high cattle prices and the USDA Livestock Forage Disaster Program. For every operation, the plan will look different. The most important part of the plan is whether or not it makes business sense. Take a step back and assess what you’re trying to accomplish, and then determine the steps that will get you there. If you don’t have an operating plan and cash flow budget, you will not be able to prioritize what you actually need to spend your cash on.
A good operating plan should tell you:
- Financial implications of the operating decisions you make for one year – production, marketing, capital, and funding
- Operating credit requirements
- Profitability
- Ability to service debts and fund capital expenditures
- Impact on working capital, and solvency
When building your operating plan, ask yourself what needs to be considered for year-end purposes, i.e., what are the items that need to be repaired or purchased before year-end?
For example:
- Take a look at your equipment and ask yourself, if replacing that worn out loader, feed truck, or pickup would make your job or life easier, and improve efficiency.
- Do you need to upgrade your irrigation system if part of your operation is connected to growing forage?
All of the previously mentioned items should be deductible under section 179, but section 179 is in a state of flux. Under Section 179 of the tax code, a business taxpayer can currently deduct, or “expense,” qualified assets placed in service during the year, up to a specified amount. A maximum deduction of $500,000 was allowed for 2013, subject to a phase-out for combined assets in excess of $2 million. However, when this provision expired after 2013, the limit for 2014 reverted to a paltry $25,000 with just a $200,000 phase-out threshold. Both chambers of Congress are debating legislation that would extend the higher Section 179 expensing allowance. The experts indicate they are in a “60% to 70% range of passage” after the November elections. We are advising our clients to proceed with cautious optimism regarding section 179.
Some other questions to consider for year-end planning might be:
- What does your debt picture look like? This may be the perfect time to get your debt paid down so it is manageable when the prices of cattle eventually come down. Being prepared for lower cattle prices in the future will be critical to
your continued success. Someday cattle will sell for less than it costs to raise them and that is when the marginal operators go out of business.
- Is it time to expand and/or strengthen your herd, holding back more heifers for breeding?
- Is it time to add more deeded range ground so you don’t have to rely as heavily on the government grazing permits?
- Should you be purchasing additional feed this fall to ensure you will be able to maintain your herd if drought conditions persist?
Additionally, you could consider alternatives to defer income, such as:
- Selling your cattle on contract. Note: This should only be done with a company that is very well capitalized and trusted.
- If you are in an area of drought, there are ways to defer income if you had to sell more cattle this year as compared to an average year, per various IRS code sections.
Once you know what you need for your operation; whether it is replacing equipment, paying down debt, expanding your operation, preparing for extended drought conditions, or a combination of all of the above, you need to be able to analyze different planning scenarios through a simulation process to ensure the results from the implementation of your plan. This may sound like a lot of work if you do not have a documented process in place – and it is – but taking the time to appropriately plan and document for your operations future is invaluable. If you don’t have a plan in place and aren’t sure where to start, contact a professional that can help.
Bottom line, having a good income year is a good thing. We like to say at our firm, “Don’t let the tax tail wag the business dog”. This statement is true regardless of any situation. A plan will help you make solid business decisions that will increase success, mitigate risk, and minimize tax from a long-term and big picture perspective.
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