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HobbyFmr
Member

Combine purchase to save taxes

Just did a quick anaysis of this year's projected P & L. Brother & I have S corp 50-50 located in NW Iowa. Had good crops in 2011 along with good prices, most of the income was realized this year. If we prepay everything for next year, we'll still have about $200,000 extra income after salaries. Income tax for each of us would be about $38000 on the extra income. Our combine is 8 years old (red) with 1800 hours in good condition. Heads are both older....corn head is almost 15 years old. Can trade for slightly larger year- old machine  with 300 hours and new heads for about $200,000. I think Section 179 max is $150,000 under current law. Like everyone else, our crops are burning up, but we have RA 80% coverage with fall price option (sold about 20% new crop corn and 50% new beans too soon).We're both going to retire within 5-6 years but my son who is an employee wants to take over. No debt....we farm 1200 acres and own half. We've talked about buying a little more land if the right opportunity arises, so saving back the $130,000 might by wise. But, we'll need another combine at some point.....Advice?

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7 Replies
Senior Advisor

Re: Combine purchase to save taxes

Sounds like you're in good shape and in a position to go a number of ways profitably.

 

Just guessing, there may be a number of farmers like you - good year and need to look at tax planning.  I think I'm going to talk to my CPA very, very early this year about when and how to take the money, to the extent that I can influence that.  

 

Some farmers may be in a position to trade iron and do well - maybe there'll be some bargains on the lot, I'm not sure what to think.  I don't know if the hot used market will continue or how this drought will affect it.  

 

If you're sure you're going to retire in 5-6 years, you're probably already trying to figure out how to exit without a huge tax penalty the last year.  I'm trying to get my income and expense in the same year so I won't have a big carry-over when I quit.

 

Lots of things to think about - good luck.

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Senior Contributor

Re: Combine purchase to save taxes

I'll just make a few points to think about.   Do you have a cash reserve?  Cash reserve might be nice in the future, especially if you want to expand on owned ground.  Or if interest rates would happen to raise.  Remember interest can't go down to much more.

Did you take an IRA out?   Double check your rules about withdrawing an IRA , you might be able to withdrawal without penalty if your over 60, can't remember.  I'm assuming that your over 60 or close to it, then you could take a $6000/ IRA I believe.  

A newer combine would be nice, I know your kid probably thinks so!   I guess how good of shape are your heads?  If you have to sink a bunch of money into one of them, maybe this year is the one trade.

 

I'm 34 so I imagine I see things different then someone 25-30 years older then me, To me there really isn't a bad choice.

Once you pay the tax you have $130,000 to do whatever you want with it, its yours.   A combine for the most part well depreciated in value BUT its a tool you need to harvest your crops.  Its like a carpenter needs a hammer, you need a combine.  

I guess for my personal thoughts Having cash to buy a farm is a better investment then a combine that will rust away.  

 

You have obviously done a good job this far taking care of business So I'm sure you'll do a fine job on this decision.  

 

 

Senior Advisor

Re: Combine purchase to save taxes

Keep the cash. Pay the tax and wait until the smoke clears. There may not be as many competitors buying combines if this crop craps out. Especially in severely stressed areas

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HobbyFmr
Member

Re: Combine purchase to save taxes

Thanks for the responses. Leaning towards biting the bullet on taxes and building up some cash reserves. Contributing the max to retirement accounts would help some. With everyone's attention on the drought, don't forget about tax planning for this year. Good luck to everyone.

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Senior Advisor

Re: Combine purchase to save taxes

Buying a combine to save taxes is never a good idea. Buying newer equipment because you NEED an improvement to get the job done may well be.

 

Paying taxes and adding to working capital or savings may be a good option. Buying something you don't really need JUST to avoid taxes may not be.

 

Too many farmers base their decision making on avoiding taxes when their real focus should be adding cash or assets to the personal coffer.

 

It's the anti tax mindset that lures people into bad decisions. What is your goal? To build your personal wealth or to avoid taxes. You can avoid taxes by not earning as much. Is that a good plan?

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Veteran Advisor

Re: Combine purchase to save taxes

My dad once told me that more farmers got in financial difficulty in the 80s, because of the previous 'good times' and spent all their money on new stuff.  When things turned around, they had no cash reserves, and their 'new' stuff was worth less than they owed on it, because so much was flooding the market.  In the mid-80s, my dad bought a nice 2 year old tractor, with 1600 hours on it, for less than half of what the original purchaser paid for it. 

The other thing to consider, is how much life you have left in your equipment.  If your combine is solid, but the heads are older, maybe upgrade the head this year.  With the low yields this year, there may be a bargain out there.  If prices stay high, next year, there may be a lot of competition for them.
On the other hand, my combine is a 1979, and the cornhead is I think a 1986.  If you don't mind rebuilding, they can last an awfully long time.

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Advisor

Re: Combine purchase to save taxes

I'm in a different situation than you are, I need a newer combine. But I don't think you can look the opportunity to save taxes in the eye and turn it down. Saving 150,000 on your income and not paying the (28%?) taxes on it...seems as good of a way to save money as paying the taxes on the entire amount and saving the rest. The mortgage interest you're able to lock in right now is just above the actual value of the money....so I don't think saving in this instance is going to do you all that much good. Even if you have to borrow a bit more on more land...you can write the extra interest off too.

 

 

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