1. A Taxing Attitude
Eric J. Deters, FBM Instructor, Riverland Community College

2. There are only two sure things in this world.
Death and Taxes
But timing is critical

3. Question: Is it better to pay a prepay for inputs or pay the tax and pay down debt?

4. Situation: Producer just purchased a different combine and secured a $50,000 loan in order to make the purchase. At the end of the year he finds he has $30,000 dollars to spend.
Does he use the $30,000 for prepay or pay the taxes and reduce the loan?

5. Producer background:
Married with 2 dependents. Farm 1000 acres on a 50/50 corn bean rotation. One spouse works off farm and generates 32,000 in income. 30% of the crop is sold in fall the rest is stored and sold in the spring.

6. Let’s answer the question: Do I buy inputs or pay tax and debt?
$50,000 Equip Loan, 7% int. 5 year Am P&I = $12, due 9/1
Added Tax on $30,000 = $10,386 $19,614 to pay down debt
Loan Schedule Normal Pay Debt
Balance Int. Paid Balance Int. Paid
Year 1 50, ,386
Year 2 41,
Year 3 32,
Year 4 22,
Year 5 11,
Year
Total Interest Paid $ $

7. Let’s answer the question: Do I buy inputs or pay tax and debt?
$50,000 7 yr SL Depreciation = / yr. P&I = $12,194.53
Normal Tax base $63,000 + Loan payment – (Interest & Deprecation)
Future Tax Normal Pay Debt
Income Tax Income Tax
Year
Year
Year
Year
Year
Year
Total Tax Paid $ $86759

8. Let’s answer the question: Do I buy inputs or pay tax and debt?
Summary Normal Pay Debt Difference
Interest $10,973 $4,263 $6,710
Future Tax $93,382 $86,759 $6,623
Total Savings $13,333

9. What about the $10,386 in taxes paid the first year?
WHOA,
What about the $10,386 in taxes paid the first year?

10. Remember the producer has $30,000 in prepay that has not been yet
Remember the producer has $30,000 in prepay that has not been yet. Thus he still has a deferred tax liability of $10,386.
So it Washes

11. The Dangers of PREPAYS:
Lets say the producer makes $93,000 for the next 6 years.
One strategy is to keep add to the prepay, another to pay the tax and reduce debt. He is not opposed to paying tax on $63,000 a year.
All Prepay All Debt Payment
Total Prepay $180,000
Total Debt Reduced $117,684 +
Tax Due $66,676 $62,316
Net Worth $113, $117, $5115 paid into SS

12. Sure, but real life is not as consistent as your examples
Sure, but real life is not as consistent as your examples. Incomes and expenses fluctuate giving us opportunities for tax savings.

13. Let’s look at 3 strategies using real numbers from FINBIN.
Fair enough.
Let’s look at 3 strategies using real numbers from FINBIN.

14. No tax planning, doesn’t care, just pay the tax.
Strategy 1
No tax planning, doesn’t care, just pay the tax.

15. PAY NO TAX, prepay any amount to avoid tax
Strategy 2
PAY NO TAX, prepay any amount to avoid tax

16. Strategy 3
Planner, try to stay in the 15% bracket, pays down debt when ever possible.

17. The income numbers used are the average net returns of corn and soybeans for the 2000 thru 2006.

18. Let’s use the same producer. Here is some added info:
Total Assets – 1,187,500
Intermediate Debt – 75,000 7% 7 years
Long Term Debt – 400,000
Needs $40,901 to pay a portion of family living and principle payments.

19. YEAR 1
Income: $108,
Taxable Income $ 108, $108, $108,207
Carry over Prepay
Prepay $108, $ 5,000
Taxable Income $108, $103,207
Tax $ 38, $ 37,026
Family Living /Prin Pay $ 40, $40, $ 40,901
Debt Reduction $ 35,000
Cash Balance $ 28, $ 1,177
Borrowed Balance $40,901 0
Int Loan Balance $ 66, $ 66, $ 31,333
Lt Loan Balance $395, $395, $ 395,765

20. YEAR 2 Income: $76,250 1 2 3 Taxable Income $ 76,250 $ 76,250 $ 76,250
Carry over Prepay $108, $ 5,000
Prepay $183, $ 15,000
Taxable Income $ 76, $ 66,250
Tax $ 27, $ 23,879
Family Living /Prin Pay $ 40, $40, $ 40,901
Debt Reduction $
Cash Balance $ 36, $ 2,647
Borrowed Balance $ 81,802 0
Int Loan Balance $ 57, $ 57, $ 19,611
Lt Loan Balance $391, $391, $ 391,234

21. YEAR 3 Income: $32,810 1 2 3 Taxable Income $ 32,810 $ 32,810 $ 32,810
Carry over Prepay $183, $ 15,000
Prepay $ 215, $ 0
Taxable Income $ 32, $ 47,810
Tax $ 11, $ 16,938
Family Living /Prin Pay $ 40, $40, $ 40,901
Debt Reduction $
Cash Balance $ $
Borrowed Balance $122, $ 7,382
Int Loan Balance $ 47, $ 47, $ 7,067
Lt Loan Balance $386, $386, $ 386,386

22. YEAR 4 Income: $41200 1 2 3 Taxable Income $ 41,200 $ 41,200 $ 41,200
Carry over Prepay $ 215, $
Prepay $ 254, $ 0
Taxable Income $ 41, $ 41,200
Tax $ 14, $ 14,649
Family Living /Prin Pay $ 40, $40, $ 34,546
Debt Reduction $
Cash Balance $ 2, $
Borrowed Balance $163, $ 15,377
Int Loan Balance $ 36, $ 36, $
Lt Loan Balance $381, $381, $ 381,198

23. YEAR 5 Income: $53,700 1 2 3 Taxable Income $ 53,700 $ 53,700 $ 53,700
Carry over Prepay $ 254, $
Prepay $ 305, $ 0
Taxable Income $ 53, $ 53,700
Tax $ 18, $ 18,977
Family Living /Prin Pay $ 40, $40, $ 26,985
Debt Reduction $
Cash Balance $ $
Borrowed Balance $ 4, $204, $ 7,639
Int Loan Balance $ 25, $ 25, $
Lt Loan Balance $ 375, $ 375, $ 375,648

24. YEAR 6
Income: $-13,
Taxable Income $ -13, $ -13, $ -13,820
Carry over Prepay $ 305, $
Prepay $ 287, $ 0
Taxable Income $ -13, $ -13,820
Tax $ -4, $ -4,845
Family Living /Prin Pay $ 40, $40, $ 26,985
Debt Reduction $
Cash Balance $ $
Borrowed Balance $ $245, $ 43,599
Int Loan Balance $ 13, $ 13, $
Lt Loan Balance $ 369, $ 369, $ 369,709

25. YEAR 7
Income: $ 42,
Taxable Income $ 42, $ 42, $ 42,780
Carry over Prepay $ 287, $
Prepay $ 326, $ 0
Taxable Income $ 42, $ 42,780
Tax $ 15, $ 15,196
Family Living /Prin Pay $ 40, $40, $ 26,985
Debt Reduction $
Cash Balance $ $
Borrowed Balance $ 67, $286, $ 43,000
Int Loan Balance $ $ $
Lt Loan Balance $ 363, $ 363, $ 363,354

26. Summary
Taxes Paid $ 122, $ $ 121,820
Deferred Tax Prepay $ 127, $
Deferred Tax Liability $ 24, $ 110, $ 15,273
Total Tax Liability $ 146, $ 237, $ 137,093
Assets $ 1,187, $1,187, $ 1,187,500
Prepay $ 326, $
Total Assets $ 1,187, $1,187, $ 1,187,500
Current Liability $ 67, $286, $ 43,000
Lt Loan Balance $ 363, $ 363, $ 363,354
Total Liabilities $ 430, $649, $ 406,354
Net Worth $ 756, $863, $ 781,146
Net Worth w/Def Lib $ 732, $ 626, $ 765,873

27. Tax Planning for the Near Future
Accept the fact that you will pay taxes sooner or later. Waiting may be disastrous.
Save 3-5% of your sales in a money market to help easy the pain of coming up with money to pay taxes.
PAY DOWN DEBT!!!! Even a small percentage of debt reduction can make a big difference.
Pay accounts and loans timed with expenses or depreciation. Thus the priority order, Accounts Payables, Current Loans (operating), Intermediate (Breeding Stock/Machinery), Long Term Loans (mortgages).
Keep ACCURATE records and start planning early.

28. Taxes take a percentage, they don’t take it all.
Parting Thoughts:
If your not paying taxes, you have more to worry about than paying taxes.
Taxes take a percentage, they don’t take it all.
Don’t let taxes prevent you from making a profit.