By Darren Hefty
Benjamin Franklin was quoted as saying, “In this world nothing can be said to be certain, except death and taxes.” As a farmer, I know this to be true. There’s no guarantee of good weather, fair crop prices, low input costs, or certainly profitability. However, you do have one advantage as a farmer: cash accounting. In other words, you can prepay to legally delay your tax bill. As a farmer using cash (rather than accrual) accounting, you are allowed to prepay up to 50% of your total expenses each year, and even more in certain circumstances (see your tax advisor for complete tax rules). It’s easy to see how this could help your tax bill today, but what about in future years? Figuring just the interest on the money you will save, that’s a huge potential savings. For example, if you prepay $250,000, figure 25% income tax plus approx. 15% self-employment tax, that’s 40%. 40% of $250,000 equals $100,000. Let’s say you prepay that same $250,000 every year for 20 years. Using a 6% APR cost of money times 20 years times $100,000 equals a savings of $120,000 for your farm in interest alone just by delaying your tax bill because of prepaying.
PREPAY ALSO OFFERS SOME OTHER SIGNIFICANT BENEFITS FOR YOUR FARM SUCH AS:
- Locking in a supply of the best seed or short supply crop protection items.
- Huge prepay discounts on seed and other crop protection products.
- Early finance offers including some at 0% APR with no loss of early discounts.
- Rebates and tie-in offers that expire early or have a limited quantity.
- Making decisions early to reduce the stress of dragging things out.
The financial landscape in agriculture is challenging going into 2018. Prepaying this season may be more important than ever for your operation. Just make sure you ask the important questions BEFORE you prepay. These questions include topics such as returns, exchanges, price protection, interest on unused money, refunds, and the most important, the financial stability of your retailer. Prepaying is not without risk, but when used properly, it should be a money-maker for you.