Posts Tagged ‘taxes’

Spending Money to Save Money. Farm Style.

It’s a funny thing.  Spending money to save money, that is.  As consumers, it’s easy to get sucked in by marketing schemes such as “buy one, get one,” or “spend $100 and save $25.”  I’m pretty sure if you posses a debit card, you are guilty of buying stuff you weren’t planning on buying  just to “save money.”  And most of us get home after doing something like that and roll our eyes when we realize what we did.  Well, spending money to save money on the farm isn’t quite the same, but it’s a similar concept.

Instead of tying our money up in a Washington bureaucracy, we gave some to this farmer, for his tractor. And he is going to turn around and buy another tractor with it, stimluating the economy in our own way. 🙂

Well, if you’re a business owner, chances are you’re familiar with an accountant and tax accounting, and you see where I’m going with this.  A couple weeks before the end of the year, Justin and I paid a visit to our accountant.  We had what’s called a pre-tax planning session.  Essentially, the accountant looked at how much money we had taken in (income) and how much we had spent on business expenses.  Take the income minus the expenses, and you have our taxable income.  Taxable income is what Justin and I have to pay our family expenses such as food, shelter, and transportation.

We don’t get much control over the prices we receive for our crops and livestock, nor do we have a lot of control over the costs of caring for those crops and livestock.  This means our taxable income varies wildly from year to year.  Some years we will make a lot of money, other years we will make no money, and some years we will lose money.  In the years we make a lot of money, it is advisable to spend it on business expenses before the end of the year, to reduce our taxable income and therefore our tax bill.  In the years that we make no money or lose money, we will attempt to sell some crops or livestock before the end of the year to give ourselves some taxable income.  It is desirable to try to keep our taxable income with a reasonable range from year to year.  At least, that’s our philosophy.

Well, this year was a good year.  A very good year.  Our income was considerably higher than our expenses.  Which means we had to spend some money or give a huge chunk of it to Uncle Sam.

Think of it this way…

Instead of getting a tax refund, you owe the government $10,000 in taxes on April 15th.  But, you could invest $7500 in your IRA or 401K and only owe $2500 to Uncle Sam.  Which would you do?  Invest the money and pay $2500 or just give the whole $10,000 to help reduce the federal defecit?  I have a pretty good hunch that most would choose to invest in themselves.

So….we purchased a tractor and grain cart as opposed to sending an exorbitant amount of money to our representatives in Washington and Des Moines.  Don’t worry, we will still have a taxable income and will be sending in a healthy chuck of money to take care of our patriotic duty to pay taxes as well as operate our farm more efficiently.

See Russell down by the tire?? The grain cart we bought is huge!! It holds one and a half semi's worth of grain!

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The End of Year Paperwork Scramble

The filiing cabinet where I keep all our records.

On the farm, the end of the year is a hectic time because it signifies the end of the business year.  Much time is spent reviewing the past year’s expenses and income and compiling those numbers into reports.  Farming is a business,  it requires that we occasionally take time  to review such things.

Usually some time in November we will receive a big packet in the mail from our bank.  It includes two things.  A cash flow statement and a balance sheet.  They include figures we used last year, and blank spots to fill in for this year.

The bottom stack is expenses. The top stack is income. Isn't that just life??

The cash flow statement is a prediction of how much and when money will be spent and received over the next year.  Basically, a budget.  It is used to determine how much money we will need to “fill in the gaps.”  Some months on the farm, we spend way more than we bring in, and vice versa.  For the months where we are short of money, we use an operating line of credit at the bank to ensure that our bills are always paid on time.

So, we must review how much grain we have in the bins and when we will be selling it, same with the cattle.  And, we also have to predict how much we will be spending on things like feed and seed and when.

Then, the balance sheet.  It tells us how much our assets are worth and weighs our debt against that.  We must list out all of our livestock, land, grain, and equipment as assets, and then list out each loan we have against those things.  The difference between what we own and what we owe is called equity, or net worth.  Net worth is what the bank uses to determine how much money it is willing to loan us.  It also helps us determine how much money we are comfortable borrowing.  We won’t borrow more money than what our assets are worth.

Stuffed to the max! Glad I get to clean it out and start new.

So, as if that wasn’t enough to worry about completing, there is also tax planning to worry about.  We need to make sure we have all of the expenses we incurred and income we received recorded and compiled to take to the accountant.  He will then help us sort through it, and determine whether or not we should spend money or find some income before the end of the year, to keep the tax bill within reason.

My relationship with our accountant is definitely a love-hate relationship.  I hate the complexity of the tax system, and I love that he understands it so well and keeps us on the straight-and-narrow with Uncle Sam.  The accountant will also find helpful things in the tax code, such as rules that allow us to deduct IRA investments or health care expenses. He’s an excellent source of guidance when it comes to paying self-employment taxes and social security.  He’s pretty good at finding mistakes that I have made throughout the year in coding expenses and income too.

This is how I feel before paperwork.

This is how I feel after paperwork.

My relationship with bookwork, in general, is love-hate.  I dread the thought of sitting down and muddling through all of the paperwork and entering things into the computer, but once I get into it, I love knowing where we sit financially.  Sometimes it is comforting to see where the farm is financially, and sometimes it is concerning.  Either way, all the paperwork is a necessary evil on the farm, and I’m glad to have professionals like our accountant and banker to help us out with all of it.

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