“Reducing Debt Means Paying Taxes”
The phrase above titled a slide in a PowerPoint presentation by Tina Barrett, director of Nebraska Farm Business Inc. (NFBI), as part of a webinar sponsored by the Center for Agricultural Profitability at the University of Nebraska-Lincoln. NFBI provides a variety of business, financial, and tax analysis services to assist agricultural producers. The webinar and an accompanying article provided aggregated 2021 financial results for clients of NFBI and explored the subject of tax planning for agricultural producers this year.
Barrett’s point with the title is that sometimes farmers and ranchers are better off paying income taxes and paying down debt to preserve liquidity instead of taking steps to reduce or delay taxes. Last year was a profitable one for most agricultural producers. Barrett reports her clients saw “the largest net farm income on record for the Nebraska Farm Business averages.” As a result, farmers experienced a much-needed improvement in liquidity. Figure 3 plots annual working capital to gross revenue ratios for NFBI clients since 2012. The improvement in the ratio (the expanding green area in the bars) the past two years is evident. High input costs, though, may strain liquidity levels in 2023 if commodity prices do not remain high. If prices decline, maintaining liquidity will be important.
Figure 3. Working Capital to Gross Revenue
Barrett says farmers she works with saw the largest increase in the value of inventory (grain and livestock) carried into 2022 than ever before. Income this year is not expected to match last year’s levels, but it is expected to remain above average. The carryover inventory and above average income means tax planning will be important. Barrett believes tax management strategies employed during periods of high farm income in the early 2010s—buying equipment, prepaying expenses, and sometimes taking on more debt to cover purchases—contributed to liquidity problems between 2015-2019. These tax strategies might make for good decisions in the short-term, however, they can cause problems in the long-term. Producers might be better off from a liquidity perspective paying income taxes and using dollars to pay down debt. If the agricultural economy falters, the operation has less debt, more liquidity, and is not looking at a delayed tax bill.
Each farm and ranch operation is unique and appropriate tax and financial strategies differ for each operation. Barrett’s presentation and article provide “food for thought” for producers and their financial advisors to consider regarding tax planning. Barrett’s article and webinar can be found at: https://cap.unl.edu/finance/2021-nebraska-farm-business-average-review-july-14-2022-webinar.