Producers are Flying High on Depreciation
In my last column I discussed how producers are utilizing appreciation of assets as a tool for growing and financially leveraging the business. These past few years with the very lucrative tax laws that allow accelerated depreciation, producers are using it as a tool for capital expansion.
Like appreciation, using depreciation write-offs to minimize Uncle Sam’s tax bite can be a powerful incentive in the management toolbox. By reducing taxes, short run cash flow is directly improved, which is useful for down payments, the repayment of debt or the cash acquisition of assets.
Where the strategy runs afoul is in those years the depreciation laws are changed, or should the producer have back-to-back marginally profitable years, in which there is little incentive to acquire assets, thus eventually running out of the depreciation.
This in turn increases the taxes paid and the cash withdrawal from the business in the years the business can least afford it. Currently we are seeing this strategy being used on many of the poultry farms in the South where large amounts of depreciation can be capitalized quickly on the buildings. Once gone, the producer has the choice of more investment and depreciation or paying taxes.
Another challenge is that the tax depreciation strategy can load the producer up with unproductive capital assets that can slow asset utilization, a key to profits.
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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