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A griculture & B usiness M anagement

A griculture & B usiness M anagement

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A griculture & B usiness M anagement

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  1. Agriculture &BusinessManagement Economic & Financial Considerations Due to Drought Jeffrey E. Tranel Agricultural & Business Management Economist jtranel@colostate.edu

  2. A Few Basic Questions? 1. Where were you on January 1, 2002?

  3. A Few Basic Questions? 1. Where were you on January 1, 2002? 2. How did you respond to the drought?

  4. A Few Basic Questions? 1. Where were you on January 1, 2002? 2. How did you respond to the drought? 3. Why did you respond as you did?

  5. A Few Basic Questions? 1. Where were you on January 1, 2002? 2. How did you respond to the drought? 3. Why did you respond as you did? 4. Where are you now?

  6. A Few Basic Questions? 1. Where were you on January 1, 2002? 2. How did you respond to the drought? 3. Why did you respond as you did? 4. Where are you now? 5. Now what should you do?

  7. Where Were You on January 1, 2002? Personally? • Age. • Health. • Children. • Retirement. • Other.

  8. Where Were You on January 1, 2002? Personally? Managerially? • On target. • According to plans. • Herd development. • Properly stocked. • Labor resource. • Machinery, buildings, fences. • Other.

  9. Where Were You on January 1, 2002? Personally? Managerially? Financially? • Balance sheet. • Net worth. • Ratio analysis. • Current with loans.

  10. How Did You Respond to the Drought? According to plans? • Herd development. • Herd size. • Marketing.

  11. How Did You Respond to the Drought? According to plans? Feed? • Purchased additional feedstuffs. • Moved cows to another state. • Sold excess feed.

  12. How Did You Respond to the Drought? According to plans? Feed? Cattle? • Some cows. • Deeper culling. • Retained only very best females. • Sold cows, kept heifers. • Sold all cattle. • Purchased cattle.

  13. Why Did You Respond As You Did? Personal situation. Goals (plans). Financial situation. Lender. Taxes. Pasture/Feedstuffs.

  14. Where Are You Now? • According to plan. • Wondering.

  15. Where Are You Now? • Wondering. • According to plan. • Better off financially. • Worse off financially.

  16. Where Are You Now? • Wondering. • According to plan. • Better off financially. • Worse off financially. • Better off personally. • Worse off personally.

  17. Where Are You Now? • Wondering. • According to plan. • Better off financially. • Worse off financially. • Better off personally. • Worse off personally. • All fences and buildings repaired. • Pastures rested.

  18. Where Are You Now? Lender accepted management plan.

  19. Where Are You Now? Lender accepted management plan. Taxes paid. Tax liability exists (1033e, 451e, other).

  20. Where Are You Now? Lender accepted management plan. Taxes paid. Tax liability exists (1033e, 451e, other) Retired. Out of ranching but still working.

  21. Financial Situation Due to 2002 Drought

  22. Remember: With no farm profits and no other income, there is no money for principal repayment, family living, investments, etc.

  23. Comment by Old Timer: “My Biggest Tax Problem Is Not Paying Enough Taxes!”

  24. Have Carry-Over Sales? If have “carry over” income and little/no profits, may want to recognize such income to offset current year expenses. • rather than continuing to carry forward income. • rather than pre-paying expenses.

  25. Other? • Do not elect accelerated depreciation. • Use other profits to offset farm losses.

  26. Livestock ProducersFeed Assistance Program • Such payments must be included in the year of receipt.

  27. Livestock Producers IRS Code Sections 451(e) and 1033(e). • Requirements of taxpayer. • Qualified farmer. • Uses cash method of accounting. • Sale would not have occurred except for drought.

  28. Tax Code Section 451(e) • Primarily for sales of market/feeder animals. • Allows for deferring recognition of forced sale income to the following year. • Livestock sold due to drought, flood, or other weather related conditions. • Area must be designated as eligible for assistance by the federal government.

  29. Tax Code Section 1033(e) • Allows for the non-recognition of the gain on the sale of breeding livestock. • Horses qualify if used for draft, breeding, or dairy. • Poultry is expressly excluded from livestock. • Animals sold in excess of normal numbers due to drought (involuntary conversion).

  30. Replacing Property Lost Due to Involuntary Conversion • Replacement property must be purchased. • The taxpayer's basis in the property is its cost. • Replacement property acquired by gift, or tax-free exchange, is not eligible for deferral. • Since the basis of the property is not cost. • Must be similar or related in service or use. • Functions in the same way. • Breeding cow and dairy cow do not qualify.

  31. Replacing Property Lost Due to Involuntary Conversion If reinvestment in similar use property is not feasible because of soil or other environmental contamination, Livestock may be replaced by other property “used for farming purposes.” Toxic chemicals are the contaminant. Brucellosis infected cattle do not qualify (bacterial).

  32. Replacing Property Lost Due to Involuntary Conversion The converted property must be replaced within a two-year period. • The period ends two years after the close of the first taxable year in which any part of the gain on the conversion is realized. • Replacement of the converted property must be completed by the end of the period. Sales in 2002 = Replacement by 31 Dec 2004

  33. Contact A Tax Professional • Competent. • Understands your situation. • Business. • Finances. • Business goals. • Personal goals. • Personality.

  34. Now What? • “To restock or not to restock?” • Possible solutions.

  35. Now What? • Restock. • Herd back to original size. • New herd smaller than original. • Slowly. • Quickly.

  36. Now What? • Re-stock slowly. • Buy a few cows each year. • Buy heifers rather than cows. • Run yearlings, then cows. • Convert to yearlings only.

  37. Now What? • Re-stock quickly. • Full AUMs with cows. • Full AUMs with heifers. • Buy cows to replace open heifers. • Buy heifers to replace open heifers. • Yearlings then cows.

  38. How/What to Produce? and For Whom? • Production environment. • Marketplace.

  39. Cash Receipts Bureau of Economic Analysis Farm Income and Expenses

  40. Cash Receipts: Livestock and L/S Products Bureau of Economic Analysis Farm Income and Expenses

  41. Cash Receipts: Miscellaneous Income Bureau of Economic Analysis Farm Income and Expenses

  42. Total Receipts and Other Incomes Bureau of Economic Analysis Farm Income and Expenses Bureau of Economic Analysis Farm Income and Expenses

  43. Cash Expenses: Livestock Purchased Bureau of Economic Analysis Farm Income and Expenses

  44. Cash Expenses: Purchased Feed Bureau of Economic Analysis Farm Income and Expenses

  45. Cash Expenses: Petroleum Bureau of Economic Analysis Farm Income and Expenses

  46. Cash Expenses: Hired Labor Bureau of Economic Analysis Farm Income and Expenses

  47. Cash Expenses: Other Production Expenses Bureau of Economic Analysis Farm Income and Expenses

  48. Cash Expenses: Total Expenses Bureau of Economic Analysis Farm Income and Expenses

  49. Cow Calf Returns & Cattle Inventory July 2002