Beginners question about profit

[BeefmasterB]

I think you simply asses a fair market value to the retained heifers and then depreciate as any other cow.

You can only depreicate them if you bought them not raised them. I suppose you could sell them to your wife (sale) and buy them back (depreciatable).

Or have two dba's.? Sell from one to the other. Your absolutely right; I stand corrected, you cannot depreciate a heifer you raised. Fred's benefit in keeping the 10 heifers would be the money saved from not having to purchase 10 and also knowing exactly what he has in the quality of the heifers he raised.

 

[Brandonm22]

That's about right Hfs! Retained heifers become a capitalized expense. Any sales, regardless, are income.

Fred, I think you simply asses a fair market value to the retained heifers and then depreciate as any other cow.
That 1k loss you mentioned, along with all other expenses, will figure in against sales. Your year-end taxes will be on net gain after all expenses and depreciation.

You had better discuss that one with your CPA before you actually do that (so at least he knows what is going on). You expensed the hay, grain, and minerals her mom ate. You expensed every gram of fertilizer on her pasture, every morsel of feed she ever ate, every shot she ever received, her ear tag, her registration, her minerals, etc. You expensed ALL of your costs in making that heifer; and now suddenly you have $1000 invested in her too expense AGAIN???. How do you PROVE that? That is why I like old style Debit and Credit accounting. $1000 cows don't just magically appear without them appearing on the other side of the ledger. If the ledger don't balance, the ledger is wrong. That kind of garbage will slide by an auditor who isn't paying attention, doesn't know jack about ag. or is just SOFT; but if you draw somebody who knows what they are doing, takes their time, has audited a ranch before, and is just mean enough to call you on it they will catch that. The general rule of thumb is you can't depreciate breeding stock unless you have a recipt (and preferably a cancelled check too) showing where you bought the animal and how much you paid. Raised livestock were 100% expensed in the raising process thus you have absolutely NOTHING too depreciate. This is why Caustic Burno says you come out ahead selling all your heifers and buying somebody else's cows. I am not saying you can't get away with that; but there is risk involved......especially if there are other "irregularities" in your returns.

 

[Brandonm22]

I think you simply asses a fair market value to the retained heifers and then depreciate as any other cow.

You can only depreicate them if you bought them not raised them. I suppose you could sell them to your wife (sale) and buy them back (depreciatable).

Sell them through the yard as 5Star Ranch (I apologize to whoever really uses that name). Buy them back under your real ranch name, depreciate the purchase price, and pay the taxes on the receipt so you aren't doing anything ILLEGAL. I just hate giving the yard the extra commission, much less exposing my heifers too the stock at the yard.

 

[BeefmasterB]

How should the value of retained heifers be figured? Say you spent 1k more than you sold in calves and cull cows but retained 10 heifers.

Fred, after reviewing the following article again I might be more inclined to say it would have to be about quality of the heifers (since there's no real tax benefit); that is, will their quality produce more $'s than you spent raising them?

http://www.oznet.ksu.edu/library/agec2/mf2566.pdf

 

[Caustic Burno]

You can't depreciate a farm raised heifer as you have already depreciated all the cost of raising her. She has no value as far as tax purposes go unless you sell her. Trying to depreciate retained heifers could have you sleeping with Bubba or Tyrone.

 

[kenny thomas]

Surely no one sells in a fake name! :roll: ;-)

 

[Brandonm22]

Surely no one sells in a fake name! :roll: ;-)

There is nothing illegal about having multiple businesses / business names. Just make sure you pay all the taxes that are due at the end of the day.

 

[HerefordSire]

You can't depreciate a farm raised heifer as you have already depreciated all the cost of raising her. She has no value as far as tax purposes go unless you sell her. Trying to depreciate retained heifers could have you sleeping with Bubba or Tyrone.

Again, Douglas is the expert...but, I am pretty sure you can depreciate farm raised retained heifers, if.....

..there are remaining undepreciated capitialization costs as the result of cow sales that were orginally capitalized. The retained heifers fall under their ancestors cap costs. If all the original cows were sold prior to completing the depreciation schedule, and the heifers were under the umbrella, the retained heifers can be depreciated.

 

[HerefordSire]

I think you simply asses a fair market value to the retained heifers and then depreciate as any other cow.

You can only depreicate them if you bought them not raised them. I suppose you could sell them to your wife (sale) and buy them back (depreciatable).

I know you are joking dun and I know you know this but I figure I should nip this thought in the bud.

That may fall under a clause in the law where you can be guaranteed balanced meals and a roof over your head. There are legitimate ways to take full advantage of our tax laws. A good rule to go by is our conscience. There is a voice inside us, some more clear than others, that will check our logic. There are two types of voices.

In no way can conscience be comprimised because there is a mechanism in us to guarantee that we always pay for lunch. There are no free lunches.

 

[Douglas]

How should the value of retained heifers be figured? Say you spent 1k more than you sold in calves and cull cows but retained 10 heifers.

99.9% of farmer are on the cash basis for tax purposes. So for tax purposes their basis is zero and there is no depreciation.

If your are looking at "what is my profit" i would say their value is what you could have sold them for. I have no idea what hereford is talking about.

 

[Alberta farmer]

I guess farmers have to play whatever tax games work. I understand that, but it still doesn't explain the basic soundness of the business?
The fact is that cow costs $1000 for that cow whether home raised or bought. She does produce a calf that is income...minus all the costs associated with that production. Whether you own the land or not doesn't matter...you still need to get a return on the land you own? It is false economics if you think you don't need a return for your land, your cattle, your machinery, your labor, your management etc.?
The return on agriculture is poor for one simple reason...there are too many people who have no clue about what their costs are and the return on their investment! In others words they will work for free or worse, pay to work! That is the absolute truth. No other business in the world would, or could, operate like that.
Now without a doubt many farmers are worth a lot of money. I would suggest the majority of that money has come from an increase in land values...which is just peachy if they keep increasing...not so good if they head south?
If you own 1000 acres valued at $3K/acre you have $3 million in land. 200 cows equals $200K. Equipment another $300K. A total investment of $3.5 million! If you had that invested you sure should expect 5%/yr. or a return of $175K? Who makes a net return like that with 200 cows? And don't forget with your $175K you would be taking it easy on the beach instead of be out in a blizzard trying to feed cows!

 

[Brandonm22]

..there are remaining undepreciated capitialization costs as the result of cow sales that were orginally capitalized. The retained heifers fall under their ancestors cap costs. If all the original cows were sold prior to completing the depreciation schedule, and the heifers were under the umbrella, the retained heifers can be depreciated.[/i]

"If the original cows were sold prior to completing their depreciation schedule" you would deduct the remaining depreciation from their sale price.

Take this example; I buy a donor cow for $5000. IRS treats cows as 5 year property so I take $1000 back on my 2009 taxes. I do the same thing on my 2010 taxes. Then I sell the cow for $1000 in 2011 so I take a "$2000 loss" on my 2011 return on that cow.

 

[HerefordSire]

..there are remaining undepreciated capitialization costs as the result of cow sales that were orginally capitalized. The retained heifers fall under their ancestors cap costs. If all the original cows were sold prior to completing the depreciation schedule, and the heifers were under the umbrella, the retained heifers can be depreciated.[/i]

"If the original cows were sold prior to completing their depreciation schedule" you would deduct the remaining depreciation from their sale price.

Take this example; I buy a donor cow for $5000. IRS treats cows as 5 year property so I take $1000 back on my 2009 taxes. I do the same thing on my 2010 taxes. Then I sell the cow for $1000 in 2011 so I take a "$2000 loss" on my 2011 return on that cow.

That sounds correct. Any sales proceeds from breeding stock lowers the original capitilization cost. If there are remaining investment costs not depreciated as the result of receiving less for the cow than what was paid minus actual depreciation, then the heifers can be depreciated.

 

[Brandonm22]

The return on agriculture is poor for one simple reason...there are too many people who have no clue about what their costs are and the return on their investment! In others words they will work for free or worse, pay to work! That is the absolute truth. No other business in the world would, or could, operate like that.
Now without a doubt many farmers are worth a lot of money. I would suggest the majority of that money has come from an increase in land values...which is just peachy if they keep increasing...not so good if they head south?
If you own 1000 acres valued at $3K/acre you have $3 million in land. 200 cows equals $200K. Equipment another $300K. A total investment of $3.5 million! If you had that invested you sure should expect 5%/yr. or a return of $175K? Who makes a net return like that with 200 cows? And don't forget with your $175K you would be taking it easy on the beach instead of be out in a blizzard trying to feed cows!

IF you had $3 million in land and $3 million in certificates of deposit and all the land did was cover your property tax and maintenance costs in ten years time the $3 million in land SHOULD (based on historical performance) be worth $5,372,543 (at 6% appreciation per year). The cash on the other hand growing at a rate of only 2% interest (the current rate here) and paying 35% on that interest in income taxes would only have grown to $3,216,740 in the same time IF you did not blow the money at the beach!

 

[Douglas]

I have done a little research in my trusty master tax guide and i would like to amend my earlier comments.

Uniform capitalization rules (what and how you accumulated cost to value your inventory at yearend) apply to heifers only if the farmer is subject to accrual accounting (rare) or the pre-production period (time before the first calf) is greater than two years. So the only way I see that most cattle farmers would be required to capitalize any cost (calculate a value for replacement heifers) is the 24 month rule. If you generally breed heifers at 14.5 months or earlier then the rules don't apply. If the rules don't apply you can expense all your cost the year spent rather than allocate some of that cost to raising your heifer inventory.

I saw a few discussion on the web from university types suggesting that most beef cattle would have a longer than 24 month pre-productive period which surprised me. When I looked at this rule years ago, I think I assumed the 24 month rule was in place to keep replacement heifers from counting, maybe I was wrong.

That being said, I not familiar with any rules that would allocate any of this capitalization from mother to daughter but i'll listen to others here. Seems to me the mom is depreciated and anything not depreciated out by the time she is sold is written off against the sales price and results in a capital gain or loss.

So is the pre-productive period for heifers generally more or less than 2 years???

 

[Brandonm22]

I saw a few discussion on the web from university types suggesting that most beef cattle would have a longer than 24 month pre-productive period which surprised me. When I looked at this rule years ago, I think I assumed the 24 month rule was in place to keep replacement heifers from counting, maybe I was wrong........
So is the pre-productive period for heifers generally more or less than 2 years???

It would (hopefully always) be MORE than 24 months. She might have a calf at 23 or 24 months; but it takes another ~205 days for her to raise that calf to a marketing normal weight. She hasn't returned a single dollar until that ~7 month old calf reaches the sale barn.......a ~31 months interval from her birth........a 40 month interval from when your bull bred her dam.

 

[Douglas]

I saw a few discussion on the web from university types suggesting that most beef cattle would have a longer than 24 month pre-productive period which surprised me. When I looked at this rule years ago, I think I assumed the 24 month rule was in place to keep replacement heifers from counting, maybe I was wrong........
So is the pre-productive period for heifers generally more or less than 2 years???

It would (hopefully always) be MORE than 24 months. She might have a calf at 23 or 24 months; but it takes another ~205 days for her to raise that calf to a marketing normal weight. She hasn't returned a single dollar until that ~7 month old calf reaches the sale barn.......a ~31 months interval from her birth........a 40 month interval from when your bull bred her dam.

I believe you are correct.
The more i read the rule the more it looks like you should be inventorying retained heifers at 12/31 each year at an estimate of the cost to raise them. Then increase it the next year if they have not produced a calf. They the following year, if they produced a calf, begin depreciation them as of the date the calf was sold. I am going to keep looking because i have been doing it wrong.

 

[Alberta farmer]

Brandon: I don't think I said land isn't a good investment? In fact I said the majority of a farmers assetts probably come through land appreciation?
Obviously a 6% return is a fairly decent return at this time. Will that rate remain the same? Go higher? Shrink? I truly don't know. I suspect however if anyone owns land that you are still paying for and if you don't have that rate locked in long term, they could be in for a big surprize by next year?
In the early 1980s interest rates took off....a lot of landowners couldn't deal with 24% interest rates and lost their shirts. And incidently land prices did drop for awhile because who in their right mind would borrow money to buy overpriced land at 24% interest.
Consider this: If you could get $60/acre rent and your 6% increase on that 1000 acres at $3000/acre land in one year you would haul in $240,000 on paper and still have your cow and machinery money in your pocket? Might be able to sit on the beach after all!

 

[Brandonm22]

I did not say whether it was better to ranch and farm it yourself or lease it out. That is a whole different argument and requires a lot of individual details and really depends on whether or not you can find somebody who will pay top dollar rates for your ground or not. Now if you are going to tell me that you want to be LONG in cash, I got 10 reasons why THAT will underperform versus other asset classes beginning with taxes and ending with inflation.

 

[talldog]

Great Posts !!! Have changed my mine on some things !! :tiphat: