Calculating profit

[herofan]

I'm not sure if I'll be able to put into words what I'm really trying to ask, but a recent conversation with another farmer showed me how much differently one looks at things when it's paying cash vs being in debt.

My brother and I bought 16 heifers in December 2011 to start a cow/calf operation(I know, most would recommend buying older cows, but that's another thread). Anyway, we pay out of our pocket for everything. The bummer is that even though we will have "income" next year, it will take another year or two to actually make back our investment for the cost of the heifers, and ongoing cost of hay, fuel, etc. Once that is made back, however, we will be able to show an actual profit. The way I see it, if all my heifers are belly-up tomorrow, that is bad and a great loss, but it ends there. I don't have to worry about paying the bank off.

On the other hand, I know some farmers who never seem to be out of debt, but they don't seem to mind. They don't care if they owe a million dollars, just as long as they have a manageable payment, and their income for the year is greater than their payments, they seem to be riding high. My brother and I are always saying, this or that for the farm would be nice, but it costs money, and we can live without it. Others are always buying a new tractor or something to keep the debt rolling. If a person is never out of debt, do you ever truly make a profit?

 

[Dave]

You certainly can carry debt and make a profit. The only thing debt adds to your bottom line is the amount paid in interest. A quick look at my interst on my little cattle loan show that I will be paying about $1,600 in interst this year. Now if I were entirely on my own money I would make $1,600 more this year. But I would also have less cattle and thus less profit. As long as you have the cash flow to cover it and the guts to do it, being in debt allows you to do things that you might not otherwise been able to do. That said, never gamble more than you are willing to lose.

 

[herofan]

You certainly can carry debt and make a profit. The only thing debt adds to your bottom line is the amount paid in interest. A quick look at my interst on my little cattle loan show that I will be paying about $1,600 in interst this year. Now if I were entirely on my own money I would make $1,600 more this year. But I would also have less cattle and thus less profit. As long as you have the cash flow to cover it and the guts to do it, being in debt allows you to do things that you might not otherwise been able to do. That said, never gamble more than you are willing to lose.

I suppose that technically one makes a profit, but I'm slowly chipping away at a lot of debt to maintain something just feels scarier than if it were in the clear. I was just raised in a family that didn't do debt. My grandfather farmed and i don't think he ever owed a dime, but as you might suspect, he didn't have thousands of acres and hundreds of cows; it was what he could manage. I just wanted to hear other opinions. My brother and i have considered some debt, but it just doesn't seem worth it to us.

 

[cow pollinater]

Taxation plays a huge role in a lot of money decisions. Sometimes it makes more sense to spend money than it does to pay down debt.

 

[herofan]

Taxation plays a huge role in a lot of money decisions. Sometimes it makes more sense to spend money than it does to pay down debt.

That may be true in some cases, but I think people often over-rate tax deductions and such. I had a friend in the tax-preparation business a few years ago, and he said people have some really weird ideas about how taxes work, even business men. He said some people think the world revolves around a tax right-off, and that some will hang on to debt just to be able to get a deduction. For me, cash availability is more of a daily concern than a tax deduction, and the deductions aren't usually as life-changing as people claim.

I've actually known people to buy something they really didn't need just so they could get some kind of tax deduction, however, if they hadn't bought it, they wouldn't get the deduction, but they also wouldn't have had the expense. I've never really understood the concept of spending $20 so i can get $5 given back at some point. Why not just keep the $20?

 

[orton]

herofan, I sure hope that you will reach the income levels that will put you in the top 10%, or even 1%. This tends to generate a little different viewpoint. Let's say you get there, and have a solid six figure tax bill and you're in the 48% bracket, you could buy 10,000 gals. of fuel for about forty thou. and reduce your tax bill by about twenty thou. in last FY. Sure, you have to cough up an extra forty, but you just saved half of that and didn't do your whole part to fund the gubment. ;-) FWIW, stay debt free. Cheers.

 

[Jogeephus]

Herofan, FWIW, I share your feelings. Before I stick my neck in the banker's noose there are a few questions I ask before I do so. I had an older and very successful farmer and businessman tell me to never chase deductions and that having to pay taxes is a good thing because it shows you are making money. He said you should never rationalize a purchase or a debt based on a deduction. I have followed this advice and I don't regret it.

 

[gonzo]

Got to agree with Joe Hero fan . I only use credit when I have too. Even then I shop around. :2cents:

 

[herofan]

herofan, I sure hope that you will reach the income levels that will put you in the top 10%, or even 1%. This tends to generate a little different viewpoint. Let's say you get there, and have a solid six figure tax bill and you're in the 48% bracket, you could buy 10,000 gals. of fuel for about forty thou. and reduce your tax bill by about twenty thou. in last FY. Sure, you have to cough up an extra forty, but you just saved half of that and didn't do your whole part to fund the gubment. ;-) FWIW, stay debt free. Cheers.

But as you said, you had to cough up an extra 40 to save 20. That's doesn't make sense to me. Am i missing something. Aren't deductions the result of spending and often paying interest? If I have to pay on something and I get a deduction, so be it, but why spend or borrow for the sake of a deduction? For example, some people go nuts over a mortgage deduction; if i buy a house for $100,000 and mortgage it for 30 years at 4%, by the end of the 30 years, I would have paid an extra $72,000 in interest. :shock: It would make sense to me to pay it off as quickly as possible and save the interest regardless of what I count off on taxes.

 

[Caustic Burno]

herofan, I sure hope that you will reach the income levels that will put you in the top 10%, or even 1%. This tends to generate a little different viewpoint. Let's say you get there, and have a solid six figure tax bill and you're in the 48% bracket, you could buy 10,000 gals. of fuel for about forty thou. and reduce your tax bill by about twenty thou. in last FY. Sure, you have to cough up an extra forty, but you just saved half of that and didn't do your whole part to fund the gubment. ;-) FWIW, stay debt free. Cheers.

But as you said, you had to cough up an extra 40 to save 20. That's doesn't make sense to me. Am i missing something. Aren't deductions the result of spending and often paying interest? If I have to pay on something and I get a deduction, so be it, but why spend or borrow for the sake of a deduction? For example, some people go nuts over a mortgage deduction; if i buy a house for $100,000 and mortgage it for 30 years at 4%, by the end of the 30 years, I would have paid an extra $72,000 in interest. :shock: It would make sense to me to pay it off as quickly as possible and save the interest regardless of what I count off on taxes.

I hear it everyday people saying i am buying a 40,000 dollar tractor to write off on taxes.
I have never been able to wrap my head around spending 40,000 to save 4,000 dollar's in taxes.
This is a great deal if you need a new tractor, buying one to write off on taxes is failing the IQ test IMO if you don't need a new tractor or whatever. My bank account is 36,000 in the hole the way I see it.
If the Mrs. and I don't have more money in the bank at the end of each year I view it as we lost money.
If you borrow to purchase anything this is even worse you don't own it you are renting.
A lot of this goes back to being raised by a different generation that saw people loose everything because of debt.
You would think with the current situation of the country it would scare the crap out of people to borrow. I operate under the philosophy if I don't have the cash we don't need it.
I shot the I Want's years ago.

 

[Isomade]

I agree with the no debt crowd. However the tax issue is a completely different deal depending on 1) Amount of taxes owed 2) how close you are to the next tax bracket 3) size of your bank account.

 

[Caustic Burno]

I agree with the no debt crowd. However the tax issue is a completely different deal depending on 1) Amount of taxes owed 2) how close you are to the next tax bracket 3) size of your bank account.

We could discuss that as well. If you are going to bust the 250,000 bracket it might pay off over the write off years.
It all come's back to your # 3 item size of your bank account. Is it going to grow because of the purchase.
That is like I hear the old arguement my net worth as has increased, you can't buy grociers with net worth unless you sell it. Then the problem is you have to find someone to buy it. This is like the guy bragging about his 5,000 dollar Angus bull that is only worth a dollar a pound at the sale barn.

 

[TexasBred]

I agree with the no debt crowd. However the tax issue is a completely different deal depending on 1) Amount of taxes owed 2) how close you are to the next tax bracket 3) size of your bank account.

We could discuss that as well. If you are going to bust the 250,000 bracket it might pay off over the write off years.
It all come's back to your # 3 item size of your bank account. Is it going to grow because of the purchase.
That is like I hear the old arguement my net worth as has increased, you can't buy grociers with net worth unless you sell it. Then the problem is you have to find someone to buy it. This is like the guy bragging about his 5,000 dollar Angus bull that is only worth a dollar a pound at the sale barn.

Too many people buy equipment solely for its tax-deductibility. Equipment should be bought only for need and any tax savings is a bonus. Watch those slick salespeople trying to entice entice you with the tax benefits of their products. :lol2: Real Tax Gurus...You don't go spending money just to save taxes on it. That being said I can also certainly see where it could be a very advantageous move to make a major equipment on borrowed money from time to time, but again "only out of need" for the equipment.

 

[cow pollinater]

I agree with the no debt crowd. However the tax issue is a completely different deal depending on 1) Amount of taxes owed 2) how close you are to the next tax bracket 3) size of your bank account.

I'll add timing to your list.
In my case, I have mortgages on a few places(and that is my only debt, period ). Each of them is between 10-30%of the value of the property. I also have a high income job that I don't forsee doing long term.
Lets say for example I save $130,000 to pay off the mortgage on a piece of ground that I own. I can pay that place off and then turn around and have to give $52,000 to the government since paying debt is not tax deductable, or I can purchase another property for somewhere around $130,000 for cash that will pay the mortgage on the original property until such time as my income puts me in a lower tax bracket and not have the tax burden the following year.

 

[TexasBred]

I agree with the no debt crowd. However the tax issue is a completely different deal depending on 1) Amount of taxes owed 2) how close you are to the next tax bracket 3) size of your bank account.

I'll add timing to your list.
In my case, I have mortgages on a few places(and that is my only debt, period ). Each of them is between 10-30%of the value of the property. I also have a high income job that I don't forsee doing long term.
Lets say for example I save $130,000 to pay off the mortgage on a piece of ground that I own. I can pay that place off and then turn around and have to give $52,000 to the government since paying debt is not tax deductable, or I can purchase another property for somewhere around $130,000 for cash that will pay the mortgage on the original property until such time as my income puts me in a lower tax bracket and not have the tax burden the following year.

CP in your example you're just swapping the debt from one piece of property to the other and accomplishing nothing other than freeing up what I assume to be a much larger or much more valuable piece of property from any lien.

 

[cow pollinater]

CP in your example you're just swapping the debt from one piece of property to the other and accomplishing nothing other than freeing up what I assume to be a much larger or much more valuable piece of property from any lien.

Nope, Either I didn't make it clear enough or you're reading it wrong. I'm saying with cash in hand and a choice between paying a mortgage off and a high tax penalty the following year or purchasing another piece of ground which is deductible it makes more sense right now to buy more ground.
Yes, I will eventually pay a tax burden on paying the debt of the first property, but I can do it at a much lower rate by waiting.
Interest also factors in, but I like my banker so I don't mind him getting a little money out of me.

 

[Caustic Burno]

I agree with the no debt crowd. However the tax issue is a completely different deal depending on 1) Amount of taxes owed 2) how close you are to the next tax bracket 3) size of your bank account.

I'll add timing to your list.
In my case, I have mortgages on a few places(and that is my only debt, period ). Each of them is between 10-30%of the value of the property. I also have a high income job that I don't forsee doing long term.
Lets say for example I save $130,000 to pay off the mortgage on a piece of ground that I own. I can pay that place off and then turn around and have to give $52,000 to the government since paying debt is not tax deductable, or I can purchase another property for somewhere around $130,000 for cash that will pay the mortgage on the original property until such time as my income puts me in a lower tax bracket and not have the tax burden the following year.

Property has no value unless you sell it. Property doesn't alway's go up as I have seen a couple three bust in my lifetime.
This is just like the cow in your pasture that is not producing it is a liability that cost you yearly to maintain.
I too had a high paying job and was one of the 5 percent for year's. Taking on debt to avoid taxes is a shell game, the piper will be paid by you or your heir's. I would rather pay my taxes than defer the taxes they have never went down in my lifetime. You have never seen an Armored Truck following a hearse.
No matter how you want to argue this you are only worth how thick your billfold is and how much train riding ticket money you can pull out.

 

[herofan]

CP in your example you're just swapping the debt from one piece of property to the other and accomplishing nothing other than freeing up what I assume to be a much larger or much more valuable piece of property from any lien.

Nope, Either I didn't make it clear enough or you're reading it wrong. I'm saying with cash in hand and a choice between paying a mortgage off and a high tax penalty the following year or purchasing another piece of ground which is deductible it makes more sense right now to buy more ground.
Yes, I will eventually pay a tax burden on paying the debt of the first property, but I can do it at a much lower rate by waiting.
Interest also factors in, but I like my banker so I don't mind him getting a little money out of me.

Would you make that purchase even if you didn't need or want the land just to have a tax break?

What about the amount you were paying each month that you now get to keep and the interest you no longer have to pay? Doesn't that count for something? I like my banker too, but not that much.

 

[backhoeboogie]

There's a difference between turning a profit, and playing games.

If I can go in debt and turn a profit and repay that debt, I am okay with going into debt.

CB is on the money with people spending money to keep from paying a light amount of taxes. His example was $40K to save $4K. People do that. People do stupid things.

I buy a new truck every 6 years or so. If I would have put that money in land it would appreciate in value. Or atleast break even and hold its value. The truck depreciates. It is a losing purchase. Unless I legitimately make money with the truck and the profit outweighs the expense. I have never done that.

My tractor cost me $5K plus $200 in parts to fix and lots of hours labor. I was offered $13K for it a month later. I gotta have it. It has a 102 horse PTO on it. It is an old Massey and it aint pretty or air conditioned but it gets the job done.

I think some folks get a wild hair for a new tractor and justify it mentally as a write off. Just as CB described. I have never done it. I do buy a new truck every so often.

Capital gains are another issue. I make little profit but my net worth has swollen tremendously. Mostly from land. Buying things below market price etc. As CB said, it aint profit until you sell. If I cash in Uncle Sam is going to take a huge cut in capital gain taxes.

I do things different than most on this forum. I have a fixed budget and cannot go beyond that budget for meds, feed, fence, fuel, tires etc. Everything that goes into the cattle has to be within budget. Even emergency issues. Carry over is carried over and that money can be used for "extras" (and written off).

A welding machine is an awesome investment. Especially if you are going to take trash and wore out equipment and turn it to treasure. I could probably make a living fixing up old junk equipment and selling it.

 

[Brute 23]

On the other hand, I know some farmers who never seem to be out of debt, but they don't seem to mind. They don't care if they owe a million dollars, just as long as they have a manageable payment, and their income for the year is greater than their payments, they seem to be riding high. My brother and I are always saying, this or that for the farm would be nice, but it costs money, and we can live without it. Others are always buying a new tractor or something to keep the debt rolling. If a person is never out of debt, do you ever truly make a profit?

That is why there are fewer and fewer farmers every year. ;-)

Yall are dead on. Keep it up. Loans cost money. That is another expense cutting in to your profit. Plus, debt adds risk and effects the way you do business. Ask these guys who have loans on equipment, land, cattle how that looks when your in a 5yr drought and at less than 50% herd capacity. How much revenue did you base you loans off of? Luckily this drought we are seeing $1+ prices... it wasn't long ago we had a drought and $.80. That is what seperates the people who run cattle for generations and those who talk about the farm they grew up on that is no more.

Just another way to look at your investment. If you spend $20K on heifers... 20 heifers @ $1K ea. You take the gross revenue, subtract the expenses. You can also calculate how much they generated for you, more like a stock. They only have to generate $2K profit to give you a 10% return on investment... which is simular to what you would get in the stock market.

If you get a great deal on heifers. You can calve them once or twice and then sell them as 3 or 4 years olds. There is the potential to make gains on the principal (original cost of heifers vs price sold as 3 or 4 year olds)... plus you generated income off the calves.