Eas tax burdens with capital investments in 2011

With drought particularly bad in the Southwest, and exceptional drought—the most severe classification—having reached 75 percent of Texas, 52 percent of Oklahoma, and 48 percent of New Mexico in early August, many farmers are thinning herds and selling off cattle to take advantage of strong cattle prices.

But the cash generated may be counted as taxable income unless farmers take advantage of tax laws allowing up to a $500,000 deduction for qualifying equipment such as livestock handling equipment, hay trailers, fencing and corral materials. Currently, the $500,000 deduction is scheduled to drop to $125,000 in 2012, thus it is important to act in 2011.

“Farmers can minimize their taxes while maximizing economic gains through properly timed and structured expenditures,” says Ken Williams, CPA and Managing Director of Williams, Jarrett, Smith & Co., an accountancy corporation whose Tulsa, Oklahoma, office has experience in agriculture.

To the extent that farmers have taxable income, they can make capital expenditures as long as they are qualified longer-term investments that can be expensed out up to $500,000 to offset taxable income, as provided by Section 179 of the IRS tax code, according to Williams.

Although easing the tax burden is a legitimate goal, so too is finding capital expenditures that will deliver the most return.

“Right now, prices are excellent on everything made of steel from hay feeders, hay trailers, and flatbed trailers to livestock equipment, fencing and corral materials,” explains Bob Studebaker, owner of GoBob Pipe & Steel, a livestock equipment supplier. With the heat and drought, needed repairs and expansion of corrals and fences have been on hold for many operations, which in turn, has stabilized steel prices, Studebaker says.

“When the weather cools off, everyone will start playing catch up and the market demand will start driving prices up again,” he says.

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