The quote of quotes in my seminar series last year came from a producer in Rochester, MN. He said, “You will never go broke paying income taxes.” Since we are in the midst of tax season, let’s drill down and examine his thoughts.
First, I have been burned too often in my lifetime, so I will never say never. However, this producer’s thought has validity in most circumstances. First, if you pay income taxes, regardless of whether you are on a cash or accrual accounting basis, it generally means you have had a profitable year. However, one must examine the profits to determine if it is a trend recurring over a period of time or a one-time occurrence.
A producer could go broke by selling capital assets, such as machinery, livestock or land, and pay income taxes, but erode the income-generating asset base. Another situation could be the one-time sale of inventory, such as livestock or grain, which could result in a sum of income that would be taxable if there were no offsetting expenses.
A producer could elect not to upgrade machinery, structures and facilities, resulting in little or no depreciation expense. While they may pay income taxes, they are not replacing capital assets vital to the competitiveness and success of the farm. This sometimes happens to children taking over the family business from parents and grandparents who were profitable but living off the depreciation, placing the children in a challenging situation.
This being said, paying income taxes as a trend is an indicator of success, particularly to lenders and other creditors. Profits, when not spent on living withdrawals, can lead to earned net worth or retained earnings on the business balance sheet. Paying income taxes allows one to build cash to take advantage of opportunities and qualify for long-term retirement accounts. After-tax profits can be used to build financial liquidity and the financial fortress for opportunity.
All in all, I agree with the producer and his quote: “You will never go broke paying income taxes.”
Editor’s note: Dave Kohl, Corn & 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. He can be reached at [email protected].