With steel prices stabilized and $500,000 deduction available to farmers and ranchers for qualified capital expenditures, now might be the time for your customers to invest in their cattle working operations.
Having to buy hay to feed cattle through winter has always been costly, but prices are skyrocketing this year as drought-caused shortages threaten to raise prices to record levels. Alfalfa hay, for instance, has recently risen over 60 percent to almost $190 per ton, according to the U.S. National Agricultural Statistics Service.
With drought particularly bad in the Southwest, and exceptional drought—the most severe classification—having reached 75% of Texas, 52% of Oklahoma, and 48% of New Mexico by early August, many farmers are thinning herds and selling off cattle to take advantage of strong cattle prices.
But the cash generated from the sale will 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, this year. Currently, the $500,000 is scheduled to drop to $125,000 in 2012, thus it is important to act in 2011.
“Selling off cattle will often generate taxable income because the cows are usually fully depreciated, and their calves have no tax basis at all,” says Ken Williams, CPA and Managing Director of Williams,
Jarrett, Smith & Co., a nationally-focused accountancy corporation, whose Tulsa, Oklahoma office has particular experience in the agriculture, energy and mining industries. “Farmers can minimize their taxes while maximizing economic gains through properly timed and structured expenditures.”
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.
“Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment…purchased or financed during the tax year,” states Section 179.Org, a website designed to answer questions regarding the Section 179 Tax Deduction. “That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the full purchase price from your gross income. It’s an incentive created by the U.S. Government to encourage businesses to buy equipment and invest in themselves.”
Conserving Hay and Time
Although easing the tax burden is a legitimate goal, so too is finding capital expenditures that will deliver the most return now and into the future. A good example is a feeder that conserves the use of existing hay so that additional hay need not be purchased at inflated prices. Hay feeders are often purchased in the fall in preparation for the winter feeding months and, depending on the type of feeder, can reduce hay loss by 30%.
The problem with a traditional hay ring is that cattle stand outside the feeder, tear the hay out, and let the excess fall from their mouths. When cattle bite off too much, as they are inclined to do, the waste falls to the ground, gets trampled and otherwise damaged—and will not be eaten.
A new type of hay conserving bale feeder, however, is designed to keep cows from tearing out hay and wasting it.
“A hay conserving bale feeder must be designed with a shape and size that requires cattle to extend their necks to reach the hay inside,” explains Bob Studebaker, owner of GoBob Pipe & Steel, a livestock equipment supplier that first introduced its original Hay Conserver hay saving bale feeder to market about eight years ago. “With the hay bale inside, cows have to commit their heads inside and stay there while they eat. They won’t go in, get a bite, and back out. They stay in the feeder, so anything that drops out of their mouths stays in the feeder, which they eat later.”
With the rising cost of feed, fuel, fertilizer, labor, and land (which is often leased in disconnected parcels several miles apart), farmers need to minimize waste of these resources, in addition to their own time. Fortunately, the purchase of a labor-efficient hay trailer can be a tax-deductible expenditure.
For example, farmers or ranchers that want the speed and convenience of staying in their tractor or pick up while loading or unloading hay bales should consider self loading/unloading hay trailers.
Fencing, Corrals and other Cattle Working Equipment
Fall is also the ideal time for farmers to repair the cattle facilities that are needed to effectively care for and manage cattle. Because working facilities such as fencing, corrals, pens, gates, chutes, and alleys are often constructed of pipe, it’s important to get the best performance and value from it so it doesn’t wear out and have to be prematurely replaced, or even cause injuries to cattle.
Unfortunately, not all new pipe is created equal either. Vendors can vary widely in their definitions.
Wall thickness is another crucial factor in the fence selection process. It determines the price per foot, as well as what kind of function the pipe can perform. Some users are tempted to skimp on thickness to save a few dollars. That can be a big mistake.
According to Studebaker, farmers should act now because with the heat and drought throughout portions of the U.S. has put repairs and expansion of corrals and fences have been on hold, which has stabilized steel prices.
“That means that prices are excellent on everything made of steel from hay feeders, hay trailers, and flatbed trailers to livestock equipment, fencing and corral materials, and sheds, shelters, and barns,” says Studebaker. “As soon as the weather cools off, everyone will start playing catch up and the market demand will start driving prices up again.”