In volatile years, cash is king. Headed into 2016 farmers should be cautious of stressing working capital and one easy way to do that is to have too much tax liability.

With the possibility that 2016 might not be all rainbows and butterflies, working capital is expected to be a big deal next year. While it’s too late to get more cash if you don’t have enough, you can avoid spending more of it on your taxes. Farmers should look for ways to reduce liability without impacting working capital says Bob Milligan a Senior Consultant with Dairy Strategies LLC.

“If next year is really going to be bad, and everybody thinks it is,” he says, “assuming we want to prepare for a really bad year, we certainly don’t want to use working capital to pay taxes.”

While Milligan advises it’s a good year to spend down your tax liability, it’s not the year to buy a new tractor unless you really need it.

“Don’t buy a new tractor to minimize tax takes,” he says.  “That would be really bad because it would reduce working capital and increase the demand on working capital next year.”

Milligan says that as a general rule, farmers should never make capital purchases to reduce taxes if they anticipate a cash crunch the following year. He recommends turning to inputs like feed because you’re going to buy them anyway.

“You’re going to have to spend the cash sometime,” he says, “so you could spend it now and get a good deal or reduce your tax liability. You haven’t reduced your working capital.”

Bryan Doherty of Stewart-Peterson LLC says natural gas is an area corn farmers could look at if they hope to secure inputs for next year.

Milligan’s best advice to farmers going into 2016, “Make purchases of short term current assets very judiciously and be very careful with capital investments.”

Source – Dairy Today