Adjusting cow-calf inventory value can pay off in the future

Making this adjustment during an unprofitable or low-profit year 
can save taxes when cattle prices go up again

Cow-calf producers should consider taking advantage of the optional inventory adjustment, says a provincial farm business management specialist.

“Economic returns for cow-calf operators this year will probably not be all that profitable,” said Ted Nibourg. “High feed costs in the winter of 2015 coupled with reduced calf prices this fall may result in negative margins for some producers and sharply reduced income for others.”

Cattle prices go through a cycle but are expected to increase over time. And because they tend to plateau at a higher level after peaking, producers can be proactive in dealing with the tax implications of increased profits, said Nibourg.

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“Using the optional inventory adjustment can help reduce tax payable in years of higher returns,” he said. “Farmers using the cash basis of accounting can include in their income any amount up to the fair market value of their inventory. This will result in an equivalent deduction in subsequent years when income is higher. The bump-up can not only move net farm loss to zero but should also be sufficient to cover a producer’s personal exemptions (which is $18,214 for the 2015 tax year).”

For purchased inventory such as feeder cattle, the mandatory inventory adjustment (MIA) applies.

“A producer is required to reduce the income loss to the extent that inventory was purchased and still on hand at year-end,” said Nibourg. “The required adjustment only needs to be sufficient to reduce net farm loss to zero. The MIA will be the lesser of the net farm loss or the value of the purchased inventory on hand at year-end unless the specified animals rules apply. Specified animals are horses or registered cattle. A producer may elect to add in the MIA of specified animals at 70 per cent of their cash costs.”

Using these adjustment tools can not only help manage taxes but can also be useful for someone establishing a cow herd.

“Creating an optional inventory adjustment reserve will allow a producer to reduce the tax burden should the producer wish to liquidate the herd sometime in the future,” he said.

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