It’s a funny thing. Spending money to save money, that is. As consumers, it’s easy to get sucked in by marketing schemes such as “buy one, get one,” or “spend $100 and save $25.” I’m pretty sure if you posses a debit card, you are guilty of buying stuff you weren’t planning on buying just to “save money.” And most of us get home after doing something like that and roll our eyes when we realize what we did. Well, spending money to save money on the farm isn’t quite the same, but it’s a similar concept.
Well, if you’re a business owner, chances are you’re familiar with an accountant and tax accounting, and you see where I’m going with this. A couple weeks before the end of the year, Justin and I paid a visit to our accountant. We had what’s called a pre-tax planning session. Essentially, the accountant looked at how much money we had taken in (income) and how much we had spent on business expenses. Take the income minus the expenses, and you have our taxable income. Taxable income is what Justin and I have to pay our family expenses such as food, shelter, and transportation.
We don’t get much control over the prices we receive for our crops and livestock, nor do we have a lot of control over the costs of caring for those crops and livestock. This means our taxable income varies wildly from year to year. Some years we will make a lot of money, other years we will make no money, and some years we will lose money. In the years we make a lot of money, it is advisable to spend it on business expenses before the end of the year, to reduce our taxable income and therefore our tax bill. In the years that we make no money or lose money, we will attempt to sell some crops or livestock before the end of the year to give ourselves some taxable income. It is desirable to try to keep our taxable income with a reasonable range from year to year. At least, that’s our philosophy.
Well, this year was a good year. A very good year. Our income was considerably higher than our expenses. Which means we had to spend some money or give a huge chunk of it to Uncle Sam.
Think of it this way…
Instead of getting a tax refund, you owe the government $10,000 in taxes on April 15th. But, you could invest $7500 in your IRA or 401K and only owe $2500 to Uncle Sam. Which would you do? Invest the money and pay $2500 or just give the whole $10,000 to help reduce the federal defecit? I have a pretty good hunch that most would choose to invest in themselves.
So….we purchased a tractor and grain cart as opposed to sending an exorbitant amount of money to our representatives in Washington and Des Moines. Don’t worry, we will still have a taxable income and will be sending in a healthy chuck of money to take care of our patriotic duty to pay taxes as well as operate our farm more efficiently.