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| Guys:
Doing something for tax reasons has to do with the time value of money and is easy to see when you work with one of our machinery purchase decision tools (e.g., owntractor.xls, owncombine.xls, etc. out there on agmanager.info website). It is easiest to think about in the sense of Sec179 expensing deduction. If I can use the deduction (up to $112,000 in 2007), it saves me from paying income tax on that much money. If I'm in a 40% bracket (35% fed + 5% state) that would amount to an income tax savings of $44,800 this year. But, it's not truly a "saved" amount since you eventually have to pay those taxes since your depreciation will be accordingly reduced in future years. But, you're paying it later rather than earlier, which saves you interest. Using an 8% interest rate and comparing Sec179 to 7-year straight line depreciation, it is like buying the $112K item $16,611 cheaper. That is, this guy would need to buy the $112K item for $16,611 less money in order for him to be induced to take the straight line rather than the Sec179 method. I worked with one farmer whose strategy was to trade for a new combine every year as long as he had a high-profit year. Despite him only tallying 200-250 separator hours per year (which would normally be below where I'd recommend annual trading) it was an appropriate move. The key of course was that as soon as he didn't need the large tax deduction he'd go back to owning the machine for several years.
I hope this helps at least a little.
Terry Kastens, ag economics, Kansas State University
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"Long run" and the life of an operation
