By Geri Wohltman, The Equity
When finalizing tax documents, you probably find yourself thinking about the tax dollars you could have invested back into your farm. One way in which you might make those dollars work for you is to contract grow pigs. The arrangement is typically such that you own the barn and the entity owns the pigs, reducing your risk.
“Depreciable assets, such as hog facilities, are an advantage allowing producers to grow by using depreciation of the asset as an offset to income that would otherwise be taxed,” says Kent Bang, vice president of swine lending with Compeer Financial.
If you choose to explore contract growing hogs, the tax implications and a steady stream of payments from the integrator may offer a way to offset the cost of the building.
“If you choose to finance a hog barn, there are participation loan options where the USDA takes a subordinate lien up to 50% of the loan, along with a local bank or other borrowing entity,” says Chris Walsh, farm loan manager with USDA Farm Service Agency. Loan eligibility and limits apply. Click here for more resources. Please note that loan approvals are subject to strict compliance with Agency’s National Environmental Policy Act.
Tax regulations, deductions and depreciation rules are ever evolving. Current tax considerations include Section 179, which became available for buildings with the Small Business Jobs Act of 2010. This includes a 100% specialized depreciation allowance for property acquired after Sept. 27, 2017, and placed in service before Jan. 1, 2023. The maximum you can elect to deduct for property placed in service in tax years beginning 2019 is $1,020,000. More information on Section 179 is available here, though it is not certain how long this will be available because the Small Business Jobs Act of 2010 can be revoked.
“The fact that depreciation claimed for hog buildings is much shorter than the expected life of the building is the advantage. Contract growers can take accelerated depreciation over the first years of ownership, offsetting income tax for that period of time and move the tax burden to later years,” says Bang.
Other IRS publications and forms directed to assist farmers can be found here. Consult your tax advisor for more information and how your situation applies to these publications if you are considering building a hog barn, and remember tax laws are constantly changing.
One practical scenario for contract growing hogs may include a barn location near fields that you intend to exploit the manure to offset fertilizer costs that already has water and electrical hookup.
“Manure is the big thing, the ability to offset fertilizer inputs for grain operations,” says Walsh. “If you do not plan to personally utilize the manure supplied by the barn, manure rights and easements must be put in place.”
In situations where easements are acquired, those easements may provide an income source as well.*
“2,400 head wean-to-finish barns can produce approximately 125 acres of fertilizer. With a normal corn-bean rotation, manure is applied every other year before planting corn, so depending on the size of barn and number of head in the barn, you could plan to take care of nitrogen and phosphorus needs for 250 acres with one barn,” says Darwin Wohltman, VP of Livestock with The Equity.
“Manure is a source of soil nutrients from the hogs is a great source of reducing crop expense and controlling costs on the farming operation,” Bang adds.
The tax situations are different with each entity and individual, though a couple examples of farmers who could possibly take advantage of contract growing hogs are mentioned in this article, it is not an all-encompassing list.
One feasible example is a high net worth, high earning, row crop farmer who is looking for a way to bring the next generation into the operation.
“These individuals offset some income through the depreciation, utilize the available labor if adding high-cost land doesn’t make sense, and utilize the manure in the crop production enterprise, maximizing the efficiency of the farm,” says Bang.
Another example where contract growing pigs may be beneficial is a farming operation in the early years of ownership who utilizes contract finish to expand the farming operation without purchasing additional land.
“Since land is not a depreciable asset, adding barns to the farming operation provides some flexibility in that regard,” says Bang.
The structure of the arrangement between an entity and a contract grower is such that the risk is typically minimized for the grower. With the possible tax benefits and the ability to diversify an operation, contract growing hogs may be an avenue that fits your situation. Be sure to talk to your tax advisor if you are considering contract growing.
*Editor’s Note: Research the Illinois Department of Agriculture website for guidance with Livestock Management Facilities Act, Waste Management Plans and Livestock Manager Certification.
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