There are several important topics that typically get covered when we discuss the MDPT process with farmers, especially after the Jan 28thFarm Journal/AgWeb webinar. Tax laws, deferral time frames, yield & interest calculations, depreciated asset questions (depreciated assets cannot be included in an MDPT process) are just some of the topics that farmers get comfortable with after discussing their options with MDPT.
The topic that could provide the most benefit to a farmer using MDPT is the financial law of ‘present value.’ Present value can be defined as: “The worth of a future amount of money at a specific point in time.”
Present value is used as a powerful tool for Wall Street and Fortune 500 Corporations as they prepare financial plans for their future. These large businesses understand that deferring any cost into the future is a benefit to their bottom line. The dollars used to pay a deferred expense in the future are cheaper than the dollar today, even with 2-3% inflation. Here is how it works:
Calculating Present Value
To see how present value performs, let’s look at how deferring expenses can work for you in the following example. Let’s say that you have a $1,000 expense that is charged to you today. But you have an opportunity to defer that payment for 30 years. Each day inflation (even 3% annual inflation) reduces the true cost to you, compared to today’s value.
We can represent the effect of present value with two examples:
First example, let’s say that the $1,000 expense today had a payment expectation in 30 years, but the balance would grow to be $2,425 during that time frame. In 30 years at 3% inflation, today’s $1,000 would just about equate to that future balance of $2,425, using present value and today’s dollar value.”
In the second example, if the $1,000 deferred expense stayed consistent over the 30 years and still had a ‘cost’ of $1,000 in year 30, the true value of the payment, in today’s dollars to you, would be $412! You are making money over time by deferring that expense and paying for it later.
Thinking Differently for Your Future
It could be one of the few examples in agriculture when time and inflation would be on the side of the farmer! But you have to think differently to take advantage of present value. Because you have been trained to pay off escalating farm bills due to interest rates from your lender, you do everything you can to pay off that note as quickly as possible.
To defer tax expense using MDPT and let time and inflation work in your favor may be hard to wrap you thoughts around. But it is powerful and can make a significant impact to your bottom line and how you manage your finances.
Talk to Your CPA
Your CPA can provide insight into present value and how it could work with MDPT for your farmland or farm product sale. Farmers First Trust provides a free financial analysis for your financial farm transaction and how deferring taxes can benefit your future. No one can accurately forecast the future and what interest rates or inflation will be over the next 30 years. But one thing is certain, present value is a financial tool that should be put to work for you and your family’s future when you utilize MDPT.
Farmers First Trust