Poulty Pros: How long to amortize infrastructure costs?

[Here4AGoodTime]

How do you determine how long to amortize initial overhead costs? Any helpful apps or software that allows expenses to be tracked in different categories? I saw the spreadsheets that raizin posted. Should I try to adapt that to my needs, or keep searching for something that fits?

Any other business-related advice is welcomed. Thanks for your time.

 

[dheltzel]

There is a set rate for amortizing capital costs for tax purposes, the IRS (and perhaps your state) publications can clarify that.

For non-tax accounting purposes, you can amortize over any period (and with any method) that satisfies the owners of the business. Those 2 rates do not need to match but you will need to develop schedules for both methods if they differ, so most small business owners just use the tax formulas.

I'm not an accountant, and if you have complicated accounting questions this is not the place to address those, but I do have an MBA and a basic understanding of the fundamentals of accounting and business management. And I work cheap (free) via this forum. Hopefully my advice is worth at least as much as you are paying for it

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[Here4AGoodTime]

That is helpful. Do you know where I could find that information for Alabama? I don't want to spend the rest of the day perusing state run websites trying to find information that may or may not be clearly identifiable.

I will likely just use the tax formula in case this hobby turns out being a profitable one, and I hate doing things twice. I have a business background, but little real world accounting experience. I'm trying to figure out the rules of thumb, and will adapt them to suit my situation.

Worth every penny!

P.S. If we continue correspondence, don't mistake my sarcasm for ungratefulness or arrogance as I am here to learn and thankful for the time others are willing to take to educate me.

 

[dheltzel]

The most important thing at this point is just to keep good records of what you spent, and file it by calendar year. If it turns out you make a profit, you can use the past capital expenses to offset that and reduce or eliminate the income tax you owe. If you never a make a profit, you never need to amortize anything, so I wouldn't do any more than keep receipts in a folder for now. Same goes for you non-capital expenses (feed, electric, anything that has no value past the time you use it), track them and subtract all that from your revenue. If you have a profit then, go back and look for amortizable capital expenses to subtract also.

IDK about state laws, but the IRS takes a dim view of you claiming expenses more than your revenue and will usually call it a hobby and refuse the deduction of related expenses from your personal tax return. I think you have to make a profit at least 2 or 3 out of 5 years. I had significant revenue last year from selling chicks, but once you subtract off the feed costs, there was little profit and that got mixed back into the dairy operation that lost money overall. You might not be so "lucky" to have a money-losing main business and will have to claim some income.

 

[Here4AGoodTime]

That all makes sense.

At what point do most people stop figuring their initial infrastructure cost into their cost-per-egg, or cost-per-pound values?

 

[brokenknee]

It is a hobby for the wife and I. I figure once eggs get to 75 dollars a dozen, We should brake even in about six or seven years.

edit: that was before I decided to take a job transfer and will have to start all over.

 

[dheltzel]

That all makes sense.

At what point do most people stop figuring their initial infrastructure cost into their cost-per-egg, or cost-per-pound values?

If you generate actual revenue, you subtract the expenses associated with producing your product (feed, labor if you hire anyone, etc) from the revenue to get your "contribution margin" (sometimes called operating revenue), ie the amount of money you made to go against your capital investment and/or back to you as profit. Of course, all of that goes into your pocket if you paid for the capital from your own pocket.

If you got a loan instead, then the payments for the loan come off that before you figure your profit in a cash sense, but for tax purposes the loan payment would be irrelevant, you'd use a depreciation number instead, which could be more or less than the loan payment.

If you do not have a positive contribution margin, then it is to your advantage to depreciate over as long a time as possible, in case some day you do make money, then you could offset some of that for tax purposes. If your contribution margin is positive, then you depreciate over less time to get more benefit from the capital expense up front. Here is where it gets complicated in corporate accounting because there is room for interpretation in much of this (or creative accounting, as I call it). Big corporations have tax lawyers on staff to optimize this and not violate any laws (too flagrantly).

If you are making enough money to be a tax issue, you should consult an accountant with small business tax expertise. They can help you get it right and save you a lot of money in taxes. If you are like most of us, and not getting enough revenue to cover our expenses, then the IRS considers your "business" to be a hobby and will disallow any deductions related to it, but you also don't have to file any paperwork or pay any taxes on your revenue. If you are making just a small amount of money, figure out how many years you need to depreciate your initial infrastructure to negate the profit. If it falls into a reasonable time period (3 to 10 years maybe), I wouldn't worry about it, just keep all the receipts in case the IRS should claim you have a business, because if they do, you can go back and write off all your expenses that are related to your hobby.

Don't forget that any repairs to the infrastructure can be treated as expenses in the current year, or added to the cost and depreciated, whichever works best for you tax-wise. Improvements or additions are generally added to the capital costs, but you might be able to make the case to expenses them.

 

[aart]

Call an accountant.

 

[Here4AGoodTime]

Thanks for the advice.

For the time being I will only factor operating expenses (feed, repairs, transportation costs, etc) into cost-per-X values so as to (hopefully) rapidly identify any areas in which improvement can be made. I will, as you suggest, keep overhead costs tallied and set aside. From time to time I will factor those into production, just to see where I stand overall.

On a similar note, I don't intend on tracking the labor involved with initial startup. I will however keep track of operating labor so as to have a reasonable estimate of the cost-per-X. In my mind, the latter will be invaluable if/when I decide to go to market as I will be able to determine an appropriate price point. Those values might also indicate whether or not I am efficient

If anyone notices any gaps/errors in my plan, please don't hesitate to submit your thoughts.

Have you any experience with vendors/distributors? My preliminary thoughts on selling to distributors VS direct to consumer (farmers markets):

Distributors:

• Higher volume
• Lower margins
• Less labor overall (per X)
• Less marketing required
• Difficult to find willing buyers
• Steady-ish demand

DTC:

• Lower volume
• Higher margins
• More labor overall (per X)
• More marketing required to reach individual consumers
• Barriers to entry into farmer's markets (limited availability of spaces coupled w/ a lack of contacts)
• Potentially inconsistent demand

These are just assumptions, if the real world doesn't work this way, I'm thick skinned.