How the New Tax Laws Affect Your Ranch’s Borrowing Power
Tax rules change, and when they do, the numbers on your return change too. Since lenders read your return to judge repayment ability, a change in the tax code can quietly change how much credit you look like you can carry.
Why do lenders read your tax return?
For most ranches, the tax return is the most reliable record of income and expense a lender can get. Loan officers look at the bottom line, but also at depreciation, interest, one-time sales and how income moves from year to year. They use those figures to estimate how much cash the ranch can safely put toward debt.
If a rule change shifts when you can deduct something or how much, your reported income may rise or fall without any change in how the ranch actually performs. That is why it helps to explain unusual years to your lender in writing.
Bring a plain-English cover letter with each return. Two or three sentences on what happened that year, such as a drought sale or a big equipment purchase, can turn a confusing number into an understandable one.
What does 'new tax laws' really mean for you?
The details depend on what Congress and the IRS have done recently, and they differ by situation. This article does not describe any specific provision. Use the IRS site and a licensed tax professional to learn what applies to your entity type, your equipment purchases, your livestock sales and your land.
Track legislation through Congress.gov if you like, but remember that proposals are not law. Many ranchers get into trouble acting on a headline before the final rules and effective dates are clear.
- Ask what changed and when it takes effect
- Ask how it applies to your entity type
- Ask how it changes this year's return versus next year's
How can deductions change what a lender sees?
Large deductions, such as depreciation on equipment, can lower taxable income and look like a weaker repayment ability, even when cash flow is strong. Many lenders adjust for this by adding depreciation back, but practices differ. Ask how your lender looks at it.
The reverse is also true. If a rule limits a deduction, taxable income may jump, and your tax bill could rise. That changes cash available for debt payments. Include your tax payments honestly in the cash flow projection, as the farm money guide suggests.
Also ask whether your lender looks at an average of several years. Averaging can smooth out the effect of any single rule change, which is helpful when a deduction rule shifts in the middle of your loan term.
What about timing of sales and purchases?
Ranchers sometimes time cattle sales or equipment purchases for tax reasons. Be careful. A sale pushed into the next year can leave the current return looking thin, and a lender who sees two uneven years may ask questions. A short explanation and supporting records usually settles it.
Check with your tax professional before you change timing for tax reasons, and tell your lender if a major shift is coming. For equipment choices, the equipment finance and ownership tips cover costs beyond the deduction.
What questions should you ask your tax professional?
Ask how any recent rule change affects your return this year and the next two, whether any elections or choices are open to you, and how those choices would look to a lender. Ask also whether the way your ranch is organized, as a sole proprietor, partnership or company, changes the answer.
Then bring the answers to your lender before you apply, not after. A loan officer who hears the explanation in your own words, backed by a letter or schedule from your preparer, is far more likely to read your numbers the way you intend. And keep copies of everything, since returns are the backbone of any future loan request.
How should you prepare for the loan meeting?
Bring the last few years of returns, a current balance sheet and a cash flow projection that reflects the tax rules now in force. Add a short note about any rule change that affected a particular year. A lender who understands the story is more comfortable than one left to guess.
Ask your lender whether they use tax return income, accrual-adjusted income or a mix. Local community banks, Farm Credit associations and the FSA farm loan programs may each do it differently.
Where can Colorado ranchers get tax help?
Start with a CPA or enrolled agent who works with agricultural clients. CSU Extension and the Colorado Farm Bureau often hold tax workshops, and the American Farm Bureau Federation publishes national summaries.
For reading at your own speed, farm.FM runs a farm.FM story on farm taxes, a farm economics and agribusiness section and a ranching section. This is general education and not tax or legal advice.
Sources and further reading
- IRS: federal tax guidance
- Congress.gov: bills and legislative status
- Farm Credit: cooperative agricultural lending network
- FSA Farm Loans: FSA direct, guaranteed, microloan and emergency loan information
- CSU Extension: Colorado State extension
- American Farm Bureau Federation: national farm organization
Ask locally: Ask a CPA or enrolled agent who works with ranches, your lender, and a CSU Extension ag business agent.
General education only, not financial, legal or tax advice, and Colorado Rancher Loan Guide is not a lender. Rates, terms and deadlines change, so confirm current details with the lender or agency.