B2B—Lancaster Farming, Friday, December 24,1982 Tax Planning Should I borrow money to save taxes? This is a question that is asked directly or indirectly quite often. The borrowed money may be for new equipment, supplies, or to pay year end bills. The answer is fairly complex. Usually I have to start by saying "it depends.” And it does depend on (a) the tax bracket of the taxpayer, (bj the interest rate on the loan, and (c) the length of tune for the loan. Tax Bracket If no taxes are due, it would be foolish to borrow money to in crease expenses. It would be better I - r i I** | ** I « BLUE BALL MACHINE WORKS pffM* Rt. 322 East. Blue Ball • Mon.-Fri. 7:30-5, Sat. 7:30-11:30 V 1O O 4 CALL 717-354-4478 A~ • ROCKWELL • POUR AS • POWERMATIC ae ooY . EMERSON * JET gprunger M 20% r>CE -ftinUitn PPICFC PLUS THESE SPECIAL DEALS JtLaKita. MODEL 90058 JBS ' U - |P 5” SANDER GRINDER El - s 5 DOUBLE INSULATED *99.25 '■•••*» A -9 10" CONTRACTORS ' Wi * ___ TABLE SAW 14" VERTICAL il c __ BANDSAW *499.00 *359.00 Brackett’s Ag Advice By John E. Brocket! Farm Management Agent Lewistown Extension Office to shift those expenses into the next year. However suppose you have a taxable income (after all deduc tions) of $20,000, you would have an income tax due of $5260 plus $440 for the state. An additional expense of $lOOO would save $412 worth of taxes. If you borrowed that $lOOO at an interest rate of 12 percent for 1 year, the net savings would be $292. Obviously a good deal if you put the $292 to good use. Invested at 8 percent, it would return nearly $25 extra in that year making a potential gain of $317.1f you only had to borrow the money for one or two months the gam would be greater. Suppose you decided to purchase a capital item instead of pur chasing that 11000 worth of fer tilizer. Would it still pay? Let’s look at that example. To get the $lOOO income reduction, you would have to buy equipment for $6067. This would give you a tax savings of $1079 ($412 taxes from depreciation and $667 from in vestment credit). Interest cost for one year would be $BOO if rates were 12 percent. Net savings would be the same if the loan was paid back in one year. Now suppose you only had a $BOOO taxable income what would the savings be on the same tran saction 7 Taxes would be $l3BO for the federal and $176 for the state. An additional expense of $lOOO would save $220 federal and $22 state tax. If you borrowed the $lOOO for one year at 12 percent interest, net savings would be $122. Interest Rate As interest rates increase, net savings decrease. For example an Tls the season to be joyous ... with a special care GRAIN CORPORATION NORTHEAST, MD. 20901 PHONE: 301-398-2111 interest rate of 18 percent reduces the net savings by $6O for each $lOOO borrowed. In like manner, as rates decline, net savings increase. Length of Loan The big tax savings occur in the first year. Loans carried over into the second year soon begin to erode the net savings. Example: Item 1 above had a bet savings of $292 if the loan was paid off in one year. If it was earned for 2 years, the net savings would become $129 (Tax savings in year 1 of $412, in year 2 of $l9O - because of interest - less a Give Eggso total interest charge of 1464). Example: at the reduced tax bracket, used previously the net savings becomes a minus $l2O. Warning Anyone borrowing money to save taxes should only proceed if (1) they know their tax bracket, <2) they realize that savings this year could be wiped out next year, (3) they can pay it back in one year or less, and (4) they understand what they’re doing, it is not something to be done without adequate counsel. Nj'Win+lliHi FLAMELESS CATALYTIC HEATERS ' “Your Pigs' WilhLove AN L.P. GAS BROODER THAT DOES A BETTER JOB ON BABY PIGS & CHICKS AARON S. SROFF & SON FARM & DAIRY STORE RD 3, Ephrata, PA 17522 (Hinkletown) Phone: (717) 354-4631 Store Hours: Mon., Thurs. £ Fri. 7 A.M. to 9 P.M. Tubs. £ Wed. 7 A.M. to 5 P.M- Sat. 7 A.M. to 4 P.M. EARCORN Paying Top Prices For Good Quality Ear Corn • Wet or Dry • No Quantity too large or too small • Fast Unloading - Dump on Pile S Go • Easy access - 2.2 miles off 283 bypass- Manheim, Mt. Joy exit • Daily Receiving 7:30 A.M. to 5 P.M. - un loading evenings & Saturdays by appt. • Trucks available for pick up at your farm. Call Anytime For Price 717-655-4785 HIDES E. mu GRAM
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