Tax planning: It makes good sense

Tax planning takes on special significance at the end of the year, because you have only a few more months to make adjustments that can save money on your income taxes.

Let's look at steps you can take today to save yourself some real tax dollars. (Remember that tax planning should take place all year long, not just at year-end!)


Step one

The first step in tax planning is to maintain accurate and up-to-date farm records that show you exactly where you stand.

The type of income you have is also critical in tax planning. By separating different types of income (e.g., general farm income from the sale of assets), you can pay a lower rate of tax on capital gains and avoid paying Social Security (self-employment) tax on certain income items.

You also need to make a few classifications in your expenses as well, such as breaking out deductible farm expenses, capital purchases and personal expenses.


The next step

Develop and analyze projections for your income and expense items through the end of the year under two separate categories: what you must do (e.g., pay employees) and what you could do (e.g., buy new equipment or prepay next year's seed bill). Your farm manager is the best person to work through these projections with your tax adviser, who can calculate your tax bill based on these various options.


The fun begins

After your initial shock wears off from seeing how much tax you might owe, you still have several tax-saving options.

You can prepay many expenses, which can be deductible in the year that you pay for them, even if you use the product in the following year. You just need to determine a business purpose for this option (e.g., locking in a price for fertilizer in December).

It might also be the time to hire your spouse and children or to pay a bonus to employees, including your spouse and children (see "Paying your spouse or children" below). Your tax advisor can also discuss the impact of making pension contributions for your employees and for yourself, as the farm owner.

In addition, you may benefit from delaying income until next year. But remember that leaving checks out in the mailbox until January won't work, because all income that you receive (even if you didn't bother to collect it) is taxable.

So far, I have talked about tax planning in high-income years. But tax planning is equally important for those whose business suffers a loss. The government offers taxpayers personal exemptions and standard deductions that are subtracted from gross income. So if your business operates at a loss, by planning ahead you can take advantage of automatic deductions and time your transactions to take advantage of possible tax benefits.

Each year, the tax law becomes slightly more complicated. We at Farm Credit specialize in rules that apply to farm taxation. Contact one of our tax specialists to analyze the tax consequences for the year — before the end of the year and it's too late to do anything about it!

NOTE: This article is based on a cash basis method of accounting, which means you pay tax when you receive cash and take an expense deduction when the bill is actually paid. You also do not adjust income or expense for inventories on hand at the end of the year. This simple method allows you to manage your tax from one year to the next.


Paying your spouse or children

Contact us at info@farmcreditwny.com for more information today!

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