If you are a farmer and paid quite a bit of tax last month on April 15, you may be asking, "What can I do to minimize my 2014 taxes?"
There are many things you can do to reduce your tax bill for the upcoming year.
Here are a 10 ideas to help you minimize your taxes as a farmer:
- If you are on the cash method of accounting, begin with tax planning in November or December 2014. Reviewing your income through November 30, along with projecting your income and expenses in December allows us to project your income and tax situation. Because you will pay less tax over time if your income is steady, it may make sense to accelerate income into 2014, reduce income by not collecting payment until 2015, prepaying some 2015 expenses, or by deferring as many expenses as possible depending on your specific tax situation. Unpleasant and unexpected tax situations occur when no planning has occurred. You want to avoid large income years followed by large loss years.
- Take advantage of Farm Income Averaging. Farmers are the only remaining taxpayers that can elect to utilize unused lower tax brackets from the three previous years to reduce their current year taxes.
- Hire your spouse and pay them an appropriate wage, including health insurance. The health insurance will need to be in the spouse’s name but can cover the entire family. Paying commodity wages can further reduce your self-employment tax as well.
- Claim the appropriate credits. Often times, when we review the tax returns of new BHT&D clients, we see that all the potential credits have not been claimed. A few of the more common missed credits: the Earned Income Credit in a year of loss, Small Employer Health Insurance Credits, Education Credits and Fuel Tax Credits.
- Make sure you are properly claiming the Domestic Production Activities Deduction. Many farmers receive this flow-through credit from their cooperative. Others may qualify if they have income and pay wages.
- Maximize your tax situation by electing an appropriate amount of depreciation on new equipment purchases. You may need to take regular depreciation, accelerate depreciation through Section 179 or Bonus Depreciation, or slow down depreciation in a loss year.
- Pay your children wages for work actually performed. If the child is under 18, their wages are exempt from Social Security and Medicare Taxes.
- Maintain a good set of records to ensure that all expenses are taken. Verify that all cash purchases have been claimed.
- Utilize an appropriate retirement plan (IRA, SIMPLE Plan, etc.).
- Find a good tax preparer. My clients have found that the additional cost to have a CPA prepare their return usually pays for itself through reduced taxes.
If you have any questions about this topic or need assistance, please request a complimentary accounting consultation with one of our CPAs or contact us at (616) 642-9467.