Good tax planning and working with an accountant specializing in your field are key factors for agribusinesses in managing their tax liability. As we head into the end of the year, here are five things to keep in mind to be prepared for next tax season:
1. Tax Planning – Determining your year-to-date income PRIOR to the end of the year and planning for an appropriate income level is essential to tax savings. By maintaining level income versus having large income swings, you will pay less tax over time due to the graduated income tax rates. Most farmers are on the cash basis so managing income is easier to do than for most taxpayers.
| Net Farm Income | Tax Due | |||||
| Year 1 | $50,000 | $10,024 | ||||
| Year 2 | $50,000 | $10,024 | ||||
| $100,000 | $20,048 | *Assumed Married Filing Joint | ||||
| Net Farm Income | Tax Due | |||||
| Year 1 | $0 | $0 | ||||
| Year 2 | $100,000 | $24,056 | ||||
| $100,000 | $24,056 | *Assumed Married Filing Joint |
Plan on being profitable and paying tax, just do so at a reasonable rate.
2. Take Advantage of Fast Depreciation Rules – Section 179 and Bonus Depreciation:
- Section 179 Depreciation: The maximum Section 179 expense election is now permanent due to the PATH Act signed into law in December 2015. This Act allows businesses to depreciate up to $510,000 of fixed asset purchases in the year of purchase, rather than depreciating the asset over time. This deduction begins to phase out when asset purchases for the year exceed $2,030,000 and is fully phased out at $2,540,000 of purchases.
- Bonus Depreciation: Assets placed into service during the current year are also eligible for 50% Bonus Depreciation if the asset has not already been written off under Section 179. Eligible assets include assets with a 20-year asset life or less and must be new, not used. Under present law, Bonus Depreciation is reduced to 40% and 30% for 2018 and 2019, respectively. Bonus Depreciation is set to expire on December 31, 2019.
3. Farm Income Averaging – you may be able to average all or a portion of your current year’s farm iincome by shifting it to the three prior years to reduce current year or future year’s tax.
4. Spend Wisely – Don’t go overboard trying to avoid tax. Buying equipment should be based on need versus as a tax-savings tool.
5. Choose a Tax Preparer That Specializes in Agribusiness – while certain aspects of your return are similar to other industries, how farm-specific issues are handled can make a significant difference in the outcome of your return.
For example:- Were your fixed asset additions and dispositions handled in the correct manner?
- Is your farm income being taxed at the correct rates?
- Should part of your income not be subject to self-employment tax?
- Is your health insurance being handled in the most tax advantageous manner?
- Why would you ever elect to pay optional self-employment tax?
- Is your Domestic Production Activities Deduction reported correctly?
- Are your patronage dividends all taxable?
- What are your tax options regarding receiving government payments and grants?
- Do you know when you can defer the taxability of crop insurance payments to the following year?
- Just how much can be prepaid at the end of the year? What items can be prepaid?
- Does it make sense to Farm Income Average this year?
- When should you not fully depreciate your current year equipment purchases?
- Why should all farmers do tax planning prior to the end of the year?
By Joe Turnes
Agribusiness accounting is a large part of the services offered at BHT&D CPAs and has been since we began in 1971. If you are interested in discussing how we can help you in this unique business please request a complimentary accounting consultation or contact us at (616) 642-9467.
