AG Producers – Planning Ahead Can Save You Thousands!
During the Fall season, I encourage Ag producers to pause and take some time to get caught up with their yearly bookkeeping. They should also spend some time reflecting on the current year and think about their plans and opportunities for the upcoming year. Accurate, up-to-date bookwork is essential to this planning process. Ag Producers are in a unique position to really take advantage of planning and timing of income and expenses to help them with potential tax savings.
Most Ag Producers are on a cash basis, which means that income is recognized when the cash is received from a sale, and expenses are recognized when paid. The timing of these events is something that you can plan for and control. An example includes waiting to sell grain or livestock until after the first of the year so that you do not receive these cash receipts during the current tax year. This allows you to report this income in the following tax year instead of the current tax year. The result is you will not need to pay taxes on this income in the current year.
You can also pay in advance for expenses you generally would have in the future year. This may include items such as seed, chemical, fuel, or major equipment repairs. By purchasing and paying the bill during the current year, expenses will increase in the current year, reducing the taxable income and lowering your tax bill. It is important to keep in mind that there are limitations to how many expenses can be prepaid. For example, prepaid expenses cannot exceed 50 percent of other farm expenses in the year of deduction. It is also important to have a good working relationship with your lender, as these timing decisions may impact cash flow.
Overall, deferring revenue until the subsequent year and prepaying expenses in the current tax year is a strategic way to reduce your tax burden.
One opportunity to consider is the timing of equipment purchases. By purchasing, and placing into service, a new piece of equipment this year, you have the opportunity to lower your overall taxable income by using depreciation expense, bonus depreciation expense, or the Section 179 deduction. I always encourage Ag Producers to carefully consider these purchases to first make sure the purchase makes sense for their operation. It is not necessarily a good idea to purchase a new asset that is not necessarily needed simply to get a tax deduction. Thinking through some long-range plans (2-5 years) will assist in making major purchases that will truly benefit your operation. Depreciation rules are complicated, and they are changing. Consult with your KT advisor before you make a major purchase to help ensure it will provide the maximum tax benefit.
Another opportunity to save some income tax is to fund your IRA, Roth IRA, or other retirement account. Funding a Health Savings Account to pay for qualifying medical costs will also lower your yearly taxable income.
Take some time to get your ranch bookkeeping caught up in October or November and make an appointment with your KT advisor to do some year-end tax planning and projections. We will be glad to assist you in paying as little in taxes as possible.
Wise planning can save you thousands!