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Tax Eliminators
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Agriculture’s protein sector is having a high net income year in 2014. The resulting tax liability needs to be managed before year end. The most effective tax planning seeks to keep taxable income at a relatively consistent level.  ​

Source: GreenStone Farm Credit Services​

Search for Tax Eliminators

Tax planning accomplishes either deferrals or eliminations of tax.  Many deferral mechanisms exist to help farmers minimize their current year tax liability, but few eliminators of tax exist to help the tax planning strategy. Let’s take a look at some of the tax eliminators.

Farm Income Averaging allows the use of lower tax brackets, if available, from prior years to compute your current year federal income tax liability.  Farm Income Averaging reduces federal income tax, but will not reduce state income tax.  

Claiming a Domestic Productions Activities Deduction (DPAD) will reduce your taxable income. Generally, the deduction is nine percent of the net income from the business, limited to 50 percent of W-2 wages paid. The DPAD is generally available to businesses that manufacture or produce. Service businesses do not qualify for the DPAD. This deduction may be passed through to a farmer from a marketing cooperative, which may reduce or eliminate a stand- alone calculation. However, the amount passed through from a cooperative is usually larger than the farmer could claim on the farm’s net income. 

Sole Proprietors can pay wages to their dependent minor children that perform purposeful work for the business. The wages paid to the dependent minor child are not subject to FICA tax and can be included as labor expenses on the tax return. The dependent minor may have to file their own income tax return to pay their respective federal and state income tax if their total income is above certain thresholds.   

Install a Section 105 Medical Reimbursement Plan. This is a mechanism that could allow the ability to deduct unreimbursed medical costs and medical insurance premiums for the family as a business expense. The spouse of the business owner becomes an employee. Employees can be paid tax-free fringe benefits, which can include medical insurance and reimbursement of out-of-pocket medical expenses. Employers with two or more employees can no longer use this plan. However, there are flexible spending plans that can be funded by the employer or employee that will accomplish the same result for employers with multiple employees. 
A Health Savings Account (HSA) could be coordinated with the Section 105 plan.  The HSA needs to be coupled with a high deductible health plan.  The HSA contribution will reduce taxable income and may not be a taxable withdrawal when taken out for qualified medical expenses.        

Review the depreciation schedule to locate any remaining basis in breeding livestock that may have been sold or that died. Any remaining basis that can be used on the return will reduce taxable income. 

Consideration of all these topics is important when you meet with your tax advisor. Complete and accurate records are very critical to the tax planning process. It will also be important to know the remainder of the year’s income and expenses. 

Start the tax planning process early to allow for proper execution of your tax planning strategy.