Another calendar year is drawing to a close, and now is the time to begin evaluating your tax position before December 31. Whether 2026 was a profitable year, a challenging one, or somewhere in between, proactive tax planning can help reduce surprises and position your operation for long-term success.

The first step in any tax plan is to ensure your financial records are current and accurate. Before making decisions regarding equipment purchases, prepaid expenses, deferred grain contracts, or other tax-planning strategies, it is important to understand where your operation stands financially. Tax planning should be based on projected income, cash flow, and business goals rather than simply repeating strategies that worked in prior years.

One of the most important principles of tax planning is to avoid letting taxes drive business decisions. While reducing taxes is often desirable, the goal is not to eliminate taxable income at all costs. In many cases, maintaining relatively consistent taxable income over several years produces better long-term results than generating large deductions in one year and facing higher taxable income in future years.

Federal tax law changes under the One Big Beautiful Bill Act (OBBBA) significantly expanded the ability of farm businesses to expense qualifying capital purchases. Current law provides for 100% bonus depreciation on qualifying property acquired after January 19, 2025, while Section 179 expensing limits remain at historically high levels. Together, these provisions may allow producers to accelerate deductions on qualifying investments such as machinery, equipment, grain handling systems, and breeding livestock. As always, capital purchases should be evaluated based on the needs of the operation, cash flow considerations, and long-term business goals, rather than tax savings alone.

Producers should be aware that state tax treatment does not always match federal tax law. While the OBBBA federal legislation expanded depreciation opportunities, state income tax treatment may differ depending on where your operation is located – both Michigan and Wisconsin do not follow the 100% bonus depreciation. Understanding both the federal and state impact of major capital purchases is more important than ever when evaluating year-end planning opportunities.

Several traditional tax-planning strategies continue to provide value for many producers:

• Farm income averaging may help reduce federal income taxes by looking at the taxable results of your last three years.
• Deferred grain contracts can provide flexibility when managing income between tax years.
• Prepaying eligible farm inputs such as seed, fertilizer, chemicals, and feed may also help manage taxable income while securing products for the upcoming production season.
• Producers operating through sole proprietorships, partnerships, LLCs, and S corporations should also evaluate how year-end planning decisions may impact eligibility for the Qualified Business Income (QBI) deduction, commonly referred to as the 20% pass-through business deduction.
• Producers should also remember to include crop insurance proceeds, government program payments, and disaster assistance when evaluating year-end tax projections. These payments can have a significant impact on taxable income and should not be overlooked when developing a tax strategy.
• It is also important to tell your tax advisor about major purchases, financing arrangements, trade-ins, and other transactions that may not be obvious from bank activity alone. For example, equipment purchased through dealer or manufacturer financing may have tax implications even if little or no cash changed hands before year-end. Providing complete information helps ensure deductions, basis adjustments, and reporting requirements are handled correctly.
• Retirement planning is another area that deserves attention. Contributions to retirement plans may provide meaningful deductions while helping farm families diversify assets outside of the farming operation and build long-term financial security.

When it comes to filing deadlines, many farmers focus on March 1 as the farmer tax deadline. However, making an estimated tax payment by January 15 may provide additional flexibility and allow more time to gather the information needed to prepare an accurate return and extend your due date to April 15. Producers should discuss both options with their tax advisor before year-end.

Another change producers should be aware of is the increase in the federal reporting threshold for many payments reported on Forms 1099-NEC and 1099-MISC. Beginning with 2026 payments, the federal threshold increased from $600 to $2,000. While fewer payments may require federal reporting, maintaining complete vendor records remains just as important as ever. The State of Michigan has enacted the same reporting thresholds as the federal government; however, at this time the State of Wisconsin has not decided to raise the threshold – so for those in Wisconsin, you may still need to file these forms with a threshold of $600. 

The OBBBA tax law changes have also created new planning opportunities for certain farmland sales. Producers selling qualified farmland should discuss with their tax advisor whether special gain-deferral provisions may apply, as eligible sales may allow gains to be recognized over four annual installments rather than entirely in the year of sale. For farm families considering a transition or sale of farmland, this may provide additional flexibility and planning opportunities.

Year-end planning should extend beyond income taxes. This is an excellent opportunity to review business structure, ownership arrangements, beneficiary designations, and succession plans. The most effective plans coordinate income tax planning, estate planning, and long-term transition goals.

The best tax-planning opportunities occur before December 31, not after it. Taking the time now to review your operation’s financial position and meet with your tax advisor can help improve cash flow, reduce surprises, and position your farm business for long-term success.

Good tax planning is not about avoiding taxes. It is about making informed business decisions that strengthen your operation today while supporting your goals for the future!

 

This article was originally published in Michigan Farm News.