It’s that time of year to start thinking about finishing the year off right and making smart tax decisions — not only for this year, but decisions that will benefit you in the future as well. The years come and go, but for farmers, change is always certain.
Michigan and Wisconsin’s agricultural industries are extremely diverse. Depending on your industry, you may be experiencing an excellent year or a difficult one. While this advice may seem repetitive, it is always wise to evaluate your tax opportunities before year-end to maximize the benefits.
Tax planning allows you to take steps to minimize your tax liabilities, ensuring all available allowances, deductions, exclusions, and exemptions are working together in the most tax-efficient manner to reduce the total income tax paid to an amount you are anticipating. Most importantly, though — effective tax planning helps you avoid surprises come tax season.
Effective tax planning helps businesses to lower taxable income, reduce tax rates, provide for greater control of when taxes get paid, and maximize deductions and credits whenever possible. It can also help you manage your taxable income at a consistent level each year.
You need to be transparent with your tax accountant throughout the process. Having an accurate set of financial records is critical for a tax preparer to work with.
Do not wait until the last minute to get your records in order. Equally important, do not make financial decisions when your books are not up to date. Buying the same amount of prepaids or making a capital expenditure because you had to last year may not be necessary because you were already in a loss position this year.
Make sure you tell your tax preparer about all equipment purchases, especially if it was dealer or manufacturer financed. It may not show up in your bank accounts if no payment was made in the tax year.
Frequent Tax Planning Strategies
Look at the tax planning strategies below, and work with your tax and accounting specialist to see if they could benefit you.
Methods to decrease your taxable income:
- Farm income averaging: Averaging all or some of your farm income using rates from the three prior years.
- Common expenditures to reduce taxable income: Prepaying inputs and other allowed items, capital expenditures — utilization of aggressive bonus or section 179 depreciation methodologies (see note above about bonus being back in 2025), and retirement contributions. Depending on your entity structure, retirement plan contributions can be significant, especially for self-employed individuals via a simple or other qualified plan.
- Healthcare deductions: Creating an employee benefits deduction to allow for business deduction of these expenses.
- Selling under a deferred contract: You can sell grain before the end of the year but not receive payment until after the first of next year. You then have flexibility to decide, after the fact, if you need additional income in the year that the crop was sold. Make sure you sell in several small contracts rather than one large contract to provide more flexibility for when to show income. Also, consider the risk of collection in your decision-making process.
- Charitable contributions: As a farmer, there is a tax-advantaged way to make charitable donations via the use of commodity inventory.
Methods to increase taxable income:
- An election to capitalize repairs rather than expensing them can be adjusted annually. In a year of losses, this can be extremely effective to capitalize these amounts and save the deductions for future years.
- Maximize depreciation methods, including direct and bonus expenses. However, you should never depreciate your way out of standard deductions and exemptions.
- If a farm loss is inevitable, common ways to increase income include: IRA distributions, IRA to Roth IRA conversions, or sale of non-farm capital assets (i.e. stocks). An IRA to Roth IRA conversion generates taxable income on the tax return, but the future earnings are tax free. Any farm losses may be offset by the income generated from the rollover and no income taxes would be owed on the money rolled into the IRAs.
Does March 1 Seem More and More Difficult to File by Each Year?
Many farmers operate under the common misconception that all farm income tax returns are due by March 1 each year. While that is one of the deadlines, it does not have to be the case for all farmers. The IRS allows farmers and fisherman to avoid paying income tax estimates during the year if the following criteria are met:
- 66.67% of your gross income for the current tax year or the prior tax year is from farming
- You file your tax return and pay all the tax due by March 1
In addition, if no income tax is due, the farm return is not due until the normal April 15 individual filing deadline.
Due to the nuances and rules involved, many times farmers simply say they want to file by the March 1 farm deadline, but there are reasons to consider other options.
Why not March 1?
Meeting a March 1 due date is becoming harder from a compliance standpoint. Many farmers receive 1099s from their cooperatives and other business activities such as rent, custom hire work, and other miscellaneous income, and are not receiving those until late in February.
Farmers who have outside pass-through entities with ownership for which they receive K-1s or have personal brokerage investments for which they receive a 1099 have the same challenges with not receiving the necessary documents until late February. The timing of receipt of this information creates a struggle to properly prepare the farmers’ tax returns by March 1.
What other options do farmers have?
Rather than being forced into the March 1 time crunch, farmers can make an estimated tax payment on January 15 and then have until April 15 to complete the return and make a payment due for any remaining tax.
The January 15 payment plan comes with two options for farmers. The IRS did farmers a favor by allowing them to pay by January 15 the lower of 100% of the prior year’s tax or 66.67% of the current year’s expected tax.
The options help accommodate the income volatility often experienced because of crop yields, commodity prices, and/or in recent years government aid. Paying at the lower of the prior or current year allows the farmer to hold onto more of their cash for as long as possible.
Making the January 15 estimated income tax payment can be extremely useful for a farmer, especially in years where taxable income will be higher than the previous year. It provides more time, until April 15, to file a correct individual income tax return that maximizes tax deductions. You receive 45 more days to see how the current year is going as well – which can help with decisions on how aggressive you are in utilizing Section 179 and bonus depreciation methods. Consider making an estimated payment by January 15 this year!
Income tax planning provides immense value for your business operations. The more useful information you can provide your tax specialists, the better decisions you can make for your operation. The strategies listed within this article are commonly used; however, everyone’s financial situation and operation are unique.
Go into your tax planning sessions with the understanding that every detail is important. Ensure your records are current to make the best decisions, receive the most accurate advice, and maximize your tax opportunities!
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