Will Farmers be Able to Make Year-End Purchases?

Tax deadlines are months away, but now is actually a great time for farms to start tax planning. Corey Clark, a farm business management educator, explained why during a Michigan State University Extension “Field Crops Virtual Breakfast” webinar. “I know farmers are really busy now, but I have seen the impact tax planning can have,” said Clark. “Decisions made now about marketing, about paying down operating loans, other expenses, and bills, those impact the flexibility farms will have when tax planning in December.”

Clark reiterated that the plans made in the current year impact the taxes that will be due in the spring. This advance planning could be particularly important in 2021 for a few reasons. For one, she said there is a potentially valuable crop out there and the market is not giving a lot of incentive to store that crop. Last year wasn’t a bad year either, and Clark added that many farms would have received government payments. She said if farms pushed crops forward or did other tax management strategies for 2020, there may have been high revenues early in this year that would factor into the taxable income for 2021.

Clark offered a four-step tax planning guide for farmers to utilize this fall. The first step is to calculate the baseline tax liability. To do this, collect year-to-date farm information. She said this is easier to do if the farm has a budget and a solid record keeping system, but it can be done even if one must start from scratch. This could include non-farm income, and some information may come from last year’s tax return, such as deferred income or depreciation from the prior year’s purchases. Next, identify expected sales and purchases, and then use this information to calculate the corresponding tax liability.

For Step 2, Clark said to incorporate management decisions. Lay out the marketing plan, identify cost-saving advance purchases, and evaluate cash flow implications. Then, calculate the result and determine if this is an acceptable outcome for the farm’s tax liability. If it is not, Clark said to move on to Step 3 to develop a target and determine strategies to get to that target.

What are those targets? According to Clark, first, there are the tax considerations, including expected marginal tax rates and tax credit eligibility implications. On the management side, farmers must determine what is reasonable taxable income for their farm. Also assess what strategies they have control over and what they do not. For instance, delayed crop sales may not be an option on a particular farm if they don’t have storage, or perhaps there are some bills that simply must be paid now, not later.  Different factors weigh in for different farms.

Step 4 is to develop a tax management strategy, including opportunities for prepaid expenses, delayed crop sales, and accelerated depreciation. Tax professionals will be able to offer additional strategies, and Clark encouraged farmers to use tax professionals, because they have invested a lot of time and training into developing their capabilities. “Use that expertise to make the business more successful,” she advised.

While it may be difficult to fit tax planning into the farm work schedule this fall, the effort can provide a valuable payback.  “Over time, managing taxes, which is really about optimizing your taxable income, is more than worth the time it takes,” Clark stated.

EDITOR’S TAKE:

Solid advice from a farm management expert. Given all the variables that can weigh into a farmer’s decision, and the ever- changing tax environment, it can be overwhelming, especially if the farmer waits too long to put tax minimizing strategies in place. We have stated many times in the AIR that farmers generally have had a very solid income stream in 2020 and 2021. Tax planning this year will be more critical than ever. You can help your area farmers and ranchers. Start by communicating to let them know you could help lower their tax burden and improve their operation by providing a new truck or two, especially when considering the rapid depreciation section 179 options that are still available. Farmers are great customer prospects when you “Look Beyond Your Lot”!