Year-end tax planning for 2013 will be very different from 2012. With the looming increases in tax rates and uncertainty about bonus depreciation and Section 179, most farmers elected to push income into 2012 and defer expenses until 2013. This is not normal for most farmers.
I believe that farmers have an inherent fear of paying income taxes. The goal should be to arrive at an optimum level of income, not eliminate income taxes. Farmers who report too little income aren’t taking advantage of all their credits, deductions and exemptions, which exposes them to higher income taxes later. This can be prevented with appropriate planning.
Below are the most common ideas that farmers should incorporate into their planning.
"Take advantage; 50% bonus depreciation remains for ... any new asset placed in service by Dec. 31."
Tax Strategies. Use deferred payment contracts properly. These contracts give farmers the most flexibility in timing income to appropriate levels. If needed, you can elect to bring income that would normally be reported in 2014 (when cash is received) back into 2013. Since this election is on a contract-by-contract basis, we advise farmers to have a few contracts in the $25,000 to $50,000 range to provide the greatest flexibility.
Plan for Section 179. You can use Section 179 for up to $500,000 on the purchase of new and used equipment. This is based on your taxable year beginning in 2013. It’s scheduled to revert back to $25,000 in 2014. While there is a good chance it will be increased, with the dysfunction in Congress, there is no guarantee.
Farmers with partnerships and S corporations with fiscal year-endings other than Dec. 31 must pay close attention this year. If these entities pass through Section 179 with more than $25,000 in 2014, this excess might be totally wasted. Plan more carefully than normal.
Take advantage of bonus depreciation; 50% bonus depreciation remains for new farm property. This applies to any new asset placed in service by Dec. 31, 2013. It’s set to expire for 2014. Unlike Section 179, there are no income or purchase limitations.
Take advantage of your retirement plan and make sure you’re fully funding it. It’s important to know your deductible amount because the deduction is allowed on your 2013 tax return, even though it’s not funded until the due date of the return.
Prepay farm expenses appropriately. We see more examples of improperly prepaid farm expenses on farmers’ books than any other item. To qualify as a proper prepayment, the expense must be for a specific item, price, terms, etc. In too many cases, we see "deposits," not prepayments.
Review crop insurance proceeds. With corn’s drop in harvest price from the spring price, most of the crop insurance proceeds will be due to price, not yield. In these cases, proceeds cannot be deferred until 2014. If your goal is to defer proceeds, work with your crop insurance agent and adjuster to ensure payment in 2014, not 2013.
If you have children, grandchildren or just a charitable intent, commodity gifts can help you save taxes, especially if you’re a sole proprietor. A gift to a charity reduces income and still lets you use the full standard deduction. Gifting grain to children allows you to reduce income and eliminate self-employment taxes on the amount of the gift. If the child is subject to the "kiddie" tax, there might not be much income tax savings, but the self-employment tax savings still apply. The gift should be from last year’s harvest.
Every farmer’s situation is unique, and it’s critical to properly project your income and review those projections with your tax adviser to determine what steps should be taken. These steps aren’t always the same, so get started now.
Paul Neiffer is a tax accountant with CliftonLarsonAllen and author of the blog, The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at paul.neiffer@CLAconnect.com.