Tax Traps: Farmers Pay Too Little in Taxes

June 23, 2014 12:49 AM
 
money trap

In the first installment of our eight-part tax series, Paul Neiffer, the Farm CPA, argues that farmers often are better off paying more in taxes.

For many farmers, "tax planning" refers to a never-ending crusade to pay as little tax each year as possible, no matter the consequences. But that practice can come back to bite you big time in the end, says Paul Neiffer, author of The Farm CPA blog and an agriculture tax specialist with Clifton Larson Allen.

Farmers, he says, need to pay enough tax to take advantage of deductions and exemptions. And it’s better to pay, say, 15% in taxes all along, than defer taxes and get killed for a big tax bill at the end. Even so, most farmers want to manage their tax liability for the short-term, says Neiffer.

"I will call a client and tell him, ‘I got your tax return done and you only need to pay $30,000.’ I expect to hear applause on the other end of the telephone, and instead what do I get? ‘Paul, I only want to pay $5,000.’"

As Neiffer says in the following video, farmers seem to be genetically opposed to paying taxes.



Farmers who underpay don’t take full advantage of historically low tax rates. And they may not be able to claim exemptions and deductible expenses. "If his kids are younger, he’s not taking advantage of all the child tax credits and everything else that we can do for him."

That farmer may pay the piper when he retires 20 or 30 years later. "He may have deferred $2 million or $3 million of grain inventory and $2 million of farm equipment. When he retires, he wants to sell it all at once. What tax bracket is he going to be in? 39.6% plus, plus, plus."

By paying 15%, or even 25%, all along, farmers won’t be penalized at the end. Plus, the strategy generates working capital that can be invested during the farmer’s most productive years.

"That 15% tax rate is probably the lowest we’re ever going to see," he says. "Your total tax bill may come to only $10,000 or $15,000. Ten year ago, $10,000 was a much bigger number than it is now. Today it’s only 700 bushels of soybeans. That’s all we’re talking about."

By paying taxes farmers may be able to take advantage of farm income averaging, which allows you to spread higher income into lower tax brackets.

Take the example of a farmer who avoided the 15% bracket who now has to file a return reporting $300,000 of income. "You get to go back and spread that $300,000 income over the last three years."
 

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Andrew Winters, CPA
Carthage, IN
2/17/2015 06:26 AM
 

  By saying that a large tax burden will come back to bite you in the end (at retirement) you are assuming that farmers will have nothing but "good years" ahead of them. All of my farm clients understand that bad times may be ahead (as they have been in the past). A bad year is a good time to get out of the pre-paying habit. There's nothing wrong with good tax planning. Our office has been doing it for 56 years.

 
 
Anonymous
6/24/2014 07:45 AM
 

  Yes, he may be better of paying taxes now rather than later. But you don't address how many farmers think. Predicting what things will be like 20 year away isn't something most believe can be done with any accuracy. But more importantly, there is that nice step up in basis the heirs get. So if you can keep delaying taxes to that point, then maybe can beat the tax man.

 
 
Anonymous
6/24/2014 07:45 AM
 

  Yes, he may be better of paying taxes now rather than later. But you don't address how many farmers think. Predicting what things will be like 20 year away isn't something most believe can be done with any accuracy. But more importantly, there is that nice step up in basis the heirs get. So if you can keep delaying taxes to that point, then maybe can beat the tax man.

 
 

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