Budget for short-term and long-term savings
As U.S. taxpayers prepare their returns ahead of April’s filing deadline, producers are thinking about taxes, too. Rather than focusing on the next few weeks, though, farmers need to think about future generations of their family to make smart tax choices for themselves, their businesses and their legacy.
“You don’t have to have all of the answers,” says Kevin Bearley, principal at K·Coe Isom. Using the following five tips, Bearley and Ben Schwab of Kerber, Eck & Braeckel in Litchfield, Ill., explain how your family’s operation might benefit in the years ahead by managing taxes wisely.
1. Get a succession plan in place.
Plenty of producers develop an estate plan in their 30s, 40s and 50s, Bearley says. The sooner you get started, the more time you’ll have to change its terms and conditions as family and business situations change. Smart decisions within your succession plan can ensure your assets pass to the next generation legally and with minimal red tape. “Wealthy people don’t pay estate tax,” Bearley explains. “Only uneducated people pay estate tax.”
2. Consider an intentionally defective irrevocable trust (IDIT).
One tool producers can consider this year is an IDIT, particularly for those who are “bumping up against that estate tax limit,” Schwab says. Although they can be expensive, and they don’t provide a step up in basis, they can help keep farm assets in a family for multiple generations. An IDIT enables producers to transfer ownership of farm assets to an estate while maintaining all of the income. One critique of the tool is that it can become unwieldy as new generations and stakeholders join the operation, Bearley says, but most of these trusts last for about 100 years—or three generations—rather than continuing indefinitely. Buy-sell agreements created within an IDIT can ensure family members who are committed to the success of the business remain in a decision-making capacity, while those who don’t want to be involved may exit.
3. Split into separate legal entities.
Separating farms into different legal entities allows for a division between the operating assets of a business and the land itself, Bearley says. It also allows producers maximum flexibility to defer income and eliminate some self-employment tax. “Use partnerships and flow-through entities,” Bearley advises. Separate entities also provide gifting opportunities and protect producers against liability, Schwab adds.
4. Review income-deferral strategies.
To manage taxes during a tight environment, Bearley says several options are available. With deferred payment contracts, producers can provide their accountant with a written contract committing to the sale of grain with payment at a future date. Another tool is crop insurance, for which deferral is allowed in select cases—for example, if revenue protection will be received because of flooding, hail or other destruction to standing crops. Other means of deferral include prepaid expenses.
5. Identify other tax savings.
Be sure to ask your accountant about other ways to capture savings this year. Possibilities include wages-in-kind, wages paid to children under the age of 18, charitable donations of commodities and gifts of commodities, Bearley says.