As you head to your accountant's office this January to talk about your upcoming tax return, you might want to consider having a conversation about how you can manage next year's tax liabilities as well.
According to Paul Neiffer, a CPA with CliftonLarsonAllen and the writer behind the Farm CPA blog, here are five topics you could discuss with your tax advisor.
- What’s your deferred tax liability? Deferred tax liability is the amount of taxes you would owe if you had to liquidate all of your operating assets. It’s important you have this information on hand in 2016 because if you’re forced to downsize this year, there will be a large tax burden, according to Neiffer. “Each year at the beginning of the year when you’re doing your tax return, sit down with your tax adviser to calculate how much of a deferred tax liability you have,” he says. “As tax advisers we’re always good at lowering your income tax but we’re not very good and planning for the impact that will have later.”
- Do you have any deferred payment contracts? Neiffer recommends you sell some grain with deferred payment contracts. Your tax adviser can use the income you’re scheduled to receive in 2017 if they need to show more income on your 2016 returns. “They’ve sold the grain and they’ve locked in the price, but they will get paid in 2017,” he explains. “What we like about those contracts is it allows us to bring more income into 2016 if we need it.”
- Are you using Section 179 appropriately? The Section 179 deduction is now permanent at $500,000. This is great news for farmers, but Neiffer says you need to be careful how you use it because it can become a tax trap. “If you take Section 179 and you’re financing the machine, you are going to be recognizing income in future years when you already have the deduction in the current year,” he says. “It’s a ticking tax time bomb.” Neiffer further explained with this example: A farmer took the $500,000 deduction in year one. In year two, they have a $100,000 payment on that machine. They either have to recognize it as income or defer it to the next year. And the cycle continues. “You will get on a treadmill that’s hard to get off,” Neiffer warns.
- Are you playing your kids enough for working on the farm? Neiffer advises farmers to pay working children appropriately because if you don’t, you might pay for it on your taxes. His advice? “If you pay your children under 18 up to $6,000, it’s completely free of federal tax for the child, and they can invest it in a Roth IRA,” he says. “For the parents, it’s completely tax-deductible. You don’t have to pay payroll taxes, it reduces self-employment tax, and reduces income tax.”
- Have you invested in a good accounting system? If you don’t already have good accounting software, Neiffer recommends purchasing it now. Without accurate records, your tax adviser can’t prepare accurate tax estimations. “The better (a farm's) accounting records are, the easier it is for us to give good tax planning advice,” he explains. Neiffer doesn’t care which software system you use, but says the $1,000 spent on the software will pay for itself in tax savings thanks to the better records it will provide.
Want even more farm-focused financial advice? Join us at Top Producer Seminar on Jan. 27-19 in Chicago to learn more tax tips and planning strategies from Paul Neiffer, The Farm CPA. (You can register here.)