Maximize savings and limit penalties with these guidelines
Wrapping up taxes for the year might seem as fun as having a tooth pulled, but it doesn’t have to be painful. CPAs Paul Neiffer of CliftonLarsonAllen and Craig Thomson of Frost PLLC share this advice.
1. Keep Good Records. This should be a no-brainer. Yet when life happens, paperwork tends to get pushed to the margins of your desk. That’s why you should revisit all documentation that has accumulated this year to ensure a clear picture of your finances, says Neiffer, who is a principal at CliftonLarsonAllen as well as a columnist for Top Producer.
2. Chart Taxable Income. Update projected taxable income right after harvest, then twice in December to ensure records are up to date, Neiffer advises. Include income or losses and anticipated additional income before the end of the year; then, subtract any expenses, depreciation or new assets.
3. Even Out Income. Amid uncertainty over Section 179, Neiffer recommends taking advantage of deferred payment contracts. This allows you to sell grain in 2015 but realize payment in 2016. Neiffer anticipates the Section 179 deduction for machinery purchases will eventually be approved at the $500,000 level for 2015 and 2016. Bonus depreciation at the 50% level is currently not allowed but could be extended.
4. Soak Up Savings. Amid tight margins, increasing farm income isn’t a bad idea. Most producers should pay taxes in the 15% bracket while soaking up exemptions and itemized deductions. Farmers can also capitalize fall fertilizer they apply for the 2016 crop. Also examine credits for which you are eligible, such as those for fuel and water, Thomson says. In Arizona, for example, there is a water conservation credit.
5. Pay Your Kids. If you operate as a sole proprietor, use this time to verify you have paid appropriate wages to children under 18. A farmer may deduct wages, and the amount is not subject to payroll taxes for either the farmer or the children. They will owe no federal income tax on the wages, and children can place earnings in a Roth IRA.
6. Review Pre-Paid Costs. Understand the rules for these expenses, Neiffer advises. “You can’t simply go down to the co-op and put a deposit down,” he says. “It needs to be for a specific item, a specific cost and a specific quantity. They can’t spend more than 50% of all their farm expenses on these costs. That’s generally not an issue for farmers, especially this year.”
7. Consider Estate Gifts. If you have a high-value estate operating with limited liability entities, you might consider making gifts of cash to your beneficiaries. The federal annual gift exclusion for 2015 is $14,000 per person, Thomson says. Be sure to document the transfer of the gift before the end of the year, and make sure the check is cashed in 2015.
8. Examine Retirement Vehicles. For producers reaching retirement age, review social security benefit elections before year-end to ensure you don’t miss financial opportunities. Thomson uses pension plans with many of his farm clients. These plans can be listed as a deduction and grow investments tax-free until they are withdrawn.