Take steps to manage around, and pay down, a large bill
More than half of the row-crop producers and ranchers who work with Tina Barrett and her team of farm accountants in Lincoln, Neb., will face the difficult task of paying down deferred taxes this year. Many farmers across the U.S. must do the same after years of deferring grain income and prepaying expenses.
“Most producers didn’t want to pay the taxes while income was going up,” says Barrett, executive director of farm accounting firm Nebraska Farm Business, which works with more than 400 producers statewide. “Now, they don’t want to pay taxes because they don’t have the money to pay it.”
Farm financial risk exposure is higher today than in 2015, according to data from USDA’s Economic Research Service. Debt-to-equity and debt-to-asset ratios could climb to their highest levels since 2002 this year. At the same time, liquidity and working capital are slipping lower.
The convergence of financial challenges suggests it’s time for proactive tax management, even when it stings.
“Every farmer should have an approach to tax planning that spans beyond just one year, one growing cycle. It has to be a two- to three-year process,” says Doug Claussen, CPA and principal with K•Coe Isom based in Goodland, Kan.
To reduce your deferred-tax balance, Barrett recommends getting over the fear of paying taxes. “Understand that paying taxes means you made money, and that’s a good thing,” she says. “It might mean paying more taxes than in the past, but the best goal is to pay the least amount of taxes over the course of your business, not just this year.”
If your farm is facing losses this year, consider liquidating farm equipment. You might not be taxed on the sale if farm losses are projected to be greater than the value of the machinery, Barrett says. You might even acquire equipment using a lease, where the lease payment is tax-deductible, Claussen adds.
Farm operators should assess family living expenses and consider cutting back on recreation and small miscellaneous costs, Barrett says.
4 Tax Strategies for 2017
Although March 1 is many farmers’ tax-filing deadline, it’s never too early to begin planning ahead for the 2017 tax year, says Doug Claussen, CPA and principal at K•Coe Isom in Goodland, Kan.
1. Crop Insurance. If you receive a claim check this growing season but normally defer receipt of grain sales until the following year, you can make an election on your return stating all or a portion of those crop-insurance proceeds are deferred until the following year, Claussen says.
2. Farm Income Averaging. This strategy is most useful when commodity prices are rising. “It allows them to take a portion of their farming income in the current year and apply the marginal tax rate from the prior three base years,” he explains. “It’s almost a smoothing technique.”
3. Loss Carrybacks. If your farm experiences a financial loss this year, the IRS allows farmers a special five-year carry-back. “They can carry the farm loss back for five years and receive a refund of income taxes they paid in 2011,” he says. They can do a two-year carryback if the tax refund is better.
4. Elect Out Of Installment-Sale Reporting. If you defer grain payments at harvest until January, but then end up with low taxable income, or even a tax loss, you can pull some of these deferred grain payments back into the preceding tax year to better manage taxable income.