Expert Advice: How to Steer Clear of a Tax Trap

December 2, 2015 03:23 PM

Make tax season easier this year with these 4 tips

With the year coming to an end, tax preparation is top of mind for many.  Want to make the process less painful? Here's what Paul Neiffer, a CPA with CliftonLarsonAllen LLP and the author of The Farm CPA blog, suggests. 

1. Smooth out income. Neiffer suggests smoothing out your farm income as much as possible. Farm income averaging allows you to do that after the fact, but it’s a good idea to keep your income as level as possible in order to take full advantage of your tax bracket.

“This is the year to start pushing some of those excess grain sales,” he says. Instead of deferring grain sales, as you might have done in previous years, use those grain sales to get your taxable income up to the optimum level.

2. Don’t fall into the ‘no tax’ trap. While many farmers won’t like to hear this, Neiffer says the biggest mistake he’s seen over the years is farmers not paying enough tax. By staying at a zero level, many farmers give up certain exemptions and credits. By doing this over a long period of time, you risk building up a large deferred tax liability, which will hit you when you retire and potentially whittle down your retirement income.

If you’re already holding a large deferred tax liability, Neiffer says there are certain steps you can take to reduce that amount. Discuss your options with your tax advisor. 

3. Know your tax liability. While Neiffer stresses not paying too little tax, he also says you should only pay the amount owed and not a penny more. Through entity structuring and planning and looking at your total farm operation, there are several ways advisors can help you reduce your tax liability.

Another key thing farmers sometimes forget, he says, is they don’t track how much their deferred tax liability is, which is extremely important. “That’s extremely important to know that amount,” Neiffer says. By not knowing how much you have in deferred tax liability, you risk the chance of having a negative net worth should your farm be liquidated.

4. Cash vs. accrual accounting. The majority of farmers have been filing their tax returns based on the cash method of accounting, no matter their size, it seems like forever. However, with software right now, you can prepare your records using GAAP or accrual based accounting, and “almost with a flip of a switch,” your CPA can convert it over to the cash method of accounting.

“I think the perception out there is that it is extremely difficult to use accrual method of accounting because then we can’t do the tax return on the cash method, and I want to just dispel that myth,” Neiffer says. 

Do you have other tax tips or advice that help you save money or minimize your deferred tax liability? Let us know in the comments.


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Spell Check

Cromer, CA
12/3/2015 05:37 PM

  Very good points. It's a shame that most farms still use cash accounting and only get accrual adjusted statements once in a while. In this day and age, the situation should be reversed. Software should be accrual first (for management purposes), and then accountants should convert to cash basis at at tax time to do their magic. With modern farm accounting software, using accrual is just as simple as using cash since all the book entries are generated automatically in the background. Clement from

Crockett, TX
12/3/2015 05:44 AM

  If one has a one time large bump in income related to land sales, can some of the profit be offset by buying equipment and immediately depreciating it? If you could do that it seems that the cost of equipment would be offset by 20-30% due to the tax benefits...I'm thinking out loud...say one million capital gains, 250,000 in gains tax, if you bought a 200,000 piece of equipment, could you wipe out 200,000 of the tax?

Springfield, IL
12/3/2015 06:02 AM

  I sure enjoy reading Paul's articles. Nice that he has ag background to relate so well to farmers and ranchers. Thank you.