Talk To Your Tax Preparer Before Buying
With tax season nearly upon us, one of the most important conversations farmers can have is with their professional tax preparer.
"Farmers have a lot of different avenues to manage their tax liability, much more so than other types of businesses,” points out, Brad Palen, a Certified Public Accountant (CPA). "Farmers have a greater ability to defer income or prepay expenses compared to more traditional businesses, such as a mom-and-pop grocery store for example.”
Palen, a manager in the ag division at Kennedy and Coe, a Midwestern accounting firm, notes that with commodity prices on the rise, farmers have the potential to have a good income year, which makes tax planning especially crucial this year.
"Tax planning is really deferring or accelerating income, or deferring or accelerating expenses,” says Palen. "We talk to our clients about where they are for income this year, where they expect to be for the next several years, and go from there. Unfortunately, it's the nature of farming that things aren't black and white, so we're still speculating, but we're making educated decisions at to what their options are as opposed to just letting whatever happens happen.”
Equipment purchases tend to be a major part of any farmer's long-range tax planning. By nature, farming takes quite a bit of machinery to get the job done. And while Palen notes that tax breaks are not the primary reason to purchase equipment, planning those purchases can help farmers make the most out of their bottom line.
"While there are many decisions about depreciation that can be made after the fact, it's still better to at least give your accountant a call,” says Palen. With bonus depreciation rules in place for 2008, farmers may want to take advantage of that by accelerating their equipment purchases, but there are reasons it doesn't always make sense to take all the depreciation you can up front.
"It all depends on your long-term tax plan,” notes Palen. "A good tax plan is all about getting the most dollars taxed at the lowest rate at the right time.”
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