While this might be my favorite time of year, I understand if it’s not yours. Tax planning season is rapidly approaching.
The normal process is to:
- Determine the optimum amount of taxable income to report.
- Determine how much income to defer into the next year.
- Or determine how much farm inputs to prepay this year.
We rarely want to show no taxable income. Instead, you want to show enough income to soak up the standard de-duction plus pay tax in the 10% to 12% tax brackets. However, this year will be different due to the COVID-19 pan-demic and current election. Here are some answers to common questions.
When should I ask for Paycheck Protection Program loan forgiveness?
Many farmers received a Paycheck Protection Program (PPP) loan, and the 24-week covered period has come and gone. Normally, we would suggest asking for forgiveness in 2020; however, according to the IRS, this forgiveness means you will have to reduce your expenses by the amount of loan forgiven if you receive forgiveness this year. If you wait to 2021, you should be able to fully deduct your expenses this year and then pick up “extra” income in 2021.
Also, Congress is likely to allow blanket forgiveness if your loan is under $150,000, so waiting makes sense.
But what if the election leads to higher tax rates in 2021? You’ll still likely want to wait until after the election.
If you only received a loan based on your Schedule F earnings, you can apply any time because there is no expense re-duction. Make sure to write yourself a check for the full loan amount first.
Can I defer my CFAP income to 2021?
This is an easy answer — no. Only crop insurance proceeds can be deferred.
Should I try to create a loss?
The CARES Act allows farmers who incur a loss in 2020 to carry the loss back to 2015 to get a refund of taxes paid in that year or subsequent years. Tax rates were higher back then, so it might make sense to show a loss in 2020 to get a refund of taxes from those years. However, this is not an extra deduction; it is simply a timing of the deduction.
This year, more than ever, you need to spend time with your tax adviser to pin down the right amount of taxable income to report. Good luck.
Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA.
