Paying taxes is seen by many as a necessary evil and by others as an unnecessary evil. "The topic always generates debate," says Glenn Rogers, farmer and farm business consultant from Essex Junction, Vt.
"While we like to avoid paying taxes whenever possible, we need to recognize that paying taxes is going to happen if we make money in the business," adds the professor emeritus from University of Vermont. "However, here are 11 things to look at this time of year – especially for tax savings in the 2011 tax year."
1. Start tax planning now, not after December 31. Once the new year arrives, many opportunities are gone.
2. Meet with your tax professional as soon as possible. Have your projected income and expenses ready, plus your capital purchases and sales for the year.
Break down capital purchases and sales into what you've held more than one year (two years for dairy/horses) or less than the required holding time. Your tax professional will have your depreciation schedule to help calculate that dreaded re-capture of depreciation.
3. List your 2012 'have-to-buys': Think about how much feed, fertilizer, fuel, seed, supplies and other items you need to purchase for the upcoming year. Include on your list the quantities, price, possible discounts you'll get for paying early.
Remember, the contract needs to be for specific quantities, price and date. You can't purchase more than 50% of next year's needs, and it can't materially distort your upcoming year income.
4. List your 2012 'want-to-buys': Think about capital items you've already purchased and what you need for the upcoming year. Buying or trading a corn planter or tractor may help – if you need one.
IRS rules allow you to "expense" capital purchases via 179 deductions. However, this isn't all roses, as there are limits. You have to consider what you're "trading in". Only the "boot" (cash paid) can be used for 179 deductions and the rules go on from there. The 179 mechanism seems great. But it can greatly affect your depreciation over the next 15 years.
Don't buy items just for tax savings. Buy because you need them, and the tax code enables you to do so.
5. If you're looking at too much cash grain inflow for 2011, consider contracting corn/beans now for delivery and money receipt in 2012. There are specific rules you need to follow and IRS may look at this as "constructively receiving the money" in 2011. Don't do it without your tax consultant's advice. Make sure it's a wise business decision as well.
6. Consider contracting now and receiving payment over time. Again, have that tax person at your side before you do this.
7. Consider income averaging – a great tax savings tool that's not used enough. Ag tax practitioners are advising it more now with the big fluctuations between high/low income years.
8. Look at IRA contributions, end-of-year bonuses and paying family for their help. (Note: True employee/employer relationship must exist.) Look at previous years losses. Also explore bonus or "special depreciation" methods. But talk with your tax person now about them, and figure out your taxes before versus after any transactions.
9. While you might not pay income taxes, you might well want to pay social security self-employment tax. Social Security, while it wasn't designed to be the only retirement income, is a retirement income. You have to pay into it to get benefits back. Social security also has disability benefits, child care benefits and survivor benefits.
10. Is now the time to take your money and run? What if, in your view, the tax rate will never be lower, and may be rising.
If tax cuts so hyped over past years exit the scene, now might well be the time to pay the high tax bill and let the following years be lower – via higher future tax rates and fewer tax management options.
11. Is it time to exit farming? Rogers isn't encouraging it. But with record or near-record income and willing buyers on the other side, it may be time to start the transition out. If that's the case, begin working with your tax and farm management people and, hopefully, your farm's next generation for two to five years to ensure a smooth and least taxing transition.
"While tax savings and reduction mechanisms are nice, don't let them drive your business," he cautions. "Instead, let tax rules help you make the most of your business."