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November 17, 2021

Farm Tax Preparation: Tax Planning Tips for Farmers

Filing farm taxes requires sufficient planning in advance to ensure the most beneficial outcome for your operation.   

With any business, finding ways to minimize tax burden is important to the bottom line. When funds that would otherwise go towards taxes are saved, they can then be redirected towards sustaining a thriving farm operation. However, the fluctuating nature of tax guidelines for farmers can make keeping up with the newest regulations daunting. That’s why meeting with a tax professional is crucial to ensure that you receive the maximum deductions possible while also avoiding any mistakes that could lead to penalties.

For some helpful tax preparation tips, follow along as we share some valuable advice from a Certified Management Accountant.  

Disclaimer: This material has been prepared by AgAmerica Lending for informational purposes only and should not be relied on for tax, legal, or accounting purposes. You should consult your own tax, legal, and accounting advisers prior to filing your tax return.  

Tax Deadlines for Farmers 

Before understanding how to file farm taxes, it is essential to know the deadline for both paying and filing your taxes.  

While tax deadlines can vary, here are some general guidelines: 

  • For farmers operating in the calendar year, the tax payment deadline is January 18, 2022, and the filing deadline is March 1, 2022. 
  • For farmers operating in a fiscal year, the tax payment deadline is the 15th day after the end of their tax year. Alternatively, they can pay the tax and file the return by the first day of the third month after the end of their tax year.  

Because tax deadlines can depend on the characteristics of your operation, we strongly advise speaking with a tax professional to make sure you meet your specific deadline. 

Tax Preparation Tips: Reducing Tax Burden and Preserving Working Capital 

Now that you understand when to file and pay your taxes, it’s important to understand the steps you can take while filing farm taxes to preserve your working capital. The goal when filing taxes is to receive more deductions and therefore generate more savings. These savings, in turn, can be used for operational improvements that serve to increase the profitability of your operation. 

Understanding What Is Taxable 

Before exploring how to lighten your tax burden, it is important to understand what does and does not need to be taxed.   

Some examples of taxable income this year include: 

  • Employee retention credit; 
  • Paid sick and family leave; 
  • FSA program payments; 
  • CFAP payments; and 
  • Crop insurance payments. 

Some examples of non-taxable income this year include: 

  • Economic income payments; 
  • Advance child tax credit; and 
  • PPP forgiveness amount.  

Cash Basis Income Reporting  

An important aspect of filing farm taxes is understanding the unique way in which income is reported. Because most farmers use the cash basis accounting system, they only need to report the income that they have received in cash by the end of the year. This differs from accrual accounting where all income, regardless of receipt, is reported. The IRS states, “under the cash method, include in your gross income all items of income you actually or constructively received during the tax year.”  

A unique opportunity with the cash basis is that farmers can, in effect, manage how much revenue they bring in. In the early fall, farmers, in conjunction with a tax professional, should consider the timing of cash receipts and cash expenses. An example includes waiting to sell grain and cattle until after the first of the year so that they do not receive these cash receipts during the current tax year. This allows them to report that income for the following tax year instead of the current one. As a result, they will not need to pay taxes on that income in the current year.  

When waiting to sell commodities, it’s important to have a strong partnership with a lender to ensure that you have the necessary capital to support your operation. Whether it’s purchasing seed or making repairs, farming is a cash-intensive business that requires sufficient capital.  

Texas Ranchers Partner with AgAmerica to Secure Working Capital  

As a perfect example of the importance of working capital, a couple in Texas seeking to upgrade their property partnered with AgAmerica to secure a $2.3MM RLOC. This enabled them to refinance their existing ag mortgage and invest in the growth of their operation.  

Prepaying Expenses 

In addition to managing revenue, farmers should also consider prepaying expenses while engaging in farm tax planning for the year. In general, the IRS states that “ordinary and necessary” expenses can be deducted. An ordinary expense is defined as “a common and accepted cost for that type of business.” A necessary expense is defined as “a cost that is proper for that business.”  

In short, farmers can choose to prepay certain expenses for the following year and deduct them as expenses for the current tax year. Some possible expenses that can be prepaid include chemical, fertilizer, and seed that won’t be utilized until the next growing season. However, it’s important to keep in mind that there are limitations to how many expenses can be prepaid. For example, prepaid expenses cannot exceed 50 percent of other farm expenses in the year of deduction.  

In addition to increasing your deductions, prepaying expenses this year can also help you reduce farm production costs in the following year due to the expected increase in input costs.

Overall, deferring revenue until the subsequent year and prepaying expenses in the current tax year is a strategic way to reduce your tax burden

Income Averaging 

In addition to reducing your taxable income, income averaging is another way to lower your taxes for the current year by filing under a reduced tax rate. In general, when your income over the past three years is less than your current income, you can file your taxes under the lower tax rate from those years, thereby reducing your tax burden.     

Other Tax Deductions 

In addition to managing expenses and revenue and income averaging, there are a few additional tax deductions that can help when filing farm taxes.  

Depreciation Provisions 

To begin, an important deduction to consider is the section 179 deduction. According to this rule, up to $1,050,000 of farm purchases in a given year can be deducted. The purchase limit for this is $2,620,000—after that amount, deductions are reduced. It is also important to keep in mind that most farm assets are included in this, but not all. 

In addition to the section 179 expense deduction limits, there is a 100 percent bonus depreciation through 2022 that can be deducted after taking the 179 deduction. This bonus allows farmers to deduct 100 percent of the value of any farm asset. It is important to keep in mind that if you take this deduction for one asset, every asset in that class must be deducted. For instance, if you deduct the value of your tractor, every piece of equipment must be deducted.  

PPP Loan Forgiveness 

Finally, if you had your Paycheck Protection Payment loan forgiven, it is essential that you acquire the appropriate documentation of this forgiveness in order to receive the tax deduction. For information on how to get your PPP loans forgiven, visit the U.S. Small Business Administration website. 

AgAmerica Partners with American Farmers and Ranchers to Support Operational Longevity 

An operation’s financial health is crucial to its overall success and longevity. That’s why engaging in business planning such as farm tax preparation is so important. Strategically planning for the future of your operation is essential when planning for its resiliency for future generations.  

Visit our resource library for industry updates and more financial tips that can help support your unique operation.  

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