Planning Strategies and Key Reminders for Taxes

By Samantha Gehrett

Another year has come and gone. Hopefully, an accountant has visited the farm prior to the start of the New Year. Proper year-end planning is critical in understanding the farm's tax liability. Preparation is key in a farm's business management plan. It's important to close 2021's year-end business transactions properly. There are several reminders to consider as that all-important date of April 15^th approaches. The IRS provides a publication titled Farmer's Tax Guide (Pub 225). It provides important information and explanation on how federal tax laws apply to farming.

As the COVID-19 pandemic continues most government payments to farmers and small businesses require their inclusion as income on the annual federal or state tax return. Crop insurance payments, crop and livestock disaster payments, Commodity Credit Corporation (CCC) payments, state or county grants or payments funded by the CARES Act, Coronavirus Food Assistance Program (CFAP 1 & 2), and Pandemic Assistance for Producers (PAP) are some of the common governmental programs that require inclusion in gross income on yearly tax returns. These payments will be reported on Forms 1099-G and CCC-1099-G that will be sent at the end of the year to report the governmental payments received. Just a reminder that regular crop insurance proceeds are on a 1099-MISC.

One of the main strategies in tax preparation are prepaid expenses. Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired. An example of a prepaid expense is purchasing seed before the year-end. That seed would be considered a prepaid expense since it will be used the following year but paid for in the current year. There are tax rules, however, to using prepaid expenses. The 2021 Farmers Tax Guide from the IRS says prepayments must meet the following conditions: Must be for an actual purchase and not a deposit. The prepayment has a business purpose and is not merely for tax avoidance. There are a couple of exceptions to using prepaid expenses. The limit on the deduction for prepaid farm expenses does not apply if you are a farmer and either of the following applies: Your prepaid farm expense is more than 50 percent of your other deductible farm expenses because of a change in the business operations caused by unusual circumstances. Your total prepaid farm expense for the previous three tax years is less than 50 percent of your total other deductible farm expenses for those three years. The maximum pre-paid amount is calculated each year based upon the final figures on Schedule F.

Too often accountants run into clients who would prefer to pay no taxes or very minimal taxes. However, a successful business that has generated income does pay taxes. The objective is to minimize the amount of taxes over the lifetime of the business versus focusing on one year. This is important to remember when you are having this conversation with your accountant. One area that is often misused is the 179 expenses. Many times, the professionals have clients telling them they want to write off all of that new tractor. However, they put that tractor on credit. This means if you 179 expense that tractor completely and not just depreciate it, you will not have anything to offset that payment you'll be making. In addition, should you want to apply for a loan, a lender will ask to see your past 3 year's tax returns before deciding to lend you money. Multiple years of loss on tax returns paints a very negative picture of your farm operation.

Section 179 depreciation allows you to expense qualified property during the year it is placed in service instead of depreciating property over a series of years as capitalized assets. Qualifying property for Section 179 includes: purchased breeding livestock, machinery, single-purpose agricultural structures (e.g. chicken houses or hog houses). For calendar year 2021, the maximum Section 179 deduction is $1,050,000. The investment limit for qualifying property is $2,620,000. It's important to note that you can take a Section 179 deduction on the qualifying property regardless of whether the asset is new or used; however, you cannot buy the asset from a related party (lineal descendant).

Business planning can be accomplished in any setting.

Bonus depreciation (also known as additional first year or special depreciation) is the second method of accelerated depreciation.

• The bonus depreciation allowance is 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023.
• With bonus depreciation, the assets may be new or used.
• Purchases of qualified used property meet the criteria for the deduction unless purchased from a related party.

In closing, it is important to understand your business's financial management, especially with regard to long-term tax implications for decisions. While you'll most likely want to be in the fields or caring for your cows, it's important to have those conversations with the professionals that you are paying to complete your taxes. If you don't understand, ask. These professionals are there to assist you and guide you in those important financial decisions. The Penn State Dairy Business Management team can assist you too in some of those critical business management needs. It's crucial to stay organized and have a team of professionals in your corner to help your business succeed.