The Value of Tax Planning for Farmers: Why It Is Essential for Success
Benefits of Showing Annual Profit & Having a Tax Plan
Farmers understand the importance of planning for the future. Tax planning is an essential part of farm financial management, and it can be beneficial to plan ahead to ensure the business is taking advantage of all available deductions, credits and other tax savings opportunities.
Taxes are an inevitable part of any business and farmers are no exception
Some farmers have a goal of never paying taxes. No one likes paying taxes, but paying some tax also can provide multiple benefits to the farmer. A goal for a farmer should be paying taxes at the appropriate level, thereby utilizing lowest tax brackets that are available each year and implementing a plan so they do not pay unnecessary taxes.
Advantages of Showing Profit
Farmers showing a profit and paying taxes allows them to reinvest money back into their business to ensure their long-term sustainability and success. When farmers reinvest money into their business to cover production costs, without building a larger debt load, that eventually becomes more and more difficult to manage.
Banks evaluate the risk level of each of their clients which dictates the availability and terms of their loans to that customer. Farmers who consistently show some profit each year demonstrate an ability and mindset to properly manage their debt which leads to better lending terms.
Security of debt alone doesn’t minimize risk that leads to better terms. Banks are directed through regulations to evaluate the customer’s ability to repay debt through normal operations, rather than simply the security of such debt. Improved terms can drive lower interest and possibly a lower payment requirement which in turn improves profitability and cash flow as a result. This can help farmers access the capital they need to grow their business and expand operations as well as minimizing the perpetual cost of their debt.
Harness the Power of Strategic Tax Planning for Farmers
Each year’s tax plan should be in alignment with your long-term strategic plan and vision for the success of your farm as well as personally. Showing a profit and paying taxes each year can be important for farmers because it allows them to take advantage of government incentives and tax breaks. Here are some of the fundamental tax planning tools for farmers:
- Deferring income on production-related crop insurance and deferring income using commodity contracts
- Using 199A deductions (which are lost each year they are not used)
- Bonus depreciation & Section 179
- Entity structures planning to reduce effective tax rates
- Income averaging
- Use of tax credits such as Research and Development credits
- Charitable giving of commodities
These are just a few of the planning options to consider. Tax planning requires creative thinking and a strong understanding of the tax code. Currently, the tax code recognizes the difficult environment that farmers face and allows CPAs to use various tools to manage taxable farm income annually.
Adams Brown’s farm CPAs can help create a tax plan and ensure they make the most of their income and take advantage of all tax planning tools. With the right strategies, farmers can minimize tax liability while still maximizing profits. Contact an Adams Brown advisor to start a conversation about tax planning.