Year-End Tax Planning for Farmers
“Traditional” Tax Strategies May Not Work in 2020
If 2020 has taught us anything, it’s that we need to be prepared for anything. Market changes, weather events, COVID-19, and other factors made this an incredibly challenging year for almost every industry, including agriculture. On November 30, 2020 Jennifer Berning, CPA and Principal, participated in a webinar where she discussed tax planning strategies for farmers.
When it comes to year-end tax planning, and 2020 in particular, what farmers want to look at is not only where they are in the current tax year but also what makes sense over a range of years. It isn’t always best to minimize income in 2020, especially when we may be at the cusp of higher tax brackets in future years. Regardless of what does or does not happen with Biden’s tax proposals, Jennifer’s point about the substantial increase in national debt is something to consider, because it also has a lasting impact on taxpayers. Given that information, 2020 is probably a year when farmers want to pick up more income if possible.
She mentioned targeting grain sales – perhaps selling more in 2020 – and getting away from prepaid expenses, something that would traditionally have been done in the past at year-end. Farmers are in a unique position where they can choose to sell their grain now, when prices are good, but defer the contract and pick up that income in 2021. The best strategy depends on each situation.
The same goes for prepaid expenses, she said. In normal tax planning years, prepaid expenses might be shifted to the current year to lower taxes. 2020 is a good year to minimize income and pay a little more in taxes, despite how counterintuitive it may seem. Again, the best strategy depends on the unique situation and there is no one size fits all solution.
Another aspect of year-end tax planning that farmers should look at is entity structure. Entity structure can play a huge part in taxation. Jennifer likes the LLC for liability control, but S-Corps have certain tax advantages. Farmers need to speak with their tax advisor, financial team, and attorneys to determine what entity structure makes the most sense moving forward.
Bonus depreciation is yet another year-end tax planning consideration. Farmers have had 100 percent bonus depreciation on new assets placed in service since the Tax Cuts and Jobs Act of 2017. That is scheduled to scale down over the next few years until 2025, when 100 percent bonus depreciation will be just 40 percent.
Jennifer explained that if farmers need to buy equipment and can choose when to buy it, the best timing for tax purposes is to buy it now. The alternative is to wait and take a different Section 179 depreciation deduction or take the regularly scheduled depreciation and allow the equipment to run out the course of its useful life. Biden has proposed doing away with 100 percent bonus depreciation, so that’s something to consider.
Lastly, farmers that are charitably inclined can gift grain. Grain that is gifted to a charitable organization will not be taxed. Not only does this strategy save on income taxes, but it also saves farmers on self-employment taxes – a double benefit. This would provide a better tax benefit for active farmers, especially if they planned on donating to charity anyway.
Tax credits can be another year-end tax planning strategy, as Bill Glazner explained in this post.
For more information about other year-end tax planning strategies and considerations in light of Biden’s proposed tax changes, listen to the recording of our November 30, 2020 webinar anytime. Farmers with questions about their specific situation can reach out to Adams Brown’s Agriculture team.