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Accounting Officer, AgChoice Farm Credit 

Tax Planning Tips and Important Tax Preparing Strategies


October 10, 2019


Accounting Officer

AgChoice Farm Credit

It’s October. Many people are not thinking about tax planning. However, tax planning is crucial to do every year.

Not just to look at income and expenses, but also at tax preparing strategies that are uniquely available to farmers. Here are three main tips, and two preparation strategies to gain the most from your planning visit with your farm accounting and tax professional.

Three Tips

Collect records on all of your capital purchases and disposals during the year, including any livestock. Information on purchases will reveal how much depreciation and possible section 179 expense is available to offset income. Information on disposals is needed to determine how much income will be subject to capital gains treatment versus ordinary income.

Provide year-to-date income and expenses. Providing the most accurate and up-to-date information on income and expenses will help your accountant set the basis for estimating your tax position. Itemize your large repair bills for your accountant to consider depreciating them.

Prepare a projection of remaining expenses and income for rest of the year. Having an idea of what you expect in income and expenses for rest of the year is important for your accountant to take into consideration when providing the tax estimate.

Preparation strategies unique to farmers

The “Optional Method” for farmers provides self-employed persons with little or no income (likely in 2019 with continued low milk and crop prices) the option to pay a small amount of self-employment tax for the tax year. It is important to show earnings to receive credit from Social Security that count toward earning requirements to collect retirement benefits and disability in the future.

In many cases for people with children, the taxpayers can use the earned income credit and additional child tax credits to offset the self-employment tax. To qualify for these credits, there must be earnings, which the “Optional Method” for farmers provides.

Farm Income Averaging provides benefits to farmers in loss years as well as profit years. It is unfortunate, but farms will be selling cows and equipment and exiting the dairy business this year. Selling those assets will trigger ordinary and capital gains. In simple terms, with the last number of years prior also not too profitable, there is an opportunity to use Farm Income Averaging to spread the gains on cows and equipment back over three years prior and take advantage of filling up some lower tax brackets.

During a year of a herd and farm equipment dispersal, there are many tax considerations that will require a tax professional. Farm Income Averaging might be a good tool to consider alleviating some tax liability.

Editor’s Note: The Herald provides this information to agriculture professionals in cooperation with AgChoice Farm Credit.


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