In agriculture, there are a variety of tax laws, deductions and requirements unique to the industry.
As a result, when it comes time to file the annual tax return, many producers face an unexpected tax bill that could have been alleviated, or at least anticipated, had appropriate planning taken place.
Two components of tax planning
Tax professionals can help ag businesses get a handle on their tax liability via tax planning, which consists of two components:
First, a tax projection provides the projected tax impact for the current year based on the expected financial outcome.
The second component identifies and analyzes opportunities. This allows the producer to consider “What if?” scenarios to make proactive decisions that lessen their overall tax burden. This piece is crucial during unusual events such as purchasing or leasing a new piece of property or selling livestock.
For thorough tax planning, it’s important to look not only at the immediate effects of a decision, but also the effects it will have long term. This insight can help producers evaluate major decisions and potentially change their course of action to earn the greatest overall tax benefit.
Tax planning during a loss year
There are many complicating factors for businesses with losses that could yield an unexpected result. A best practice is to continue to tax-plan to manage a loss in the most tax-effective manner possible.
You should also keep your checkbook in mind. For capital-intensive businesses, a low checkbook balance does not always mean low earnings. For example, taxpayers will rarely get a tax deduction when purchasing land. Therefore, it’s possible for a business to part with large sums of money and still be liable for taxes.
In such cases, tax planning can help mitigate taxes and aid in planning for enough capital to meet all obligations.
Planning for the next generation
When it comes to a producer’s exit strategy, tax planning should also be considered.
Tax planning can help producers draft the most beneficial and affordable transition plan for all parties involved.
Timing is crucial
Regardless of the situation, I can’t stress enough the importance of timing. Communicating with your tax professional before decisions are made can make all the difference.
Additionally, there are many tools built into the tax code dependent on timing, and choosing to execute now vs. in the future, or vice versa, can have significant tax consequences.
My advice: As soon as you have an idea for your business, from a routine equipment purchase to a longer-term business transition, it is best to call your tax adviser for advice.
Norton is a Farm Credit East tax specialist in Presque Isle, Maine.