| Published: November 03, 2022

Prepare For Year-End Tax Planning and Filings

Not everyone enjoys doing taxes, but they are an annual requirement for most of us. If you are a farmer or small business owner, tax time can be especially challenging!

Have you been maximizing your tax deductions? Are there items that are falling through the tax cracks? As a farm tax accountant, I highly encourage you to look at these common items that you may need to analyze every year.

Take control over your tax plan

Annual tax planning is a proactive way to minimize tax liabilities and ensure all available allowances, deductions, exclusions, and exemptions are working together in the most tax-efficient way. This can reduce your total income tax paid each year. We’ve seen increased commodity prices and unexpected twists and turns in the industry this year. Items like equipment trades, timber sales, and even a large business loss can affect your bottom line and tax return this year, but may also prevent an unexpected tax bill in future years.

Decrease taxable income

Common expenditures to reduce taxable income include:

  • Prepaying inputs and other allowed items, capital expenditures, and retirement contributions. Depending on your entity structure, retirement plan contributions can be significant, especially for self-employed individuals via a Simplified Employee Pension (SEP) or other qualified plan. Having a diversification of retirement assets outside of farming is a good thing!
  • Healthcare deductions: create an employee benefits deduction to allow for business deduction of these expenses. A common way that farmers do this is farm income averaging. This is a way to average all or some of your farm income using rates from the three prior years.

Increase taxable income 

If a farm loss is inevitable, common ways to increase income include:

  • IRA distributions
  • IRA to ROTH IRA conversions. In the pathway of an IRA to ROTH IRA conversion, this can generate taxable income on the tax return, but the earnings are tax free. If you have a farm loss, this income that is generated by the conversion and no income taxes would be owed on the money rolled into an IRA.
  • Selling of non-farm capital assets
  • Are your repair bills high this year? You can make an election to capitalize repairs rather than expensing them. This can be adjusted on an annual basis.

Before tax planning, review the following items:

  1. Update your balance sheet and profit/loss statement.
    Having your records up-to-date is important because the balance sheet gives a financial snapshot of your business at that time. Comparing your profit and loss year-end statement aids you in measuring your business’ success. This means you have to dig deep into reconciling your bank accounts and cleaning up the check register. If you aren’t sure where to start with these items, contact us – we have a few templates for you to use!
  2. Review your budget and examine your cash reserves.
    This process is important to know how much cash you'll have available between now and yearend. Did you purchase or plan to purchase any fertilizer, feed, chemicals, etc. that are considered a prepay? These were purchased at a discount, but are usually stored and used in the next coming year. It's important to identify the prepaid expenses to possibly move these items to the balance sheet. These prepays can increase your expenses, but may take your profit into a loss. A rule of thumb is to use 50 or 100 percent of the prepays andmove those into the next year. 
  3. Do you have dead assets? Be sure to review your depreciation schedule for all of your current livestock buildings, machinery, and equipment. Clearing out old items that are no longer on the farm is important to update on the depreciation schedule.

Last, but not least, start tabulating your amounts for 1099 filings and wrapping up your fourth quarter payroll filings. Soon, it will be time to file 1099s and distribute your employee’s W2s. This year’s tax deadline for entity filers is March 15, 2023 and individual filers is April 15, 2023.

Keep these items on your to-do list for tax preparation to save some money or spark your interest to get last year’s tax filing amended and save you tax dollars. Call your tax accountant and business financial team to schedule an appointment for more guidance and to discuss these options. 

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