Typically, we think of the importance of tax planning when things are going very well for the industry because it equates to higher income, and therefore managing the taxation of that income is an important consideration.
However, income tax planning is still important in economically difficult years. This year is a good example. While many segments of ag production have lost money during the year, it is still possible to have taxable income and a tax liability that could shock farmers, ranchers and cattle feeders if they are not prepared for it.
K·Coe Pro Tip #1: Don’t delay planning.
Ag producers should plan for projected taxable income to provide time to implement strategies to manage taxable income. There are some strategies and tools that allow the producer to accelerate income or deductions if there is significant uncertainty through the end of the tax year. In addition, producers can maximize the impact of those tax planning strategies using intelligence gathered on operations/markets through a good portion of the next year if they extend the filing of their income tax returns.
K·Coe Pro Tip #2: Manage tax liability.
Consider these options for managing any tax liability:
- Rather than a total tax-aversion strategy, it is usually wise to load up lower tax brackets with taxable income, or break even and plan to average income back in future years if profitable to take advantage of the lower tax brackets.
- The next level of tax planning for income beyond the lower rates involves the deferral of income and acceleration of expenses. Contracting and prepaying inputs to accelerate expense is common, and deferred payment contracts on sold goods are also used.
- Monitor potential for additional business risks, such as third-party risk, market risk, financial risk and even interest rate risk, which must be balanced against the anticipated tax benefit through planning.
- Consider accelerated depreciation as a tool to use when managing taxable income.
K·Coe Pro Tip #3: Implement longer-term strategies.
Create multiple entities for various components of the overall business with varying year-ends.
For example, a farming entity combined with a land ownership entity allows for some deferral and acceleration strategies among the entities, but keeps the total dollars involved within the ownership umbrella. This can provide significant benefits to the owners, not just from income taxes but also for business risk and succession planning.
Of course, there are many other variables that should be assessed – ranging from simple to wildly complex – growing deferrals, operating risks, estate plans, retirement planning, or business downsizing. In these cases, and in preparation for what the 2020 tax year might yield, it’s always best to consult with a professional tax advisor for the best short- and long-term decisions for your business.
Contact a K·Coe tax expert with questions or to get started on a strategic business tax assessment.