MANHATTAN, Kan. — With the new year straight ahead, there’s no better time for farmers and ranchers to take stock of where they are financially in order to put them in the best tax situation possible, according to agricultural economist Mark Dikeman.
Dikeman, associate director of the Kansas Farm Management Association at Kansas State University, said some farmers arrive at the end of the year without a good understanding of where they are financially. Spending time now to determine where your operation is can benefit a farmer in the long run.
“In the last 10 years, we’ve looked at tax planning from the perspective of keeping income down and staying in a certain tax bracket,” Dikeman said, but with lower commodity prices the last couple of years, some farmers may be on the brink of showing a net operating loss, which has its own pitfalls, tax-wise.
In addition to obvious reasons to avoid such a loss, a net operating loss means a farmer will not be able to utilize personal exemptions, capital loss carryovers, or all of their standard deduction.
“That’s lost to you. Avoiding a net operating loss is always a good idea. For a married couple with two children, that is up to $28,900 in lost deductions in 2017,” Dikeman said.
He provided year-end tips:
- Get your records in order. Having an accurate set of records is critical for a tax preparer to work with. That doesn’t mean a shoebox with a bunch of receipts. A computer program or ledger sheet — something that’s reconciled back to a bank statement — is best. If you don’t have that set up, consider that your New Year’s resolution so you’ll be better prepared next year.
- Don’t wait until the last minute to get your records in order. Waiting until December to start your bookkeeping for the year means guessing about checks written in January and that doesn’t lead to accurate records.
- Meet with your tax preparer before the end of the year to discuss your current financial situation and what tax bracket you’re likely to be in. Allow enough time to bring in additional income if facing a net operating loss or to make additional purchases if your income is too high.
- If a farm loss is inevitable, think outside the box to bring in additional income. Extra IRA distributions, traditional IRA to Roth IRA conversions, or non-farm capital asset sales (like stocks) can potentially offset negative farm income and avoid a net operating loss.
- Remember the option to sell grain using a deferred contract. In that case, you can sell grain before the end of the year, but not be paid until after the first of the next year. You then have flexibility to decide, after the fact, if you need additional income in the year that the crop was sold. Make sure you sell in several small contracts rather than one large contract to provide more flexibility for when to show income.
- Make sure you tell your tax preparer about all equipment purchases. If equipment is dealer- or manufacturer-financed, it won’t show up in your bank accounts. That can be $300,000 or $400,000 that your tax preparer doesn’t know about it unless you tell him or her.
For farmers, part of tax planning involves understanding your options regarding when you file your return and pay taxes. The most popular, Dikeman said, is to not make any estimated tax payments, but in that case, you must file your return and pay all tax due by March 1. The downside is that if you have investments in stocks or mutual funds through brokerage accounts, some of those firms don’t mail 1099 forms until mid to late February which may not allow enough time to file by the deadline.
Other options are to make quarterly estimated tax payments, although this is the least popular. In that case, the tax return must be filed by April 15. This option may be required if less than two-thirds of your gross income comes from farming.
Some farmers make one annual estimated payment which must be paid by Jan. 15, though the tax return itself must be filed by April 15. In that case, the smaller of 100 percent of last year’s tax liability or two-thirds of this year’s tax liability is the estimated payment amount with any shortfall due when the return is filed.
A final option for farmers when it comes to filing deadlines is to not pay any estimated tax and file by April 15. If a farmer owes tax, this would likely result in penalties and interest, Dikeman said, but usually not as much as interest paid if they had to borrow the funds to pay taxes.
“More and more are doing that because cash is tight and operating loan balances are high. Depending on the situation, it might make sense to do that,” he added.