Are You Taming The Deferred Tax Monster?!
The Farm Doc Daily just released a new article today titled “The Deferred Tax Monster“. Current deferred taxes is comprised of the estimated taxes owed on deferring crop sales and prepaying farm expenses. Intermediate deferred taxes are the taxes owed on selling farm equipment. Long-term deferred taxes are the amounts owed on selling farm land. It is highly unlikely that all deferred taxes would ever be owed at one time, but it can happen.
The article presents three graphs. In the first graph, it shows the average deferred tax by type of asset from 2003 to 2016 based on their database of Illinois farmers. Beginning with the ethanol mandate, current deferred taxes accelerated compared to the others. It peaked out in 2012 with the extra revenue generated by high corn and soybean prices and crop insurance proceeds. It has now dropped back to being on par with intermediate and long-term deferred taxes. Intermediate and long-term deferred taxes increased at a steady rate and did not have the volatility of current deferred taxes.
Graph 2 shows the amount of deferred tax due to land, machinery and buildings. As expected, the greatest amount of deferred tax in this chart is land at an average of about $1.8 million per farm. This is an increase of almost $1.3 million from 2003. Machinery deferred taxes has increased from about $200,000 to $600,000 during the same time period. This is primarily due to the use of Section 179 and bonus depreciation. Farm buildings has showed the lowest amount of increase primarily due to Section 179 not being allowed on farm buildings (in most cases). It has not quite reached the $200,000 level yet.
Graph 3 shows Total Deferred Tax vs. Net Worth. The ratio of deferred tax to net worth peaked in 2008 at 27.3% and had decreased slightly to 24.5% in 2016.
Most farm financial statements do not show deferred taxes since most expect it not to be owed. However, as farmers approach retirement (especially if there is no successor), deferred taxes becomes a “real” liability. A good farm financial manager will calculate this liability each year and know how to manage it. Others will be surprised when it “comes home to roost”.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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