It’s Never too Early…For Tax Planning
High commodity prices, extreme input costs, continued inflation in the used equipment market combined with supply chain issues on new equipment will again make planning for income tax an adventure this year. The traditional “levers” that can be pulled to manage farm incomes are, to say the least, a bit out of sorts. Expectation in the grain belt is that 2022 farms incomes will be extremely good, assuming inputs were bought “right” last fall.
In recent years, I’ve had several clients move from the year-end projection to the mid-year projection. By August, most producers will have a good idea of where they stand for the year in terms of current crop year expenses and will have an expectation as to yield. Planning now and revisiting in December, gives a producer more time and more options in terms of which lever to pull and more time to prepare for what could be a substantial 2022 tax bill. It also appears that there is not any significant tax reform on the table in Washington, thereby eliminating unknowns that have interfered with planning in recent years.
Some things to consider as planning begins:
•Equipment values are high and interest is no longer “cheap”. Consider selling some of that excess equipment that hangs around the barnyard. The tax will take care of itself with the increase in prices compared to three years ago.
• Grain prices have never been higher. Are you better off to sell out of the field and avoid storage charges? If more grain than normal is sold this fall, remember to use deferred payment contracts in small bushel amounts in order to provide for maximum post-mortem planning, as that income can be picked up in either 2022 or 2023 if it is handled correctly.
• Producers always refer to their land and their equipment as their retirement plan. But wouldn’t it be nice to have some liquid assets on which to retire on? Too many farmers do not take advantage of retirement plans to build a bucket of assets outside of their farm assets. There are many plans more powerful than the IRA that can provide for a tax deduction and allow the farmer to hold onto their own dollars.
• Is it time to pay some tax? Tax rates have never been lower, farm debt has increased, and rates are going up. It is hard to find and acquire equipment at reasonable values. Is it just time to pay the tax? If your tax bracket can be managed, it may be beneficial to hold onto some cash either to pay down debt or self-finance 2023 inputs.
These are just a few of the planning options to consider. Agriculture has more opportunities than any other industry to tax plan. Take advantage of it early so that you do not get caught with a surprise at the end of the year.
Kelly Jackson Hardy is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers, privately-held elevators and supply dealers, and cooperatives. Kelly is a principal with CliftonLarsonAllen in Princeton, Illinois, as well as a regular speaker at tax and estate planning seminars. Kelly was raised on a hog, row crop and cattle farm in central Illinois and has been involved in the ag industry her entire life. Kelly, her husband, and two sons are active in 4-H and operate a small feeder calf operation and pumpkin business.
Is it possible to elect out of a basis contract to pull the income back into the prior year, and if so, how do you determine the price to pull in?