After you file taxes this year, you might consider having a conversation with your accountant about how you can manage this year's tax liabilities. Paul Neiffer, a CPA with CliftonLarsonAllen and the writer behind the Farm CPA blog, suggests starting with these five topics:
1. What's your deferred tax liability?
Deferred tax liability is the amount of taxes you would owe if you had to liquidate all of your operating assets. It's important you have this information on hand in 2016 because if you're forced to downsize this year, there will be a large tax burden, Neiffer says. "Each year at the beginning of the year when you're doing your tax return, sit down with your tax adviser to calculate how much of a deferred tax liability you have," he says. "As tax advisers we're always good at lowering your income tax but we're not very good and planning for the impact that will have later."
2. Are you using Section 179 appropriately?
The Section 179 deduction is now permanent at $500,000. This is great news for farmers, but Neiffer says you need to be careful how you use it because it can become a tax trap. "If you take Section 179 and you're financing the machine, you are going to be recognizing income in future years when you already have the deduction in the current year," he says. "It's a ticking tax time bomb." For example: A farmer took the $500,000 deduction in year one. In year two, they have a $100,000 payment on that machine. They either have to recognize it as income or defer it to the next year. And the cycle continues. "You will get on a treadmill that's hard to get off," Neiffer warns.
3. Are you paying your kids enough for working on the farm?
Neiffer advises farmers to pay working children appropriately because if you don't, you might pay for it on your taxes. His advice? "If you pay your children under 18 up to $6,000, it's completely free of federal tax for the child, and they can invest it in a Roth IRA," he says. "For the parents, it's completely tax-deductible. You don't have to pay payroll taxes, it reduces self-employment tax and reduces income tax."
4. Do you have any deferred payment contracts?
If you have grain to sell, Neiffer recommends you sell some of it with deferred payment contracts. Your tax adviser can use the income you're scheduled to receive in 2017 if they need to show more income on your 2016 returns. "They've sold the grain and they've locked in the price, but they will get paid in 2017," he explains. "What we like about those contracts is it allows us to bring more income into 2016 if we need it."
5. Have you invested in a good accounting system?
If you don't already have good accounting software, Neiffer recommends purchasing it now. Without accurate records, your tax adviser can't prepare accurate tax estimations. "The better [a farm's] accounting records are, the easier it is for us to give good tax planning advice," he explains. Neiffer doesn't care which software system you use, but says the $1,000 spent on the software will pay for itself in tax savings thanks to the better records it will provide.