Eide Bailly LLP – Jerad Michels

Importance of Tax Planning in Down Years

The common misconception for ag producers is that tax planning is only necessary when the ag economy is doing well and the farmer wants to minimize their tax burden. However, planning during down years is just as important to prevent losing deductions and credits that could be helpful during those tough times. It’s common practice for farmers to hold on to grain when prices are poor but operating expenses are still ongoing. This can cause large variances in income from one year to the next, but proper tax planning can prevent that variance and offset future income.

Typically, the first thing that should be avoided is a negative farming operation. It’s important to avoid a Net Operating Loss (NOL) in any given year because that loss will offset the income in future years but will not offset the 15.3% Self-Employment (S.E.) tax that is applied to self-employed individuals. The next thing to focus on is preserving the free standard deduction of $24,800 for a married filing joint family. This deduction does not carry over if lost this year, and applicable taxpayers receive one each year. Finally, bringing in income and having a net positive farm operation may provide additional credits that you would not receive with a NOL. The Earned Income Credit (EIC) could potentially provide thousands of refundable credits to an individual, but proper planning needs to be done to achieve this credit. An additional benefit to consider is the Commodity Credit Corporation (CCC) loan. CCC loans are a great way to bring in income without having to sell grain when prices are not favorable.

Ag Producers have some possibilities to maneuver income after year-end, but other opportunities need to be established before that time. Also, tax planning can help ag producers figure out where they are sitting for taxable income and set up a plan to push off expenses or take in income. Potentially, selling grain at a lower price could be better than losing the Standard Deduction, EIC, S.E. tax and continued operating loan interest.

No individual ag producer’s situation is the same, so it’s important to meet with your tax advisor, especially when times are tough—it may save you from creating those large unkind variances.

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