Farm Tax & Financial Planning Strategies for 2022
December 2, 2022 | by Kurt Groff, CPA & Partner with Simon Lever
Agricultural markets have seen continued market volatility over the past few years. The impact of COVID, shutdowns, supply shortages, the Russian invasion of Ukraine, wage pressures, shortage of truck drivers, limited supply of new equipment, and spikes in commodity prices, fuel costs, and, recently, interest rates have all contributed to extreme unpredictability.
Fortunately, most ag sectors have seen increased revenues to help absorb these higher input costs. Governmental grants have also provided much-needed funding over recent years. With volatility comes both pressure to make a profit and profit-making potential. Making wise financial decisions is key to capitalize on strong profits today and to prepare for a possible period of lower profitability in the future. At Simon Lever, our focus is on maximizing your success while managing tax liabilities and business cash flow to help prepare you for sustainable growth. As we approach the end of another year, here are a few tax planning and overall financial planning strategies to consider.
Farm Tax Strategies
The strategies mentioned below are designed to lower taxable farm income in a year of strong profits. These strategies can be applied annually to continue to defer income and taxes to future years. Our goal is to offer proactive advice that lowers your tax bracket by utilizing tax benefits accessible to a farming business.
- Prepay farm expenses. Prepaid expenses is a widely used planning tool for farmers. Paying for your 2023 seed and fertilizer not only creates a tax write-off, but it also secures product availability and locks in certain early pay discounts.
Livestock farmers have an even greater ability to prepay their feed for the next year. There are specific requirements for these payments, including non-refundability of your payment, a specific quantity of feed, not prepaying more than one year of feed, and total prepaid expenses can’t exceed 50% of your Schedule F expenses for the year. Consult your tax advisor for assistance with this determination.
- Delay collection of crop income until January 2023 by utilizing a local grain bank or by creating a storage arrangement with the mill where you deliver your fall crop.
Consider the benefits of constructing grain storage to capitalize on the tax deduction while capturing higher crop revenue for storing the grain.
- Delay receipt of milk, livestock, or other farming revenue by entering into an agreement with your co-op or packer to defer income until 2023. These arrangements need to be signed in advance.
- Purchase necessary equipment before year-end, but beware: new equipment is nearly impossible to find on the lot! We’re hearing that most equipment dealers have sold the equipment sitting on their lot and you may need to wait 3–6 months to receive equipment ordered today. The IRS is clear: to depreciate equipment purchased in 2022, you must receive the equipment by the end of the year, making it available for use. A deposit on a piece of equipment that hasn’t been manufactured would not meet this requirement.
Consider purchasing a new or used no-till planter or drill. Not only does this help you with a tax write-off, but Pennsylvania offers a tax credit equal to 50% of your cost to purchase the no-till equipment. The credit is through the Resource Enhancement and Protection Act (REAP). The credit cannot be used in conjunction with any public grant funds, such as EQUIP.
Eligible costs that qualify for REAP tax credits include constructed manure pits, constructed waterways, fencing around streams, manure injection equipment, and costs to create or modify nutrient management plans. Simon Lever advisors can assist with the application process and determine if your farm has incurred eligible costs. These credits can be sold for approximately 85 cents on the dollar. Contact a Simon Lever advisor for more information on REAP credits.
- Contribute to a retirement account, such as an individual retirement account (IRA). Taxpayers under the age of 50 years old can contribute up to $6,000 for 2022. If you are over the age of 50, you can contribute $7,000 to an IRA. Consult your tax advisor on the differences between a traditional IRA and a Roth IRA to determine what is best for you.
- Pay your children working on your farm operation. Children can report up to $12,950 of federal income and not owe any tax. This could effectively shift income out of the 22% federal bracket of the parents and save $2,849 in federal taxes.
- Utilize the farm income averaging, which helps lower taxes when there is a spike in farm profits. This is a tax calculation that is done on Schedule J of your personal income tax return and is only available for farmers. In some instances, this can save $10,000 or more in federal taxes.
Farm Financial Planning Strategies
- Review your wills and ensure you have medical and financial powers of attorney in place.
- Review beneficiary designations on life insurance and retirement account to ensure your intentions haven’t changed. Please note that beneficiary designations impact the flow of these funds ahead of your will.
- With rising interest rates, consider using current funds to purchase new equipment without borrowing and pay only the minimum payments on older loans at much lower rates of interest. In the end, the amount of borrowings are the same, but you can keep lower-rate loans and avoid new loans at much higher interest rates.
- Pay down lines of credit with excess savings to prepare for the next downturn in farm profits.
- Consider low interest rate loans available through the Economic Development Company of Lancaster County, which offer low fixed rates for longer periods of time.
- Consider farmland preservation opportunities, which can help with farm transition planning. Preservation funds are non-taxable to the extent the farm has sufficient cost basis to offset the proceeds. Preservation funds can also be applied through a 1031 exchange to purchase other real estate tax-free.
- Consider bunching charitable donations from two years into one. Charitable giving requires careful tax planning in light of the standard deduction being $25,900 for 2022. A donor-advised fund can help to capture added donations in one year and allocate the funds to charities the following year.
Please contact Simon Lever for more information, or contact your personal tax advisor to incorporate these concepts into your year-end planning.
Disclaimer: Information provided by Simon Lever as part of this blog post is intended for reference only. This information is not a substitute for seeking professional advice from a Simon Lever advisor. Although Simon Lever has made every effort to ensure that the information provided is accurate, the reader assumes all responsibility for the use of this information.