How to avoid common year-end tax mistakes
Monday, July 3, 2023
Reference: FCC
What are some common mistakes farmers make at year-end, and how can they be avoided?
I always look for what clients are missing. At year-end, that might mean checking if the optional inventory adjustment is being used properly. For farmers working on a cash basis, this allows them to include income in the current year up to the total value of their inventory; so, if your inventory is worth $500,000, you can include $500,000 of extra income in the current year. The rest can be rolled over. This is useful if someone has invested in new equipment; it allows them to smooth their income out over time.
Planning for retirement can be another important topic at tax time. Farmers and farm families should develop a wind-down plan that accounts for their specific goals and, for those who might be taking over the business, setting them up. Consider the value of your equipment and what’s left in the depreciation pool. It’s tempting to go after the biggest write-off, but that’s not always the best thing for the long term.
Being mindful of farm structure is always important. There are benefits and drawbacks to incorporating. Just because a business might incorporate doesn’t mean everything in the farm – specifically land – must go along with it. It’s goal-dependent but retaining some personal ownership can be a good thing.
A lot of people aren’t using AgriInvest and AgriStability. AgriInvest allows farmers to invest 1% of their sales – after production costs are subtracted – into a government account. The government then matches that investment dollar for dollar, only taxing it once funds are withdrawn. It’s designed to help save money for difficult years, though is sometimes used as a savings account. I recommend producers discuss both stability programs with their accountant.
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