Time to start thinking about tax season

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tax form

How can it be November already? For a year packed with the unexpected, time continues to fly by. In the fourth quarter, crop harvest will be completed and those involved in the farm’s bookkeeping and finances should be thinking about those fun year-end thoughts: tax planning.

While most of us do not get excited about the planning or paying of income taxes, we are fortunate that there is a small but important group of people who really enjoy — and are good at — helping the rest of us do farm income tax work.

Next week, colleague Barry Ward begins six weeks of intensive, two-day Ohio State University Extension Income Tax Schools, which will be attended by hundreds of tax preparers and accountants across the state. In these workshops, tax professionals learn about 2020’s new rules, regulations, changes and all things taxes.

Early in my career, I was encouraged to attended one of the two-day workshops, and did. Never again! As a non-tax preparer, it was just too much information.

For civilians

But, there are two gems in this year’s workshop schedule for us civilians.

The first is a Farmer and Farmland Owner Income Tax Webinar. This two-hour program, scheduled for Dec. 3, 6:30 p.m., is for farmers and farmland owners who would like to increase their knowledge about income taxes specific to agriculture.

Consider this program if you do taxes for yourself or would like to be better prepared for all of the interesting issues related to COVID-related legislation, PPP, EIDL and more as you work with your tax professional.

The second is an Ag Issues Tax Webinar. This is the program that always goes on my December calendar. Scheduled for Dec. 18, from 8:45 a.m. to 3:20 p.m., the webinar digs deeper into tax issues related to farming. Professionals specializing in ag taxes participate, as well as some farmers and extension educators.

Find registration and additional information about all of the income tax programs at farmoffice.osu.edu.

Look ahead

If you haven’t already, make some time to look at your 2020 projected taxable income. Some farms that are selling unpriced grain at harvest may have higher incomes than expected. On the other end of the spectrum, farms may incur unanticipated income tax liabilities when they are having cash flow difficulties.

When bills are not paid, they are not deductible expenses in cash-based bookkeeping systems — used most often by farms. Schedule F might look like there was some cash, while in reality there was not enough to pay all the farm expenses, family living and make principal payments. Better to know now and have time to deal with the situation.

Profitable farms

Long term, profitable farms pay taxes. That is a good thing! That said, we do want to manage income tax liabilities. For that reason, project income tax liabilities for your farm early enough so there is time to do some tax management planning. Prepaying production expenses for the next production year is a typical and important income tax management strategy.

A second strategy often employed is to purchase machinery and equipment that can be depreciated using section 179 expensing. This strategy is something you will want to explore with your tax preparer before making a purchase.

Purchases

It is critical that farm businesses do not purchase capital assets just to reduce income taxes. Especially if they have to borrow money to make the purchase.

Ask these important questions: Do I really need this item? Is it a want, or a need (a really good question when the item being considered is a loaded pickup truck)? Will it improve the profitability, efficiency or safety of my farm business? Is it the best use of my financial resources? Can I pay for it?

All of these are important questions, but the last two sometimes get lost in the shuffle. If money has to be borrowed to make the purchase, the last one is absolutely critical! You aren’t just using up cash on hand but are committing a portion of your future cash flow to loan payments. Is it really available?

Benchmarks

Since it is November now, the end of the business year is just weeks away. As you assemble the information needed for your 2020 income taxes, consider that this information plus the crop reporting information you assemble is the same information needed to do a complete enterprise analysis of your farm business with the Ohio Farm Business Analysis and Benchmarking Program.

Farms that participate also receive benchmark reports comparing their farm’s performance with their peers across Ohio. It is a powerful tool to put in your farm management toolbox. Feel free to contact me to discuss how this can benefit your farm’s business.

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