Cash accounting helps farmers' tax planning
Planning income, expenses can help even out tax bill
By TIM HEARDEN
Farmers and ranchers have many options when it comes to doing their end-of-year tax plans, experts say.
Many agriculturists use cash accounting, which means you can expense items when the money is spent rather than when the item is used, noted John Anderson, an economist for the American Farm Bureau Federation. If a farmer has reaped a sizable income from a healthy crop year, he or she can offset some of the taxes by purchasing inputs they'll use in 2011.
"For livestock producers and for some farmers, they have some flexibility when to sell their product," he said. "If I'm a grain farmer and have harvested my grain and have it in a bin on the farm, I can time when I sell that grain and influence my tax liability.
"If I'm concerned about a large income this year, I can hold some grain over until Jan. 1 to manage the tax liability," he said. "If my income is light and I'm worried about next year, I can accelerate some sales and get them in before the first of the year."
The cash accounting is a benefit for an industry with so much potential for variability of income year to year, as production and market uncertainties reign, Anderson said.
Planning the timing of income and expenses is one of many devices farmers use to avoid high taxes, and growers and economists stress that it's important for each producer to consult an accountant or tax adviser because everyone's situation is different.
"It's essential, if you ask me," said Henry Giacomini, a rancher in Hat Creek, Calif. "Tax laws are complicated. Really, we have to have someone that works in that field all the time to understand it and interpret it to the best of their advantage. ... I think it's probably one of the most essential professional services in the business. I wouldn't dare try it alone. That's a recipe for disaster."
Options could be as simple as opening a simplified individual retirement account, a simplified employee pension or a Keough retirement plan for themselves, their spouse or their employees, advisers say.
While such deferred-income devices aren't subject to taxes in the short term, they are when the money is withdrawn.
As the end of the year approaches, producers "need to sit down and evaluate what their income and costs have been for the year and what that says about their tax liability, and evaluate whether they need to take advantage of things like prepaying inputs or delaying sales to reduce their tax liability," Anderson said.
Tax laws allow farmers to factor in depreciation of equipment or even of breeder cows and bulls, Giacomini said. Cash accounting "just gives us the flexibility ... to manipulate our taxable income," he said.
Farmers shouldn't go out and buy equipment just for the sake of saving on taxes, said Gregg Ibendahl, an associate extension professor at Mississippi State University.
"For farmers, that's a good excuse to buy something they want, but it doesn't make good economic sense, really," Ibendahl said.
"If you make a decision purely on a tax basis it really won't pay off," he said. "The real question is, is the amount of taxes I (saved) going to justify the cost ... to own that thing because it's not going to pay for itself. Typically, taxes are bad, but buying things to avoid them that you don't really need is not going to make you money."