Timing income and expenditures avoids windfalls
By TIM HEARDEN
There are many ways in which farmers and ranchers can legally ease their tax burdens, a financial expert advises.
For starters, many have the advantage of operating on a cash basis, which means they can plan their income and expenditures to avoid windfalls, said Terry Francl, a senior economist with the American Farm Bureau Federation in Washington, D.C.
For example, Midwest farmers may harvest their corn and soybeans, but may not sell them until the following year. However, they can start buying inputs for the 2010 crop season before the end of this year, Francl said.
"They can adjust their income flow by adjusting the years in which they sell their crops vs. paying for inputs," he said. "What some people don't appreciate is that if in fact the farmer has storage ... it may get strung out over a couple of years. They have the ability to adjust their cash expenses and cash income.
"What you do in that is you level out your income over time," he said. "Where you pay more taxes is if you jump up in income."
As part of that strategy, farmers can write off the purchase of certain equipment, so if they've had a high-income year, they can go out and buy some needed equipment and deduct at least a portion of the cost, Francl said.
Planning the timing of income and expenses is one of many devices farmers use to avoid high taxes, and Francl and others stress that it's important for each producer to consult an accountant or tax adviser because everyone's situation is different.
Options could be as simple as opening a simplified individual retirement account, a simplified employee pension or a Keough retirement plan for themselves, their spouses or their employees.
While such deferred-income devices aren't subject to taxes in the short term, they are when the money is withdrawn. With an IRA, a person can start withdrawing when he is 591/2 years old and must start withdrawing by age 701/2, Francl said.
"When that money comes out, that is taxable," he said. "It goes into your income, but the theory is when you're in retirement, your income is lower so your tax rate is lower.
"The other thing is, during the course of the period of time you're invested in the IRA and you get capital appreciation, the capital gains are not taxable until the money is distributed or taken out," he said.
Depending on how his or her business is structured, a farmer may be able to write off the cost of a health-care plan. But putting a spouse or others on the payroll can actually increase the tax burden and add expenses for Social Security and Medicare as well, Francl said.
Further, investing in a retirement or health care plan may be more than some farmers can bear in the current economy, said Larry Forero, a University of California Cooperative Extension farm advisor in Redding, Calif.
"With most of these operations this year and last year, there's not a lot of extra money at the end of the rainbow," Forero said. "In terms of an IRA option or health insurance, I'm guessing there's not a lot of that going on right now."