Before you flip the calendar to 2023, cross a few important tax to-dos off your list, encourages Paul Neiffer, CPA and principal with CLA.
1. BE SPECIFIC WITH PREPAID EXPENSES
Supply chain struggles have put a damper on prepaid expenses. To obtain a valid prepaid expense, a farmer has to request a certain quantity of a product. If a supplier can’t provide that quantity, it isn’t a valid prepaid expense for the year.
“So many farmers think they can go down to the co-op and put a deposit down on a product for large sums of money,” Neiffer says.
“We’ve had several clients go through audits and fail on that front, despite our warnings. It just doesn’t work.”
2. STAY OFF THE TAX TREADMILL
Farmers sometimes climb on a tax treadmill ride that can last for decades. With COVID-19 aid, it might be even harder to hop off in 2022. Plus, farmers have received Emergency Relief Payments this year. These types of payments are similar to crop insurance, but you can only defer to the year after damage was incurred.
“These payments are for damage that occurred in 2020 and 2021,” Neiffer says. “2022 is the latest you could defer 2021 payments, and since producers collected them this year, they’re stuck with reporting these payments in 2022.”
3. DRAFT A PLAN FOR UNWANTED REVENUE
With the drought in the West, some cattle producers have been forced to downsize their operations. If you fall into this camp, consider a deferment.
“If a producer normally sells 500 head in a year, and this year they sold 1,000 head, they get to take that extra 500 head and either defer for one year, or up to four, five or six years — depending on how long the drought goes on,” Neiffer says.
4. COUPLE EQUIPMENT PURCHASES WITH TAX PLANNING
If you’re planning to buy farm equipment before the end of the year, here’s a refresher on two tax tools you can use.
- Section 179: For 2022, the Section 179 deduction limit is at $1.08 million with an equipment spending cap phasing out beginning at $2.7 million. It can be used for new and used equipment.
- Bonus depreciation: Bonus depreciation provides a 100% additional first-year depreciation deduction for qualified property through 2022.
For example, if you buy a new piece of equipment for $300,000, you can depreciate that amount this year. Or you can depreciate the asset out over its useful life, Neiffer says. For example, a new combine can be depreciated out over five years.
“If you pay cash for equipment, deducting all of the depreciation up-front is fine,” he says. “But if you are financing 100%, you may want to elect out of full depreciation and match up the yearly depreciation amounts with your loan payments.”
Jenna Hoffman is a content creator who investigates the issues in Washington, D.C., that matter most to farmers.