YC.com: Tax Planning

With 2004 being a year of good livestock prices and bumper grain production,
farmers need to be planning now to address income tax issues they will be facing.
Cash receipts for agricultural products are expected to increase five percent this year due to continued strength in commodity prices and higher volumes. Demand for beef and pork continue to be strong and dairy prices improved, leading to good markets for producers.
Corn and soybean harvests are under way and excellent yields are being reported.

"Overall about all the commodities are having a good year," said David Heisterberg, coordinator of the Kentucky Farm Business Management Program, a plan of the University of Kentucky College of Agriculture. "Many grain farmers defer sales from one year‚s crop
into the next so many farmers may have sold some of the 2003 crop that year but waited until early 2004 to sell the remainder capturing high prices and looking at a bumper crop
in 2004," he said.

With this scenario, paying taxes may be inevitable but properly managing taxable income will result in the minimum amount of taxes being paid. For proper planning, good records are essential, he said. Without good, accurate records, farmers can‚t know where they stand.

The KFBMP can assist farmers in keeping accurate records. The program helps farmers track financial performance, determine the profitability of individual enterprises, improve management practices, complete tax returns, set business and personal goals and make sound management decisions. The program also helps improve farm management of non-member farms by providing factual economic information about Kentucky farms for research, teaching and extension.

Farmers should consult with a qualified tax advisor to establish a plan prior to the end of the year. The advisor should be able to provide details and regulations concerning deferred sales contracts, prepayment of expenses and other possible planning measures.

"Most farmers won‚t take any action until December, but they need to get their ducks in a row now," Heisterberg said.

Under no circumstances should sound marketing practices for grain or livestock be abandoned in order to defer income to a later year, Heisterberg said. Instead there are
several tax management strategies to utilize.

Prepayment of 2005 operating expenses is the most commonly used strategy but to be deductible, the payment must be for a specific quantity of specific inputs.

Another strategy would be to use accelerated depreciation on equipment or other capital gains. But remember the first criteria in using this strategy should be that the purchase of equipment be based on need for the item without tax considerations, he said. If the equipment is justified from a management standpoint, then the most
advantageous use of it can be made for tax purposes.

"The goal of any business is to make money and if you are spending money you don‚t need to for your business, that‚s not wise management," he said. "Don't be afraid to pay
some taxes. This year is going to be a high tax year, but next year could be worse without proper tax planning."

Farmers need to keep accurate information on breeding livestock which is handled differently than other livestock for tax purposes and Phase II tobacco payments which are not taxable in Kentucky. Check what laws are applicable in your state.

Another factor tobacco growers need to consider is what the buyout may do to their income in 2005 and consider that when making tax plans for 2004.

"The goal is to keep income level," he said.

With the volatility in farming, that may not always be possible, Heisterberg noted a look at the five-year history of someone who manages their income and tax situation well will show a pretty level track.