A Matter of Tax: Year End Tax Strategies for Farmers

Speculation abounds around increases in tax rates and credits and a decrease in the estate tax exclusion. Because upcoming changes are uncertain, it’s best to stick with the facts. Here are some clarifications and recommendations from Compeer Financial’s tax and accounting team for you to review as you look to closing out 2021:

THE ADVANCED CHILD TAX CREDIT

Taxpayers with 2020 adjusted gross income under $150,000 (married), $112,500 (head of household) or $75,000 (single) and at least one dependent under 18 may have received advanced payments on their 2021 Child Tax Credit paid by a check or with direct deposit.

If you were not eligible to receive these advance payments, you may still qualify on your 2021 income tax return. In January 2022, those who qualified for advanced payments will receive a letter from the Internal Revenue Service (IRS) reporting the amount of those advanced payments. Your tax consultant will need the letter to calculate the credit for your income tax return. 

YEAR-END TAX SAVING MOVES

• Equipment purchases. Are you looking to reduce your tax liability with equipment purchases? Expensing 100 percent of the cost is still available with Bonus and Section 179. Section 179 allows the taxpayer to expense less than 100 percent of the equipment cost if the tax liability is lower than projected.
  
  
• Employing minor children. Wages are exempt from payroll taxes for sole proprietors and allows income to be taxed in the child’s lower bracket. Use this as an opportunity to build their Roth individual retirement account (IRA) balances. An annual contribution to a Roth IRA is allowed up to the child’s earned income. (Roth funds are eligible for retirement, higher education or a down payment on a first-time home purchase.)
  
  
• Contribute to a retirement plan. Two flexible options for retirement contributions are a SEP (simplified employee pension) and an IRA. The amount for the SEP is based on the profit of your business and may allow a higher contribution than an IRA in a very profitable year. You can use both a SEP and an IRA at the last minute before filing your tax return. In contrast, you will need to establish a SIMPLE IRA or 401(k) before the tax year ends.
  
  
• Energy efficiency costs. These may benefit both business and personal situations. Currently, solar energy can provide a 26 percent tax credit, and a portion of the cost is depreciable if used for business.
  
  
• Charitable contributions. Donations made in 2021 may reduce your tax liability. The CARES Act allows, for 2021, a $600 deduction for charitable contributions even if you do not itemize. You may also benefit on your state income tax return with charitable donations. For example, Wisconsin calculates an itemized deduction credit depending on your income level, based on charitable contributions, mortgage interest and medical expenses.
  
  
• Qualified charitable distributions. Redirecting the required minimum distribution (RMD) from your IRA to charity reduces taxable income. This might be a perfect move if you normally do not itemize.

HEALTH-CARE BENEFITS

Consider these alternatives to a traditional group health-care plan that may benefit you as a business owner:

• Employ your spouse. A Health Reimbursement Arrangement allows your business to purchase health-care insurance and reimburse them for other medical costs. Your spouse is the person named for the benefits, but you will receive them if you are covered under your spouse’s plan. You may need to offer the same benefits to other employees, so planning is essential.
• A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) allows employers to reimburse employees, tax-free, for health-care costs and personal health insurance plans.
• An Individual Coverage Health Reimbursement Arrangements (ICHRA) is like a QSEHRA with a few less restrictions.
• A Heath Savings Account allows an employer and employee to contribute tax-free funds to an account for medical expenses. You need to coordinate these with certain health insurance plans.

Limitations exists for each of these plans, and the IRS requires documentation. We recommend discussing these various options will a skilled tax consultant and working with a third-party benefits administrator like Total Administrative Services Corp or BASE.

EMPLOYEE BENEFITS

Employers have more opportunities to provide tax-free benefits to their employees through a total compensation package. Rather than paying a year-end bonus, how about reimbursing an employee for certain expenses? The employee receives value in exchange for services without incurring extra income tax costs. The employer provides benefits to an employee without incurring extra payroll taxes. Here are some examples:

• Educational assistance programs allow employers to pay up to $5,250 in tuition, fees and books. The education does not need to be related to the current job.
• Dependent care assistance might be popular due to the high cost. Employers can use either a tax-free, employee contribution or an employer-funded plan up to $5,000 ($2,500-MFS).
• Employees no longer have the ability to deduct unreimbursed job expenses on their personal income tax return. Employers can deduct these costs as tax-free payments to their employees if they reimburse them with an accountable plan (versus a non-accountable plan). Typical job expenses include tools, travel (meals, hotel, transportation), personal auto mileage at the standard federal rate, licenses, fees, certification and special work-related gear or clothing.

Your tax consultant can provide advice about limitations related to dollar amounts and other restrictions.

ENTITY CHANGES

As a business grows, it may outgrow its current entity type. Usually, a business starts its operations as a sole proprietorship or partnership. These types offer flexibility with deductions and more readily allow the owners to deduct losses. With growth, some businesses may benefit by seeking status as an S corporation with the goal of tax savings in mind. This change depends on the level of profits earned by a business but comes with extra tax compliance to include more tax returns and record keeping.

As 2021 closes, look at where you've been and where you want to go. Connect with the tax and accounting team at Compeer.