Year-End Farm Tax Planning to Maximize Benefits & Deductions

As the year draws to a close, it’s essential to review financial records and assess your tax situation. This is a valuable opportunity to proactively manage your tax consequences and explore strategies to reduce your liability or increase potential credits. 

Check Tax Benefits of Prepayments & Deferred Sales 

Another thing to consider is prepayment of expenses, as these will require cash outlay sooner rather than later, such as for feed, fertilizer, chemicals and seed. You may also benefit from a cash discount in addition to the possible tax savings.

Farmers should consider making deferred sales contracts in smaller increments to have more flexibility in deciding which contracts they could claim as income in the current year if they need income. This strategy allows the farmer to manage their income more effectively and take advantage of potential tax benefits.

For example, if a farmer sells grain in December under a deferred payment contract that calls for payment in the following year, they can include the sale in the current year on a contract-by-contract basis. By having smaller contracts, the farmer can pick and choose which contracts to defer based on their financial situation and tax planning needs.

Explore Direct Expensing Limit Tax Write-Offs

For 2024, the direct expensing limit under the Section 179 election for capital purchases is $1,220,000. However, this deduction decreases by $1 for every $1 of investment exceeding a threshold of $3,050,000 for 2024. If your investments surpass this limit, leasing certain assets can help bring your total back within the threshold. Since the like-kind exchange of personal property was eliminated in 2017, we’ve seen increased us of the Section 179 election to offset gains reported on asset trade-ins. 

This approach can lower self-employment income reducing Schedule F income and offsetting capital gains from trade-ins. While this method offers saving on self-employment tax, it’s important to be mindful of potential drawbacks, such as insufficient contributions to Social Security, which may impact credits for disability, retirement and Medicare eligibility. 

Add on Bonus Depreciation

Another option to consider is the special depreciation allowance, often referred to as bonus depreciation. This allows for a deduction of a percentage of the property’s basis in the year it is placed in service (60% in 2024 and 40% in 2025). Bonus depreciation applies to property with a General Depreciation System (GDS) recovery period of 20 years or less, making nearly all depreciable agricultural property eligible. Keep in mind that the Section 179 deduction is utilized before bonus depreciation. However, bonus depreciation is less flexible, as it requires a class-by-class election – meaning all assets in a specific class, such as five-year property, must use bonus deprecation. The benefit of the Section 179 deduction lies in your ability to choose how much depreciation you need to achieve your desired tax outcome. 

It’s important to remember that using either the Section 179 deduction or bonus depreciation reduces your future depreciation deductions, which can result in a larger tax liability later. If an asset is financed and all the depreciation is claimed in the current year, you won’t have that deduction available in future years when paying off the loan principal, potentially leading to a higher tax burden. These issues can also arise during transition planning when liabilities exceed the remaining basis of assets being passed on to the next generation.

Be aware that some states do not align with federal rules regarding the Section 179 deduction or bonus depreciation, so understanding the implications for your state tax return is crucial. 

Know Your Reporting Requirements

You should also be aware that the federal government recently enacted the Corporate Transparency Act, which requires certain entities, including many small businesses, to report information about the individuals who ultimately own or control them. These reports must be filed online with the U.S. Treasury Financial Crimes Enforcement Network (FinCEN). Entities required to report that fail to do so may be subject to civil and criminal penalties.

Access the e-filing system and find more information about the reporting requirements here. We encourage you to consult with an attorney if you have questions about your obligations to comply with this new reporting rule. 

But it’s not just about the numbers. We know each farm’s financial ecosystem is unique, which is why our farm tax consultants offer personalized, holistic strategies that align with your long-term goals. By assessing everything from deferred sales to bonus depreciation, we help you make informed decisions that benefit your farm now and in the future.

Let Compeer Financial be your partner in more than just tax season. Together, we can cultivate a financially secure future for your farm.