7 Ways to Potentially Reduce Tax Liability for Your Ag Operation
As you prepare to meet with your accountant at the end of the year, your primary goal is likely to reduce your tax liability ahead of the coming year. To achieve this as a cash basis taxpayer, there are a number of available tax liability reduction strategies to consider and discuss with your accountant.
1. Defer Income
If you’ve sold commodities this year, you likely can opt to defer your farm income until next year as a way to reduce tax liability. This tax liability reduction strategy can also include grain payments, crop insurance indemnity payments, or even some forms of government disaster aid payments.
2. Pay Outstanding Bills
Often tied to higher interest rates, these bills can really add up over time. You could pay off old equipment repair, feed, seed or other bills as soon as possible to reduce your liability.
3. Pre-pay on Inputs When Possible
Some operational purchases, including crop protection, fertilizer and seed, can be prepaid before the end of the year — often at substantial discounts. While farmers can effectively reduce operating costs through this approach, be mindful of IRS limits on prepaid expenses. They should not exceed 50% of all other Schedule F expenses (excluding prepaid expenses).
4. Make Proactive Purchases
Buying new equipment, completing building or equipment repairs, buying inputs or making other proactive operational purchases can potentially help reduce your farm’s tax liability. Note that repairs must be completed and paid by the end of the year to qualify. Similarly, newly purchased equipment must be present on your farm and fully available for use before the end of the year to be eligible for this approach.
5. Take Advantage of Special Tax Incentives
Bonus depreciation is a special tax incentive available to farmers under some circumstances. An allowance for businesses — like ag operations — to deduct a large portion of the purchase price of specific assets, including machinery, bonus depreciation provides an alternative to writing the purchase off over the life of the asset. For more details on whether this is an option for your operation, discuss with your accountant during your end of year meeting.
6. Contribute to Your Retirement Account
When thinking ahead in planning your tax filing, it’s helpful to also think ahead about your long-term financial future. In 2022, individuals may contribute up to $6,000 to a traditional deductible individual retirement account, or IRA. Farmers over the age of 50 may contribute an additional $1,000. Such contributions are possible until the due date of the tax return in April 2023.
7. Support Conservation Efforts
According to the IRS, farmers can deduct some “expenses for soil/water conservation, prevention of erosion of land used in farming, or endangered species recovery.” It’s important to note, however, that this deduction cannot be more than 25% of your gross income from farming operations.
The IRS also notes that “although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil.”
Planning Ahead for the Financial Future of Your Farm
Looking for additional guidance on the financial health and future of your ag operation? The FBN Finance team includes more than 35 loan advisors, analysts and closers, each with an average of 15 years of ag finance experience. Because many FBN Finance professionals are producers themselves, they deeply understand the unique nature of your ag business.
Click here or complete the form at the bottom of this page to connect directly with a member of our finance team.
© 2014 - 2023 Farmer's Business Network, Inc. All rights Reserved. The sprout logo, “Farmers Business Network”, “FBN”, "Farmers First", “FBN Direct”, "F2F", and "F2F Genetics Network" are trademarks, registered trademarks or service marks of Farmer's Business Network, Inc.
The material provided is for information purposes only. It is not intended to be a substitute for specific tax planning, tax preparation, or legal advice. Please consult a qualified professional. Neither Farmer’s Business Network nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in the material and any liability therefore is expressly disclaimed.
ALWAYS READ AND FOLLOW LABEL DIRECTIONS. It is a violation of federal and state law to use any pesticide product other than in accordance with its label. The distribution, sale and use of an unregistered pesticide is a violation of federal and/or state law and is strictly prohibited. We do not guarantee the accuracy of any information provided on this page or which is provided by us in any form. It is your responsibility to confirm prior to purchase and use that a product is labeled for your specific purposes, including, but not limited to, your target crop or pest and its compatibility with other products in a tank mix and that the usage of a product is otherwise consistent with federal, state and local laws. We reserve the right to restrict sales on a geographic basis in our sole discretion. You must have a valid applicator license to use restricted use pesticides. Please consult your state department of agriculture for complete rules and regulations on the use of restricted use pesticides, as some products require specific record-keeping requirements.
"Master Farmer" is a registered trademark of Rob-See-Co, LLC. Paloma Seed™ products are sold by FBN Direct as a distributor for Warner Seeds™.
PALOMA IS A TRADEMARK OF M.S. TECHNOLOGIES, L.L.C., WEST POINT, IA.
Product Use Statement: Enlist E3® soybeans contain the Enlist E3 trait that provides crop safety for use of labeled over-the-top applications of glyphosate, glufosinate and 2,4-D herbicides featuring Colex-D® technology when applied according to label directions. Following burndown, the only 2,4-D containing herbicide products that may be used with Enlist™ crops are products that feature Colex-D technology and are expressly labeled for use on enlist crops. 2,4-D products that do not contain Colex-D technology are not authorized for use in conjunction with Enlist E3 soybeans. Warning: Enlist E3 soybeans are tolerant of over-the top applications of glyphosate, glufosinate, and 2,4-D. Accidental application of incompatible herbicides to this variety could result in total crop loss. When using 2,4-D herbicides, grower agrees to only use 2,4-D products that contain Colex-D technology authorized for use in conjunction with Enlist E3 soybeans. Always read and follow herbicide label directions prior to use. YOU MUST SIGN A TECHNOLOGY AGREEMENT, READ THE PRODUCT USE GUIDE PRIOR TO PLANTING AND FOLLOW HERBICIDE RESISTANCE MANAGEMENT (HRM) REQUIREMENTS. The transgenic event in the Enlist E3® soybean is protected under Corteva Agriscience and M.S. Technologies, L.L.C. Patent Rights which can be found at: www.corteva.us/Resources/trait-stewardship.html. The transgenic event in the Enlist E3® soybean event in Enlist E3® soybeans is jointly developed and owned by Dow AgroSciences LLC and M.S. Technologies, L.L.C. ®™ Enlist, Enlist E3, the Enlist E3 logo and Colex-D are trademarks of Dow AgroSciences LLC. Please read the M.S. Technologies, L.L.C. Use Restriction Agreement located at: - http://www.mstechseed.com/use-restriction-agreement/ FBN recommendations regarding seed placement are based on field observations collected by FBN Direct, provided by FBN suppliers, contributed by member farmers or are consistent with local established agronomic practices. Individual results and performance may vary depending on local growing, soil, weather conditions, commodity prices.
Terms and conditions apply. FBN Finance, LLC commercial operating lines of credit are offered by FBN Finance, LLC and are available only where FBN Finance, LLC is licensed. Equipment financing provided by Ritchie Bros. Financial Services, Ltd. and TCF National Bank. Land financing provided in connection with Farmer Mac. Input financing provided in connection with our financing partners. To qualify for a financing offer, a borrower must be a member of Farmer’s Business Network, Inc. and meet the underwriting requirements of FBN Finance, LLC and its lending partners. All credit is subject to approval and underwriting. Interest rates and fees will vary depending on your individual situation. Not all applicants will qualify.