7 Ways to Potentially Reduce Tax Liability for Your Ag Operation

FBN Network

Dec 05, 2023

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. 

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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. 

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FBN Network

Dec 05, 2023

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