Top 10 end-of-the-year tax tips from a CPA
Another year of unpredictability is almost in the books.
There is always opportunity to plan, and this year brings more opportunities from a financial standpoint. Here's 10 of the top fiscal tips that agricultural producers are using, although there are many more.
- Defer income. This is considered an installment sale; therefore, you can choose how much you want to defer. Do defer in various contracts, so if you need to pull some back into 2020 you have the flexibility to do so.
- Prepay expenses. You may prepay inputs including seed, fertilizer, chemical, supplies and fuel. Do make sure you have an invoice with quantities and dollar amounts. Do not simply make a deposit, as this does not qualify as a prepay.
- Take advantage of 179 or bonus depreciation on your asset purchases up to a life of 20 years.
- Contribute commodities to charity. In lieu of writing checks, use this method by delivering commodities in the name of the charity you want to support and still benefit from deducting the inputs on schedule F.
- Consider hedging gains/losses when planning. Your marketing consultant can provide an estimate of these gains or losses.
- Take advantage of 199A, which is a 20% deduction of qualified business (farm) income.
- Plan to have consistent income year over year rather than using income averaging allowed by the IRS. It is better for you to be in the driver’s seat than the IRS. Income averaging requires you to average income equally over the past 3 years. But it does not average income for self-employment taxes.
- Take advantage of capital gain tax rates for raised livestock used in breeding (0–15%) or land sales. Installment sales of land are also a great way to spread the income over several years.
- Pay kids under age 18 wages if you are a sole proprietor. They do not have to pay social security and Medicare taxes and have standard deduction of $12,400; therefore, you could have a substantial savings if they work on the farm.
- Deferred crop insurance from 2019. We saw a lot of deferred insurance last year. This won’t normally show in your accounting system, so don’t forget about it when planning.
Payroll Protection Plan forgiveness is in full swing. As of now, guidance states the expenses are not deductible. We recommend leaving the expenses as is, then when forgiveness happens, move the loan to other income. Congress could still change this, but time will tell if they do. If forgiveness does not happen until 2021, we recommend deducting the expenses this year and reporting the forgiveness income in 2021.
Other items that have come up recently are the difference between qualified and non-qualified patronage dividends. Non-qualified patronage dividends are taxed when you receive the cash. Qualified patronage dividends are taxed when you receive the dividend, even if the equity is retained by the co-op.
The new 1099-NEC, Nonemployee Compensation, replaces custom hire normally put in box 7 on the 1099-MISC.
There is no one size fits all. Every producer is different, so plan for what is right for your operation. Don’t fail to plan and have surprises when time to file.