Tax strategies for a year of high commodity prices
In years of higher income, it’s imperative to tax plan to avoid any large surprises come tax time. At this point in the year farmers may not quite be thinking about taxes and taking action sooner than later to mitigate potential tax liability. However, due to various factors in our current economy, now may just be the time.
The last few years, with 2022 being no exception, prices have been doing quite well in the world of ag commodities. Given that agriculture has many more opportunities to tax plan than other industries, it’s important to take advantage of those opportunities if possible. Consider the following food for thought to help spread income more evenly across years:
- Set up properly structured deferred payment grain contracts in small bushel amounts. Even if deferred, it’s possible to elect to bring that income into 2022 vs. 2023 if at tax time it’s determined more income could be reported. The election is made on a contract-by-contract basis. If only one large contract is set up it may not be feasible to elect reporting that full amount in 2022 and forces that income to remain in 2023. If there are multiple contracts set up it may become more feasible to pick and choose which of those contracts could be reported as income in 2022 with the remainder deferred until 2023.
- Prepay expenses such as feed, seed, fertilizer, chemicals or other farm supplies. Note there are some limitations on this opportunity but it’s worthwhile especially as input prices continue to rise and availability may be limited.
- Defer crop insurance income recognition if the payment was received for crop damage as long as, under normal business practices, income from the sale of that crop would have been included in gross income in the following year. Note payments for revenue protection policies are ineligible for this deferral opportunity.
- Purchase capital assets that allow for accelerating depreciation deductions into the current year. With the reduced availability of equipment to purchase and increasing interest rates it’s important to think earlier than later whether a purchase is necessary. In order to take advantage of those depreciation benefits such as bonus depreciation or Section 179 the equipment does need to be received by the end of the tax year and not just ordered. Additionally, remember that any trade proceeds received in a purchase are considered income.
- Gift commodities to charity. This strategy can not only save on ordinary income tax but self-employment tax as well. The key in this gifting strategy is ensuring the title of the commodity is transferred to the charity before selling to the coop. The charity is then responsible for the storage/selling of the commodity.
Note most of these options are for cash basis vs. accrual taxpayers and would be best to discuss further with a tax advisor to determine the best action to take.
Finally, consider paying more tax this year given the tax rates are still as low as they’ve ever been. If the tax is manageable it may be beneficial to hold onto some of the extra cash to pay down debt or self-finance 2023 inputs. Additionally, it may be wise to consider funding more liquid retirement plans to retire on rather than only relying on land and equipment as a retirement plan.
Fortunately, there are no major tax law changes in the pipeline that would inhibit proper tax planning at this time. The 2022 Inflation Reduction Act was recently passed however this legislation mostly deals with various energy tax credits, providing additional IRS funding, extended benefits for those on ACA Marketplace insurance, and extension of the Excess Business Loss rules.
Tax planning schedules will fill up quickly this year so be sure to schedule with your current tax advisor soon. If in need of an advisor please call the Compeer Contact Center at 1-844-426-6733 to be connected.
This article was originally printed in the Winter 2022 edition of Compeer Financial's Cultivatemagazine.