6 ways ag businesses can reduce taxes in 2020
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From donating grain to minimizing capital-gains taxes, consider taking advantage of these tax breaks
Even if taxes are a certainty for most Americans, you can still be smart about your tax bill. This year, consider the following tips to legally reduce the amount of taxes you owe:
1. Take advantage of individual retirement accounts and 401(k) plans. Retirement savings plans like IRAs and 401(k) plans don’t just let you set aside funds for the future. They also allow you to save money now. In 2020, you can contribute up to $6,000 to an IRA and up to $19,500 to a 401(k) if you’re under 50. These limits increase to $7,000 and $26,000, respectively, for those 50 and over. Put your money in the traditional version of either account (as opposed to a Roth), and you’ll reduce your taxable income for the year. For example, if you fund a traditional IRA with $4,000, that’s $4,000 the IRS can’t tax you on.
2. Look for opportunities to convert employee cash wages to wages-in-kind to save on federal payroll taxes. Wages-in-kind is when a commodity you’ve grown, such as grain or cattle, is transferred from you, the employer, into the name of your employee. The employee has ownership of the commodity and decides when or if to sell it. The benefit to you as an employer is that in-kind wages are not subject to self-employment taxes. While they can’t and shouldn’t eliminate the payment of cash wages to employees, wages-in-kind can offer advantages under a bonus structure.
3. Consider making a charitable contribution using grain. If you actively farm on a cash basis, you can reap significant tax savings by donating grain directly to a favorite charity such as a public library, church or university. The charities make money by selling the donated grain, and you get a better tax savings than you would with just a cash donation.
4. Minimize your capital-gains taxes. Capital gains are preferential tax rates for income generated from the sale of assets. If you’ve held on to your asset for more than a year before selling it, your capital-gains tax rate is classified as a long-term asset. It will be taxed at lower rates, which are significantly below the short-term capital-gains rate. The tax rate on most net capital gain is no higher than 15% for most individuals.
5. Evaluate investing in “Opportunity Zones” before year-end. Opportunity Zones were created by the 2017 Tax Cuts and Jobs Act. They were designed to spur investment in distressed communities by offering generous tax incentives. If you have sold or are considering selling assets this year that would generate large capital gains, the gain can be deferred if you invest an equal amount in an Opportunity Zone fund within 180 days of the sale. If you hold the investment for 10 years, you won’t recognize any gain on the new investment itself. You still have to recognize the original gain you have deferred by Dec. 31, 2026, at the latest. More than 8,000 opportunity zones exist throughout the U.S. in areas ripe for investment, and numerous funds are soliciting investors.
6. Don’t squander the gift tax exclusion. You can give up to $15,000 to as many people as you wish in 2020, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. If you combine gifts with your spouse, you can use your exemptions together to give up to $30,000 per beneficiary each year. So, if you have three married children, you could give each couple $60,000 and remove $180,000 from your estate in a single year. You can give even more tax-free if you have grandchildren.
Always consult with your tax advisor before putting these tips into action to determine how they’ll affect your own situation.
Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].