Your pocket or Uncle Sam’s?

5 ways to minimize your tax liability and manage taxable income for this year and next

As 2022 winds down, take advantage of the next few weeks to look for potential tax savings for both this year and next in your farm business. Here are some tips:

1. Determine your taxable goal and what it means for your future. It’s a good idea to focus on the rate of tax you pay, not the amount.

• Utilize the lower tax brackets. Your filing status and taxable income determine your tax bracket and how much you owe the IRS. So, it’s important to pay close attention to the tax bracket you’re in. If you’re married and filing jointly, and report taxable income of up to $83,550, you fall into the 22% tax rate. Taxable income above that rises into higher tax brackets, eventually topping out at 37%. By fully utilizing the lower tax brackets, using appropriate credits and deductions, you’ll keep your effective tax rate low.

• Report your capital gains. Long-term capital gains—gains from the sale of certain assets, such as securities or land, after being held for more than one year—are taxed at rates lower than comparable ordinary income. If your taxable income as a married, filing-jointly taxpayer falls between $83,351 and $517,200, your tax bracket for long-term capital gains is 15%. Above $517,201, your capital-gains tax rate jumps to 20%, compared to an ordinary income tax rate of 35% or higher. Work with your accountant to make sure you capitalize on capital gains opportunities.

2. Evaluate when you’re going to file your taxes. April 15 is the general IRS deadline, but you can file an extension to file your return to Oct. 15. Sometimes it’s better to opt for the later deadline for several reasons. Tax impacts could change as the IRS provides more clarity on various provisions. Also, you may not receive all of your tax documents, such as the required K-1 or 1099 forms, leaving you without important information for filing. Further, you may develop a better idea about your own farm business as the year progresses: Will your income increase or decrease? Will your tax bracket change? Filing an extension gives you extra time to work between two years.

3. Make sure you time your equipment purchases before bonus appreciate rules change on Jan. 1, 2023. Bonus depreciation is a tax incentive that lets a business immediately deduct a large percentage of the purchase price of eligible assets, such as heavy equipment, instead of writing them off over the “useful life” of that asset.

Beginning Jan. 1, 2023, the maximum bonus depreciation you can take is 80%. That’s a drop from 100% in 2022. If you will need another tractor, skid loader or other heavy equipment in 2023, consider purchasing it and putting it into service before 2022 ends to take advantage of the 100% deduction allowed.

4. Know what you have deferred and what your farm profitability will look like over the next two to three years. No one has a reliable crystal ball, but it may be safe to assume that 2023 won’t be as profitable as this year for many in the agricultural community. Input costs continue to rise, and they’re likely to put an even deeper dent into agricultural operations next year. You may want to defer some of 2022’s income to take the lower returns expected for 2023.

5. Get your books and records in shape. Staying current on your record-keeping helps you know your cash-flow needs, prepare for loan renewals and assist you with tax-planning and other financial obligations. Accurate financials make it possible for you to form a budget and make decisions. Moreover, keeping track of your accounts and paperwork now will help you avoid a last- minute crunch when your tax deadline rolls around. So, get your loan balances and checking accounts reconciled and tied out. Make sure your commodity hedges are in order. Update your depreciation schedules for equipment purchases.

These tax tips are general recommendations. Since no two businesses are exactly alike, reach out to a tax expert to help you minimize your tax liability for this year and implement strategies to manage taxable income for 2022 and 2023. Any savings in tax liability allows you to retain the cash and invest in your business.

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].