5 tax-planning tips for farmers to consider by Dec. 31  

Good year-end decisions can help minimize your business tax obligations

As a certified public accountant, it’s my goal to make sure your ag business is meeting your tax obligations while also helping you minimize them whenever possible.  

As the year winds down, here are five planning tips to make the most of tax-saving tools: 

1. Consider bonus depreciation and Section 179 deductions before Dec. 31. Most ag operations are familiar with the bonus depreciation tax incentive, which allows a business to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery, rather than write them off over the “useful life” of that asset.  

For 2023, the bonus depreciation dropped to 80%, down from 100% in 2022. Keep in mind that next year the allowance decreases to 60%. You might want to make that combine or tractor purchase by Dec. 31, 2023, to capitalize on this year’s 80% bonus depreciation. 

You can also use the Section 179 deduction to write off tractors, farm implements and other equipment. Under this incentive, the Internal Revenue Service allows farmers to deduct the full purchase price of certain equipment for the year it was placed in service. That’s higher than the 80% depreciation allowance, offering you a lower tax liability. 

The Section 179 deduction limit for 2023 is $1.16 million. The total equipment purchase limit stands at $2.89 million. Both dollar limits are up from the 2022. This deduction is good on new and used equipment as well as off-the-shelf software. To take the deduction for tax-year 2023, the equipment must be financed or purchased and put into service between Jan. 1, 2023, and the end of the day on Dec. 31, 2023.  

As a note of caution, don’t be tempted to buy a piece of equipment you really don’t need just to get a tax deduction. Make sure your financial decisions make good business sense. 

2. Consider using State and Local Tax deduction workarounds available for your state. The SALT deduction cap refers to the $10,000 limit on the federal deduction for state and local taxes. This cap for individuals was included in the federal Tax Cuts and Jobs Act, enacted at the end of 2017. However, several states have implemented workarounds that allow certain pass-through business owners to bypass this limit. These workarounds involve imposing state tax at the pass-through entity level and then providing a state tax credit or deduction on personal returns. These PTEs include S Corporations, partnerships and most LLCs.  

Part of what makes SALT challenging is that each state takes a slightly different approach. Also, the SALT cap applies only to tax returns filed for 2018 through 2025.  

3. Higher limits for estate and gift planning will expire in 2025. The Tax Cuts and Jobs Act of 2017 also made a significant change in estate-planning rules. Under that tax reform legislation, the estate-tax exemption for an individual has been climbing and now stands at $12.92 million ($25.84 million for married couples) in 2023. There are no federal estate taxes on amounts under those limits gifted to heirs during your lifetime or left to them upon your death. 

However, these rules are set to expire at the end of 2025. At that time, the exemption amounts will revert back to previous—and lower—levels, adjusted for inflation. You may want to take advantage of the higher estate-tax exemption in passing on your estate or other higher-valued assets before the return to lower levels. 

Meanwhile, if you haven’t reviewed your current estate-planning documents in a while, make time to do that. You want to be sure they represent your current wishes and that you’re taking full advantage of any tax advantages that have emerged since you first created your estate plan. 

4. Have cash or available credit to prepay expenses. With increased inflation and higher interest rates, your 2023 expenses probably exceed last year’s costs. Make sure you have cash or available credit to pay fuel, fertilizer, crop protectants, feed, irrigation supplies, and other inputs.

There can sometimes be some confusion about deducting prepaid expenses. Generally, for cash-basis taxpayers, you can deduct the expense in the year of payment. There are a couple basic rules to consider when evaluating the amount of expenses:

• It needs to be used in the next 12 months, and
• The amount of prepaid expense cannot exceed 50% of the total expenses for the tax year.    

You can dig deeper into IRS rules in the Farmer’s Tax Guide at irs.gov/publications/p225.  
 
5. Use deferred contracts to increase tax-plan flexibility. According to the IRS, if you sell a commodity under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. That means the sale does not need to be included in income until cash is received. However, for commodity contracts, the farmer can choose to report the income in the year of receipt or in the year the contract was entered into, thus providing flexibility in the timing of reporting income and maximizing the utilization of expenses.   

The bottom line: Good year-end decisions can help minimize your business tax obligations for this year and next. As always, maintain accurate, current records to keep track of your expenses. Consult with your tax advisor for proper tax-planning tools that can benefit your particular farm, livestock operation or ag processing facility.  

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].