Year-End Tax Management Strategies

Farm Business Management Update, October 2001

By Jack Dunford

Income tax management is an important part of sound business management. A major goal of tax management is to minimize taxes over a period of years rather than just in the current year. Having historical farm records to determine a "normal" income pattern over a multi-year period, enables you to use tax management when the estimated net income in a current year falls outside the normal pattern.

Some ways to delay income or accelerate expenses in good financial times are

• Use deferred sales contracts;
• Make bona fide advanced purchases of feed and fertilizer;
• Postpone some sales until next year - culls for example;
• Fully utilize "Section 179" depreciation;
• Make major machinery/equipment purchases in the current year; and
• Fully fund IRA's for you and your spouse.

Conversely, some ways to increase net income in the poor year are:

• Speed up marketable grain, hay and/or livestock sales;
• Postpone major investments;
• Forego "Section 179" depreciation;
• Schedule bill payments into the next year if possible; and
• Do off-farm or custom work.

Your tax management strategy must be consistent with the farm business management plan. Making a profitable management decision is always more important than making a decision resulting only in saved taxes. Also beware of managing net income so that it is consistently very low or even negative. You family's future Social Security benefits will be severely impacted by this strategy. In addition, you need to generate at least enough net income to take full advantage of available personal exemptions and deductions. Now is the time for farm business tax planning and for properly managing tax liability without adversely impacting farm profitability. Accountants and other tax advisors earn most of their annual fees by providing useful tax management advice in the last business quarter.

Contact the author at dunford@vt.edu

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