Yes, really. You should be contemplating tax consequences right now for the year. You have six weeks left to get your income and expenses, capital purchases and sales tallied and contemplated.
Here are some factors to consider.
ARC/PLC, MFP, CFAP, EIDL Grants, Syngenta payments, Iowa Livestock Producer Relief Fund and the Beginning Farmer Debt Relief Fund payments are all income. Include these payments in gross income (subject to self-employment tax) when compiling income and expenses.
Crop insurance proceeds and federal disaster programs in gross income for the tax year during which they receive the payments. Unless a one-year deferral is triggered for provision for insurance proceeds and disaster payments received for “destruction or damage to crops.” This is to acknowledge those operations that sell the year following harvest. If farm operators are planning to play games by avoiding income this year it may be tricky to “right the ship” in the following years if they lose sight of the plan.
What to do:
Farmers have a number of tools available to help manage their tax liability. Sometimes to many tools and to vigorous use of tax avoidance means pain on the backside when the farmer tries to exit the field for good and finds out the social security benefit is a low number and they owe tax on depreciated items when later sold is a harder thing to plan around than they would like.
Avoiding income spikes and dips prevents overall income from being taxed at unnecessarily high tax rates. Some common techniques are income averaging, prepaying expenses, making contributions to retirement accounts, gifting grain to a charity, carefully timing the purchase or sale of assets, entering into or electing out of deferred payment contracts, and properly managing depreciation and expensing decisions. Farm operators can defer income from the sale of crops or livestock in the year of the sale by deferring receipt of payment until the following year through a deferred payment contract. If when filing tax returns for the 2020 year it would benefit the farmer to recognize income from the deferred price contract in 2020, the farmer can elect to report constructive receipt of the income in 2020, the year of the sale. The danger is that the check won’t be good in 2021 when the operator goes to collect.
