Planning Now Helps Producers Manage 2022 Taxes
The first hints of fall are barely here, but it is not too early to start thinking about your 2022 tax strategy. By looking at the year’s financial performance and taking steps now to manage revenue, producers can avoid unpleasant surprises when the next tax return is due.
Timing is everything
Timing is crucial when it comes to tax planning. Once the year ends, it is too late to change the numbers that influence your tax bill—whether you like them or not. That is why it is so important to monitor revenue and expenses to assess your anticipated tax situation for 2022 during the fourth quarter, while you’ve still got plenty of options.
Keep your books up to date throughout the year and share them with your accountant after harvest. Giving your CPA a preliminary look at the figures will help them strategize your tax bill with you.
It’s also a good idea to consult with your attorney and your local FSA office to make sure you are current on any programs that are available to you. These programs change often and new ones come online, so it’s to your advantage to double check compliance and explore any changes on a regular basis. Why risk leaving money on the table?
Keep revenue in the optimal range
A bumper crop is something to celebrate, but the excess revenue it generates can create a high tax bill. Identifying deductible expenses can help you reduce your taxable income, thereby
lightening your tax load burden. Managing the time frame in which revenue is counted is another approach that allows you to distribute income across years, preventing a spike in taxes for any one year. Key strategies that can help producers lower taxable net income include:
- Purchasing equipment – Do you have known needs for the next growing season? If so, then, 2022 may be the perfect time to upgrade older machinery that’s nearing the end of its useful life. You could also consider investing in new equipment that helps you increase efficiency or expand production.
- Making prepayments – Cash basis farmers can get a jumpstart on 2023 by prepaying suppliers for inputs like chemical and fertilizer. The payments you make this year for basic necessities that you’ll use next year can be deducted from your 2022 revenue.
- Deferring peanut sales – Producers that participate in the Commodity Credit Corporation marketing programs should consider carefully when to take income from sales of the peanut harvest. Besides looking at market conditions, peanut producers should assess the impact on their 2022 or 2023 taxable revenue as you determine the ideal time to recognize the revenue.
- Delaying crop proceeds – A decision to delay cotton or other crop revenue until next year can help farmers balance revenue across years. Think it through carefully before you structure crop payments for 2022 and evaluate when the income will be best taken.
- Thinking twice for crop insurance payments – Crop insurance and disaster payments do more than protect farmers from financial loss; they’re also great tax planning tools for producers who use the cash method of accounting, allowing these producers to adjust income for the year if they meet certain conditions. Should you defer crop insurance proceeds or recognize this revenue in 2022? The answer can have a big impact on your taxable revenue (and your tax bill).
- Exploring depreciation strategies – Do you understand all of the various depreciation elections that are available to you? Your CPA does. Making the appropriate elections on your tax return will help you manage taxable revenue. Be sure to discuss this with your tax advisor to make sure you’re choosing the most tax-efficient approach.
Succession planning
Have you considered an exit strategy? Is the next generation ready to step up or will you need to explore other options for retirement? This topic is rarely an easy one to tackle. Even if there is a clear successor, determining the best fit for transferring assets and cash flow in a tax efficient manner is a difficult subject that may take years to complete. Every situation is different, requiring tailored approaches in each family’s best interest. It’s never too early to have a plan in place for you and your family.
Tax strategy for producers is a complex matter. Work closely with your accountant and keep them informed throughout the year so they can help you take advantage of the tax-savings opportunities available to you. To learn more about tax strategies specifically for producers and other closely held agribusinesses, contact Rob Douglas here.
Mauldin & Jenkins is annually recognized as a Top 100 Certified Public Accounting firm by Accounting Today and Inside Public Accounting and provides assurance, tax and advisory services to clients throughout the Southeast. For additional information, please visit our website.