The farming industry is a very different type of industry as far as businesses and taxes go. A farmer on a cash basis business is one of the few businesses that can prepay up to 50% of its expenses which allows it to use a future deduction on ‘”this” year’s tax return. The timing of deducting expenses and deferring income at the right time allows a cash basis farmer to smooth out their taxable income and effectively reduce their tax bill. If you’re a farmer and your CPA or Accountant isn’t familiar with farming and the tax laws surrounding your industry, you could be missing out on deductions and more.
A Farm CPA or Farm Accountant that really understands your industry will also know what the bank needs and how to assist you when applying for a credit line. For example, if a farmer’s books are cash basis, a Farming Accountant or CPA will know to give the banks accrual basis financial statements. They know accrual basis financial statements will show the bank a true financial picture of the farmer’s business. They will also be able to assist you in creating a useable budget that the bank will understand and trust. With the right CPA or Accountant working on your financials and budget for the bank, you will be more likely to be approved for your credit line.
Tax planning is another area in which a farmer will benefit by having an Accountant or CPA that really understands their industry. Tax planning involves both the timing of the selling of your crops and the purchasing of your farming inputs. Many dollars can be saved with tax planning. A Farming Accountant or CPA will be able to tell you when the best time is to sell and how much to defer until next year. When it comes to purchasing, it is important to know whether this deduction is better shown on this year’s or next year’s tax return. Sometimes thousands of tax dollars can be saved by prepaying expenses and using a future deduction on this year’s tax return. Below is a list as to what qualifies for prepaid farm expenses:
What is a Prepaid Farm Expense?
Prepaid farm supplies are amounts you paid during the tax year for the following items:
– Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year
– Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business that would be deductible in the following year if you had capitalized the cost and deducted it ratably (for example, monthly) over the lesser of 12 months or the useful life of the poultry
– Poultry bought for resale and not resold during the year
What is Not a Prepaid Farm Expense?
Prepaid farm supplies do not include any amount paid for farm supplies on hand at the end of the tax year that you would have consumed if not for a fire, storm, flood, other casualty, disease, or drought.
You can deduct an expense for prepaid farm supplies that does not exceed 50% of your other deductible farm expenses in the year of payment. You can deduct an expense for any excess prepaid farm supplies only for the tax year you use or consume the supplies.
The cost of poultry bought for use (or for both use and resale) in your farm business and not allowed in the year of payment is deductible in the following year. The cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry.
As in any business, it is important to let specialists handle the areas in the business that specialty is required and will save you money. A Farming business requires specialty when it comes to tax planning, budgeting, accounting, income taxes and estate taxes. Make sure to hire an Accountant or CPA that knows your industry. You will be glad you did.