As we shift gears and focus on tax planning, it serves as an ideal time to review past years performance and also keep in mind a range of topics to help you manage your tax liability. Tax planning is crucial this year due to the extra government payments that you may have received. These payments range from PPP to EIDL to other government payments. These may cause your income to be higher than expected.
When developing an effective tax plan, your best chance for success requires accurate farm financials such as year-to-date amounts and reasonable projections for income and expenses through year end.
Be sure to partner with a tax professional committed to understanding you and your farm operation. Avoid the one-size-fits-all approach, which will lead you to make inefficient decisions. Examples of customized strategies are:
• Identifying depreciation planning opportunities;
• Utilizing the Qualified Business Income Deduction (§199A); and
• Reviewing available pre-tax deductions.
ACCELERATION OR DECELERATION OF INCOME AND EXPENSES
This method is a simplified approach of carefully timing when you receive revenue or make purchases, allowing you to manage current-year net activity.
But many operators are owners in business entities, including partnerships, LLC (limited liability companies) and corporations. Tax planning for business entities is inherently complex and requires a comprehensive understanding of the specific entity, owners and circumstances of their individual tax returns. In short, what one owner needs individually may be insufficient for the other owners involved.
The recent tax reform increased allowable expenses for business owners in the year the asset is placed into service. Direct expensing, or Section 179, is a powerful tool that offers great benefits for business owners.
However, an aggressive approach with Section 179 expensing may result in future tax liabilities exceeding cash flows. It’s advisable for businesses to align their depreciation amount with their loan payments because principal is not deductible. This can help you avoid a tax liability that exceeds cash flow. A comprehensive review of your specific farm financials is essential to determine if direct expensing is appropriate for your operation.
ADDITIONAL DEDUCTION AVAILABLE
Also consider one of the impacts of the Tax Cuts & Jobs Act (TCJA) of 2017, which provides business owners (with the exception of C Corporations) the opportunity to deduct 20 percent of Qualified Business Income (QBI) as a deduction against taxable income. While appearing straightforward, this is a challenging calculation, especially for those with taxable income of $321,400 married filing jointly ($160,700 single) or greater. Beneficially, for taxpayers with multiple revenue sources, the deduction allows for aggregation of multiple business lines to increase the deduction.
Pre-tax deductions serve as a great way to tax plan and manage tax liabilities. Health savings accounts (HSAs) and retirement accounts are excellent options to reduce your taxable income, as they deal with tax-deferred monies.
However, some retirement accounts have deadlines for creation or contribution limits, while others have extended contribution periods. Many retirement account products are available for both self-employed and wage earners, any of which could be a great option for tax savings. To maximize the benefit from a tax-deferred account, have an experienced professional review your specific circumstances along with current and future retirement tax rates.
Tax planning can be of great value to any taxpayers – W-2 wage employees, landlords with rental income or an active business with self-employment income. By doing some proactive planning, you can change your tax future today.