Editor's note: The following item ran in the Jan. 31 edition of Dairy Exec newsletter, published by Dairy Herd Management.

Who would have guessed a few short years ago that we’d be covering the challenge of what to do about your profits come tax time? The dairy industry experienced an exceptional year in 2011, and indications are looking positive for 2012, as well.

When it comes to reporting your income, though, high profitability also comes with tax consequences. Diane Collins, partner at Accounting & Tax Solutions Inc., in Lancaster, Wis., meets with her dairy owner clients on a regular basis throughout the year to help manage expectations and make decisions that affect their tax preparations.

“While dairy farmers can’t really defer the largest part of their income — their milk — they do have options,” Collins said. “I encourage my clients to consider their capital needs. Are there upgrades that should be done, repairs to make that they haven’t had the cash flow to do yet, expansion projects, a new piece of equipment?”

Pre-paying expenses can also help, but Collins cautioned that if another good year follows, you’ll be in the same situation. If your children work on the farm and they’re under 18, you can pay them up to $5,000 tax-free. Establishing your business as a corporation may work because you can pay yourself a reasonable wage and you pay social security tax only on that dollar amount vs. the entire business profit.

“There is a significant change in 2012 to writing off capital expenditures like equipment,” she adds.  “Farmers recently have been able to deduct up to $500,000 for capital expenditures, and new tax laws for 2012 have dropped that limit down to $125,000.”

Bottom-line: Many of Collins’ clients will be paying in taxes this year. If you haven’t yet met with your accountant to review your 2011 information, don’t delay. You’ll have quite a few things to discuss.