Now that majority of crops are harvested, farmers are redirecting their time to prepare year-ending tax prep work. Despite dealing with lackluster milk box prices this year and rising input costs, experts advise paying attention to year-end tax basics.
Virtual bookkeeper, Mary Mackinson Faber of Mary T Faber Solutions, based out of her home office in Pontiac, Ill., offers three tips to farmers going into tax prep season.
- Collect and record all the documentation for capital projects. This includes new purchases, like a skid steer or tractor. Remember you must have all the paperwork to document that purchase. If you built this year, you will need all the invoices from the builder so they can be added to your depreciation schedule. Also, gather all paperwork to document any purchase of breeding stock, as this can also be added to your capital projects column.
- Make sure you can explain any differences or changes between 2020 and 2021. For example, why did your feed costs significantly increase? It may be as simple as the increase in input cost or because you are feeding more cattle. Why is there a huge increase or decrease in your repair bill? Well, maybe in 2020 you had a bunch of your equipment that needed to be repaired and those repairs worked in 2020 and your repair bill in 2021 is significantly lower. Also, elaborate on the differences and changes if something in 2021 occurred that is new. The easiest way to explain is by having a paper trail that documents everything. Anytime you see something of interest, write a note (digital or actual) and include it in your files, so that way you can easily recall if you get questioned later by your accountant.
- Have a list of questions. Write any questions you may have down to ask either your tax preparer or accountant. Maybe you’re not exactly sure what can be depreciated or what counts as a capital project or what can be considered a repair or an improvement. Write these questions down and remember there is no such thing as a dumb question.
Paul Neiffer, CPA and principal at Clifton Larsen Allen agrees with Faber but also encourages farmers to pay their kids. “If you are a schedule F farmer with children under age 18, make sure to pay them what they really earned this year,” he advises. “Children with no other income can earn about $6,000 this year tax-free (some states might require a little bit of tax) and the wages paid are completely deductible and even better, no payroll taxes are owed.” He says the child can take those earnings and contribute to a Roth IRA account. If your child puts $5,000 into a Roth IRA at age 17 and lets it compound until age 65, it will grow to about $80,000.
Also sell some grain on a deferred payment contract if you need to generate some additional income for 2021. “This gives you flexibility after year-end if you need to bring income into 2018,” Neiffer explains.
Carve out some time now that the crops are harvested to focus on tax prep work for the year that is coming to an end very soon.
