A34-Lancaster Farming, Saturday, November 4, 2000
Brent Landis
Agriculture Services Coordinator
-hJkfd-\The
Lancaster
Mli Chamber
U .y. -J—) ln*lustr\
Phone: (717) 397-3531 ext. 62
E-mail:blandis@lccl.com
Pre-Year End Tax Planning
The end of the year is fast
approaching, and do you know
what your tax liabilities will be?
To become better prepared for
your tax liabilities and possibly
help save you money m taxes,
schedule a pre-year end tax
planning meeting with your
accountant
It is advisable to meet with
your accountant during the month
of November to review your year
to-date financial records and
project December's numbers in
order to forecast your tax liability
This pre-year end meeting will
allow enough time to make any
final business transactions or plan
other options to level your taxable
income before the December 31
deadline
With nearly all taimers on a
cash basis accounting system, you
pay taxes on the difference
between your receipts and
expenses In larmmg there can be
a large volatility from year to year
on both your receipts as well as
your expenses A farmer’s tax
icporting process, (schedule F), is
one of the most liberal in the
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Your Hoffman Seeds dealer wants to help you save on your next seed corn purchase.
When you buy 10 bags of any NK® Brand seed corn before November 30, 2000, you'll get
2 EXTRA BAGS ABSOLUTELY FREE. See your Hoffman/NK® Brand dealer for details.
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business community. This can
allow you to level out your
taxable income over several years
and remain in the same tax
bracket, rather than pay a large
amount in taxes one year and very
little the next
One strategy to take in leveling
your income is to defer income to
the next year and prepay expenses
or show income early and defer
expenses to the next year,
depending on your financial
situation Planning allows you to
manage which tax bracket you
want your income taxed, and even
allows income that otherwise
would have been taxed to be
sheltered if the income is pushed
into a subsequent loss year The
following example illustrates how
tax planning can benefit a farming
operation-
Fat met Brown, a faun
piopnetoi, has 2 children and
files a joint tax return with his
spouse Then 2000 taxable
income befoie tax planning is
$54,000, and they expect then
2001 taxable income to be
significantly less Theiefore, then
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tax planner advises them to defer
income and prepay expenses of
$lO,OOO to reduce their 2000
taxable income to $44,000, which
is the top end of the 15% federal
tax bracket. Without planning,
the Brown’s combined marginal
tax rate would be 47% (28%
federal, 4% PA and local, and
15% social security); therefore,
by prepaying expenses or
deferring income of $lO,OOO, the
Browns save approximately
$4,700 of tax.
Those that don’t plan claim
that the profit gets taxed the
following year, so why bother?
First, the time value of money is
an important item to remember.
Having the tax money in your
pocket to invest back into your
operation or into a retirement plan
(see below) instead of the
government’s pocket for one year
is valuable. Second, if this year’s
profit is pushed into a lower
bracket next year, the tax savings
generated by the difference in tax
brackets is permanent. Third, if
you expect a loss next year, the
profit pushed into next year is
offset by the loss and never taxed.
The most common method of
managing income is to delay or
accelerate selling crops. In a
dairy operation, delaying the
receipt of a milk check is more of
a challenge, especially if you have
an automatic deposit feature. If
you receive Commodity Credit
Corporation (CCC) loans or crop
damage insurance proceeds, there
are some planning options
available as to when this income
is reported.
Another approach to managing
taxable income would be to use a
retirement planning option This
might involve placing money in a
SIMPLE plan, IRA, 401 K, or any
other retirement planning tool
Be aware that a contribution to
your own retirement plan saves
income tax, but does not reduce
your social security tax
However, this planning technique
will help you secure and diversify
your retirement wealth as well as
reduce your taxable income
Common methods of
managing your expenses include
prepaying or delaying payment of
feed, supplies and fertilizer.
There are limits on how much
may be prepaid so consult with
your accountant concerning these
rules. Another available tool to
avoid high taxes is first year
depreciation or Section 179. With
this special depreciation election,
you may show an expense of up
to $20,000 on equipment
purchased. Another method is to
pay your children, provided the
labor and hourly wage is
legitimate. No social security tax
is due on wages paid by farmers
operating as sole proprietorships
to their children ojnder age 18. In
addition, children do not have to
pay federal income tax on their
first $4,400 of wages because of
the standard deduction allowed on
their tax returns, so it’s a great
way of sheltering income within
the family.
As with any tax planning
decision, be cautious to not leave
the “tax cart” get in front of the
“good business horse.” In other
words, consider whether the tax
See
Lancaster Farming
CowCaxn
Visit our Website
at www.lancasterfarming.com
planning decisions you are
making still make good business
sense. For example, if you are
considering prepaying feed and
prices are high in December, and
you can do much better
economically buying feed next
year when feed prices are
anticipated to be lower, consider
this as you make your year-end
tax planning decisions.
If you do not already have a
pre-year end meeting scheduled
with your accountant, consider
doing so this month. This not
only allows enough time for tax
planning but also will encourage
you to maintain a better record
keeping system and reduce the
shock of your tax bill come
February If your time is limited
this fall, it might be tempting to
spend any extra time with the
harvest fieldwork, but proper
planning of your finances can
save you far more money than the
few extra bushels of grain you
might harvest.
The Lancaster Chamber’s 24" 1
Annual Agriculture-Industry
Banquet will be held on
November 21 at the Lancaster
Host Resort. For more
information or to register for
banquet tickets, visit
www.lancaster-chamber.com.
contact Brent Landis at (717)
397-3531 or e-mail
blandis@lcci com
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