Year-end tax planning helps prepare and organize a plan that can target the income and tax bracket where you feel comfortable, and can get the most out of your business heading into 2013.
2012 is one of those years where having a game plan going into harvest makes a lot of sense. Due to high commodity prices coupled with a possible large 2011 grain inventory carryover to 2012, this is the time of year when it is advisable to review your 2012 income tax situation. By now you probably have a good idea of your anticipated income and deductions for the year and there is still adequate time to evaluate possible tax savings or tax deferral techniques available to you. The merits of a pre-harvest meeting would be to formalize a fall marketing plan for your 2012 new crop production.
The advance preparation of a tax plan is critical since last minute planning rarely gives you enough time to implement all of the strategies needed for a well-rounded game plan. Some of the issues to consider this year include:
Depreciation & Capital Expenditures
For 2012, we can accelerate depreciation in two different ways through Section 179 and bonus depreciation methods. The Section 179 limit for 2012 has dropped from $500,000 in 2011 to $139,000 in 2012, but can be elected on new or used business assets such as equipment, tile or bins. For 2012, 50% bonus depreciation is allowed on qualified new property such as equipment, tile, bins, machine sheds or shops. This means you can deduct 50% of the business asset in the current year and depreciate the remaining value over its regular depreciated life. No bonus depreciation is scheduled in 2013, which makes this year a perfect time to plan for possible capital expenditures for your farming operations in 2012.
Defer Crop Insurance Proceeds
Generally, cash method farmers must report income in the year they receive the payments. An exception to the general rule is when crop insurance proceeds are received on damaged crops in the current year of damage. In order to defer the crop insurance income to the following year, an election must be made and the taxpayer must establish that under normal business practice they routinely defer at least 50% of their current crop into the subsequent production year. Proceeds from revenue assurance contracts typically cannot be deferred. This allows farmers to defer 2012 crop insurance proceeds on 2012 crops to 2013.
Cash method farmers can defer income by utilizing deferred payment contracts. A deferred payment contract is where a farm operator transfers ownership of the grain or livestock and signs a contract that requires payment early the following year. This allows a farm operator to sell inventory in 2012 and lock in a sales price, but defer realizing income until the following year.
Pre-Paid Farm Expenses
Farmers are generally allowed to deduct the costs of supplies purchased during a tax year even if the supplies will not be used until the following tax year. A cash-basis taxpayer must meet all four of the following conditions to claim a deduction in the year of the expenditure:
The expenditure must be a payment for a supply, rather than a deposit.
The prepayment must be made for a valid business purpose.
The expense should be used normally within 12 months of purchase.
Typically cannot prepay more than 50% of the current year operating expenses, including depreciation.
This practice allows farm producers to guarantee delivery and lock-in prices on crop inputs for the following year and to level off high projected income for 2012.
Other Tax Planning Issues:
Review grain inventory and projected income
Domestic production activities deduction
Planning for capital gains and possible tax rate changes
Possible federal tax rate changes for 2013 and beyond
Aligning the above issues to work best for your situation will be critical to avoid unwanted surprises and provide a plan to get the most out of your money this fall.
Please contact GellerRagans if you are interested in discussing your pre-harvest income tax planning.