Too Much Income

[gman]

I do returns for several farmers. This year they are all showing quite a bit of profit. They all ask"What can I do so that I am not paying so much in taxes. What are some suggestions you give to your Sch F or C clients other than 179 assets???

Thanks for the suggestions...

[JohnH]

How about a big tax consulting session between now and Dec 31, payable at the time of the meeting? That would be at the top of my list.

[Lion]

Expenses

Look at disbursements they would make in 1Q 2009 and see if they can make any of those this month instead. Bonuses to employees. Can they postpone any income, not invoice, not sell grain, etc.? If it was a better-than-normal year, they should consider equipment or something they've been postponing. Repairs and maintenance. January's property tax and mortgage payments now. Tell them to contact you earlier next year.

[gman]

Thanks

For the serious reply. Farmers have had a lot of bad years, fortunately they have recently had a few good years and are now faced with paying in a lot of income & ss. tax.

[Gretel]

Does your farmer qualify for income averaging?

[JohnH]

I'm glad to see you got other replies, but mine was also serious. That is, unless you consider tax advice rendered at year-end in the course of helping someone save money to be of no value and not worth charging for. If so, you have plenty of company since many clients have that same attitude - they will gladly accept it without even thinking of paying for it.

[BOB W]

Does your farmer qualify for income averaging?

Use this as a worksheet.

http://www.irs.gov/pub/irs-pdf/f1040sj.pdf

[Jiggers]

Tax Planning for Farmers

1. Pay all bills. Feed, fertilizer, supplies. All received in December. Sometimes they have to make a trip to the feed store, etc., and request their balance and write them a check.

2. Be sure all lease payments for the land, if leasing it, are paid by Dec 31. Even those due in January.

3. Pay all property taxes. In my area they are due January 31.

If the taxpayer doesn't have the cash, put these on a credit card. They are deductible in the year charged, not the year paid.

[S T]

Already Said

Defer income and accelerate expenses, mortgage/loan payments for the interest deduction, property taxes, etc. What about any repairs (not necessarily improvements) that can be accomplished between now and 12/31/08.

Sandy

[BHoffman]

Most of the suggestions are a deferral of tax payments, not a decrease in taxes. Sec. 179 simply accelerates the deduction that would be taken in any event over time. So does the notion of accelerating the recognition of expense and deferring the recognition of revenue.

There is no "magic bullet" other than straight out tax evasion. Do your farmers have some sort of tax deferred retirement plan? That is the most obvious way to save a little on taxes.

Otherwise, if you're making money you are going to pay tax. Them's the facts. You might point out that income taxes are cost of business and that their company actually pays no tax since the money for those taxes comes from customers. The cost of their taxes are passed on to the customer. They are merely custodians of the cash until it's time to pass the collection plate over to the Rector.

You might want to try and set them up for quarterly payments. I try to work with my clients throughout the year to make sure there aren't any surprises on 04/15. Of course, surprises do "crop" up. (pun intended)

[erchess]

Question for John H

How about a big tax consulting session between now and Dec 31, payable at the time of the meeting? That would be at the top of my list.

How many appointments and how much total time does it take you to do all the tax planning a typical farmer or small business person can benefit from, and how do you charge for that? What percentage of your clients are willing to pay for that?

I personally charge $75 an hour for tax planning and so far I have only one client who uses me in the off season. I have perhaps one other client who could benefit from such but won't pay for it.

[outwest]

True that tax planning is often a deferral..

but the farming area is a little special. With wildly swinging commodity prices, many are finding a big bump this year but next year looks brutal. If the the farmer bumps into a 25% or better bracket this year and to a small loss next year, there is a overall permanent tax cost that could be avoided by smoothing out the income between years.

Typical strategies, accelerate expenses, prepay fertilizer, seed, and Section 179. Also delay sales till the following year. Problem is, fertilizer prices are falling so why prepay at a high price? A why delay sales if commodities are falling?

Also, for a farmer, taxes paid deplete the cash to plant the next crop in the spring. That's also the reason that farmers don't often use quarterly estimates. Till fall, all the money is in the crop. Note that if they file by March 1, there is no penalty for this practice by farmers.

Much more than other occupations, tax planning and smoothing are very important.

BTW, as a side note, farmers that I deal with have by far the cleanest books and best understanding of tax law. I only wish the urban clients had as much sophistication.

[equinecpa]

Most of my clients operate horse farms and see wild fluctuations in income -one year will be profitable, the next not.

All of the above are good suggestions. Another item not mentioned that I consider when undertaking tax planning -is the choice of entity. Sometimes being taxes as an s corporation or LLC proves beneficial, it can help to minimize self-employment taxes. It won't do your client any good for this past year but might be a consideration for future years.

Other than that, I make sure my client buys any machinery they might need before year end, pays all outstanding accounts, gets that last load of hay in etc. Sometimes they choose to purchase more livestock. SEP retirement plans help minimize the tax burden as well.

If your client has stock investments, get them to trigger a loss by selling stock (these can be replace by a similar stock if they want to maintain position in the market).

Effective tax planning however can't be left to the last moment. If I see an opportunity for a client when I'm preparing their return I will mention my ideas to them. I had a client last year that opted to form an LLC after she saw how much self-employment taxes she was paying.

Good luck

Carolyn

[JohnH]

Not many. Only 3 or 4 out of a total of 190 or so clients are willing to pay for a pro-forma tax return prep and consultation in any given year. There are another half-dozen who call or email info to me and I give them quick updates. Those I don't charge if I can do the update in a few minutes (for example, a minister who wants to know how much of his FICA offset to keep and how much to send the IRS).

Having the mind-set that this is chargeable time (when it requires some work) is important in dealing with some clients. That affords them the opportunity to set their own priorities by offering to have them come in and pay. There are exceptions, but the majority of clients won't place any more value on your time that you do. How many times does someone who knows you are in the tax business make a comment in the off-season to the effect that "you must have lots of free time right now". Whenever I hear that, I alway acknowledge that I'm generally busier during tax season, but this is definitely a year-round business.

Several years ago, I saw someone post on a forum that when they send their January mailing to their tax clients, they devote a paragraph to year-end planning. They encourage clients whose income varies or who need tax planning for any reason to remember to schedule an appointment in Oct or Nov (or sooner) for a "Tax Checkup". The paragraph would include some wording about the cost, just to let clients know it isn't a freebie. I've never followed through on that idea but I like the concept. Setting the expectation well in advance goes a long way toward establishing that the service has value.

[gman]

Thanks

for all the wonderful replies.