The official tax season won’t start for another month, but planning for tax season is well advanced on many farms.
âMany producers meet with their tax planner to see what their tax liability will look like in 2022,â says Dario Arezzo, senior tax advisor at Farm Credit East.
The proposals that would have eliminated the reinforced base as part of President Joe Biden’s Build Back Better plan as well as the proposals that would have lowered the threshold for inheritance tax have been largely put on hold, so there is no need to s ‘worry about paying Uncle Sam more in either of these cases, he said.
But Biden’s infrastructure bill removed employee retention credit retroactively to September 30. It allows qualifying businesses to claim a 70% tax credit on qualifying wages up to $ 10,000 per quarter – maximum of $ 7,000 per employee per quarter – if the business was either fully or partially closed due a government order (the least likely qualifier for traditional producers) or if an eligible business has seen its gross margin drop by more than 20% in a given quarter from the previous year.
So how should you prepare for tax season? And is there something new to think about before you sit down and file your taxes this winter and spring? Arezzo provided insight in a recent conversation.
What should you not overlook when filing your taxes this year?
I would say for 2021 … and even 2020, the # 1 thing that can save producers money is employee retention credit.
Regardless of its demise, many producers – and maybe even their advisor – don’t know they’re eligible. Few people take the time to compare income from year to year. For example, if you had $ 100,000 in gross income from January to March 2021 and $ 500,000 in gross income for the same period in 2019, this is a significant drop – over 20% – so you would be entitled employee tax credits.
Of course, there are a lot of exceptions and rules. For example, you get up to 70% of an employee’s salary and eligible health plans, up to $ 10,000 (per quarter). So if a person earns $ 10,000 for that quarter, you will get a tax credit of $ 7,000 for that person.
Now there are gyrations where you have to cut expenses and that goes into tax planning. But people need to know if they qualified before the fourth quarter. And if so, do they take into account all the gyrations involved to claim it with the application and the reduction in expenses?
At its basic level, if the government made you close, modify, or partially close your retail stand or other business, you might also qualify for this credit and get back the money you paid for your employees. I think most people miss this for 2021. There are also special rules available which are quite lucrative for some start-ups.
Additionally, towards the end of 2020, the government made an adjustment indicating that people who received Paycheck Protection Program (PPP) loans and retention credits could claim both, although this requires speaking to a tax professional.
You normally have three years to correct and amend a previous tax return, so all is not lost if these credits have not yet been claimed.
What Federal Tax Proposals, or Legislation, Should Producers Watch Out For?
So far, this is good news when it comes to pending legislation.
We have all kept an eye on the Build Back Better bill in the House. There was talk earlier in the year of getting rid of the increase in the base, so that when people die, for example farmers with farmland, their land is valued at its current value on the date of death. death. So if I bought a piece of land for $ 100 and it is worth $ 1 million when I die, it is passed on to the farm worth that million dollars to determine the gain on a future sale.
This measure was likely to be repealed and has tax ramifications associated with certain other legislative proposals. It does not appear to have been the subject of the bill, which is very good news for farmers.
On a related note, there has been a lot of talk about inheritance tax thresholds with inheritance tax exemptions and donations declining in 2022. At the moment, that doesn’t seem like either. no longer have its way into the bill. Many people were concerned about estate planning earlier in 2021 when it comes to these changes. Some still are … because while the inheritance and gift exemptions don’t change under this legislation, we know that unless something else happens by January 2026, the inheritance exemptions and donation will decrease.
Also, keep a close eye on possible changes to the state and local tax, or SALT, and its potential impacts. If you remember, people could only deduct up to $ 10,000 from their state and local taxes. So this is a big challenge, especially for high income states like the North East and the West.
In House and Senate bills, SALT appears to be increasing. So for growers paying a decent amount of state and local taxes, especially here in the Northeast, this could be a potential help.
Many states have created SALT workarounds for S Corps. or partnerships. For example, if you pay tax at the partnership or S corporation level, you can deduct it as an individual and it will not count towards your $ 10,000 limit.
What are the good financial management tips for year-round management?
It’s so basic but it’s so critical. The cornerstone of any good tax mitigation and management strategy always begins with good records. The better the accounting, the better the categorized items. The more up-to-date these records are on an ongoing monthly basis, the better people like me can do our job.
Regardless of how you manage your books, whether you do them yourself or hire the professionals in, having really strong ledgers and accounting is essential to keeping an up-to-date picture of what’s going on. happening throughout the year. This allows your tax accountant to take proactive steps to benefit your business.
What are the biggest mistakes producers make when it comes to taxes?
The biggest mistake would be to look at things on a one-year basis and not take a multi-horizon approach. And that’s where I really believe I have a relationship with a tax professional, where you envision a three, five, 10 year window to put a plan in place.
In other words, it might not make sense to pay the lowest tax possible every year. Maybe we are optimizing the tax brackets.
For example, maybe the next generation comes back to the farm next year or the year after, and maybe the farm has a high debt load. We can start paying off some of that debt and optimize some lower tax brackets now to prepare the farm for this transition.
Many farms will either pay more up front or overtax the plan. For example, a dairy farmer sells cows raised from his herd. These are treated like actions. These are capital gains. So if you’re a taxpayer paying 0% in capital gains, as a married couple, let’s just say you have a threshold of at least $ 80,800 in that 0%. It might make sense to fill that threshold with high cow sales and not pay up front because you are going to pay, in some cases, 0% tax on your high cows anyway.
On a related note, you may have funded equipment worth $ 500,000. It might not make sense to write off this piece of equipment under accelerated depreciation tools in 2021. As you pay off that debt over the next few years, you’re going to have to pay off. higher taxes with the repayment of these refunds. You are already matching the amortization with your debt repayment schedule.
In short, by working with a tax advisor, you take a long-term approach to tax planning that matches the family’s vision for a short-term solution and decisions to be made later.