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by Dennis Roddy
Senior VP – Financial Services
Business planning should take place all year long when possible. The tax planning side of the Business Plan does take on more significance at year-end, as there are only a few more months to make adjustments that can save dollars from being paid to taxes.
Your Frontier Farm Credit Business Services Tax and Accounting Specialist can: 1. make sure you have accurate and up-to-date business records; then, 2. help develop and analyze projections for your income and expense items through the year-end. This will enable you to save or defer tax dollars and minimize the impact to your cash flow.
Options for completing year-end business planning include:
Prepay expenses
If you are a cash method taxpayer, you can prepay many expenses, which may be deductible in the year that you pay for them.
Defer income until the next tax year
You may benefit from delaying income until next year. But remember that leaving checks out in the mailbox until January won’t work, because all income that you receive (even if you didn’t bother to collect it) is taxable.
Pay your spouse and children for the work they provide
If your spouse and children work for the business, you may hire them as employees and deduct their compensation. This process can possibly save you social security tax and may increase your contributions to retirement plans. You can provide health insurance as a tax-free fringe benefit to a spouse who is on your payroll, and you may save income tax and self-employment tax at the same time.
Contributions for yourself and family employees to retirement plans
There are many options to fund your future; consult with your Business Services Specialist to learn about your choices of the various retirement options available for farmers and ranchers.
Section 179 depreciation
For the tax year 2009, the deduction limit is $250,000. Qualifying property for Section 179 includes breeding livestock, machinery, single purpose ag structures and drainage tile. Property can be new or used. Property eligible for Section 179 cannot be purchased from a related party (spouse, ancestors, or lineal descendant).
Bonus depreciation
Businesses are allowed to depreciate an additional 50% of the cost of certain property. Eligible property includes: tangible property that has a recovery period not exceeding 20 years, purchased computer software, water utility property and qualified leasehold improvement property. Only new assets qualify.
Take advantage of the New 5-year MACRS Recovery Period
added for 2009 only. New farm machinery and equipment (but not used equipment) placed in service during 2009 qualifies for a 5-year recovery period.
Lease versus purchase
Leasing can be a good option to avoid some of the limitations surrounding depreciation. With the correct structure, your lease payment may be fully deductible each year and even provide a faster write off than with depreciation. If you have used all of your section 179, have purchased too much in the 4th quarter of the year, or have purchased too much over the entire year, leasing may be a beneficial option.
Take advantage of available energy credits
During 2009, individuals can make energy-conscious purchases that will provide tax benefits when completing their tax returns next year.
Use 3-year income averaging
Farmers can elect an amount of their current farm income to divide equally among the previous three years. Savings may result if the previous year’s income was taxed at a lower tax rate than the current year.
Defer disaster payments and crop insurance indemnity payments
You may postpone reporting crop insurance proceeds as income until the year following the year the damage occurred if you meet certain conditions. The insured must suffer actual physical loss in yield.
Utilize a Health Savings Account
A Health Savings Account (HSA) is a tax-exempt custodial account that must be used in conjunction with a highdeductible health plan. The contribution limits for a Health Savings Account in 2009 are: single $3,000 and family $5,950.
Tax law can be complicated. We at Frontier Farm Credit specialize in rules that apply to agricultural farm and ranch taxation. Our goal of tax planning is to minimize your taxes for the long run, not just this year.
Contact your local office to work with a Business Services Specialist.
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