I am excited for the opportunity to write this article and provide business owners with valuable tax planning ideas. However, I am a CPA and many may question my qualifications for writing an article in Progressive Dairyman. So I wanted to start off with some instant dairy credibility by listing some of my impressive agricultural qualifications.

Ben Brown

• I was raised in farm country (Burley, Idaho), where I can count seven dairies within a two-mile radius of my childhood home and where I was an active member of the neighborhood watch program, which consisted of calling to let the dairymen know that their cows were out.

• I worked on a farm for one entire summer and survived with all appendages attached; however, in the interest of full disclosure, there was one finger that was touch-and-go there for a while. In addition, all summer I was affectionately referred to as “Farmer Brown.”

As remarkable as the above qualifications are, I do have industry-related accounting experience, having been fortunate enough to have worked my entire career for a great CPA firm with a client base that has allowed me to service many farms, ranches and dairies. These industries are something that I relate to closely and they truly feel like home to me. Now, let’s move on to the topic at hand.

A common question I hear in my profession is, “How do I avoid paying a lot of taxes?” This is a great question. Minimizing taxes is an important consideration while operating a successful business.

The problem with the question is the fact that, more often than not, I’m asked that question in January, February or March, after the tax year has ended. The time to ask that question is now, while something can still be done to reduce taxes.

The first step to year-end tax planning is to begin with good numbers. This entails making sure your books are up-to-date and accurate. Next, prepare a projection of income and expenses through the end of the year. This information is critical in determining the specific tax management strategies to implement.

Once projected income for the year is determined, consider your overall business goals and contemplate how these relate to your tax objectives. Following are some possible ways to minimize tax in the current year.

Prepaying expenses
Farms generally operate using the cash basis of accounting. In this case, one possibility to reduce income is paying all accounts payable due and prepaying livestock feed and farm supply expenses for the coming year. This is a well-known strategy to the IRS and they have provided specific guidance to farmers, in Publication 225 Farmer’s Tax Guide, on what prepaid expenses are allowed.

In general, prepaid expenses must be for the purchase of a specific amount of feed or supplies and not just a deposit; the prepayment must have a business purpose beyond tax avoidance and the expenses cannot be greater than 50 percent of your other deductible farm expenses for the year.

Additionally, if these expenses are paid using a credit card, a current-year deduction is still allowed, even under a cash basis of accounting. For accrual basis taxpayers, there is also some ability to deduct prepaid expenses.

For example, an accrual basis taxpayer is permitted to deduct pre-payments for services or property if the services or property can reasonably be expected to be received within 3 ½ months after the date of payment.

Defer income
Another common method of minimizing taxes in the current year is to defer income, if possible again taking advantage of the cash basis of accounting. In general, this would involve waiting to collect cash on late-year sales until the following year or waiting to make a sale until the following year.

Also, there is a unique rule for farmers that allows for deferral of income recognition if weather-related conditions caused the sale of more livestock than normal in a year.

Capital investments
Now is the time to upgrade equipment if new or additional equipment is needed. Under current laws, there are two highly beneficial methods to allow current-year expensing of capital equipment.

First, businesses can consider making expenditures that qualify for the business property expensing option known as Section 179 expense deduction. This option has been around a long time but, under current law for tax years beginning in 2011, you are allowed to expense up to $500,000 of qualifying expenditures if the total amounts of capital purchases are under $2,000,000.

However, unless Congress extends the current law, these amounts will drop substantially in 2012.

Property that qualifies for the Section 179 depreciation expense deduction must be eligible, purchased, be for business use and placed in service. Below is a list of eligible property applicable to the farming industry.

1. Tangible personal property. This includes machinery, equipment, property non-structural in nature attached to buildings and livestock.

2. Qualified real property. Generally qualified leasehold improvements.

3. Other tangible property (except buildings and their structural components) used as a facility used in connection with manufacturing, production or extraction for the bulk storage of fungible commodities.

4. Single-purpose agricultural (livestock) structure. A single-purpose agricultural structure is any building or enclosure specifically designed, constructed and used to house, raise and feed a particular type of livestock, its produce and equipment used.

Second, businesses can consider making expenditures that qualify for first-year 100 percent bonus depreciation. Again, unless Congress extends or changes the current law, 100 percent bonus depreciation ends this year.

Below are the various requirements that must be satisfied in order for an asset to be eligible for the 100 percent bonus depreciation.

1. The assets’ original use must be by the taxpayer.

The asset must be assigned a MACRS depreciable life of 20 years or less. Fortunately most, if not all, farm expenditures will fit this requirement.

2. The asset must be acquired and placed in service after September 8, 2010, and before January 1, 2012.

3. Both of these options allow for a deduction that is not pro-rated for the date that the asset is placed in service during the year. This means even if the asset is purchased at the end of the year, the full amount can be expensed and it opens up a great opportunity for year-end tax planning.

As I finish providing these ideas, I want to leave you with a story from my youth that may suggest caution when implementing tax-saving strategies. When I was young, my father gave my mother a beautiful and elegant piece of art for her birthday. My mother immediately went to our formal living room to decide where she wanted to display the art.

Before the rest of our family could catch up to her, my mother had already decided where she would hang it. My mother then quickly turned to my father and expressed her desire to re-paint, re-carpet and re-furnish the formal living room in order to match the piece of artwork.

I share this story because it is a great example of a common idiom that you may recognize – “Don’t let the tail wag the dog.” In my story the tail is the piece of artwork which began controlling the dog.

The dog, of course, was the more important and significant formal living room. My mother was allowing a small piece of artwork to not only determine how the entire formal living room was viewed, but also to govern the investment of substantial resources.

This idiom applies closely to business owners and is something that should be continually thought of when tax planning. The dog is what is important; it is your business and it is your farm.

You shouldn’t let the tail wag the dog. Don’t let the possibility of paying some taxes cause you to make poor business decisions.

Remember, now is the time to begin your tax planning. Thoughtfully consider the above tax-minimizing strategies discussed and implement them when and if they help accomplish your overall business goals.

Good luck and I’ll keep my eyes open for roaming cows, because I do consider my neighborhood watch membership a lifelong commitment. PD

Ben Brown
Senior Tax Associate
Jones-Simkins, P.C.
bbrown@jones-simkins.com