Posted by: Kelley Dees | February 10, 2011

Tax Time–April 15 is Approaching Quickly!

Tax time can be stressful for anyone, especially those who have their own business and have several potential deductions or losses. Taxes are due this year on Friday, April 15. You can file for an extension, but you need to take care of that as soon as possible to ensure that you don’t have any delays later on. Today, 10 tax tips for farmers and ranchers:

  1. Get your hands on Publication 225. This is a tax guide for farmers, written by the IRS and farm extension specialists. You can download and print it here or you can have it mailed to you (along with any other tax publications you may need) free of charge here.
  2. Find a great accountant. Accountants are invaluable year-round for farmers. Find one who specializes in farming tax code, as this is different from a lot of other businesses. You can also minimize accounting costs by keeping detailed and accurate financial records. There are several computer bookkeeping programs available, including Quicken, AccountEdge, and QuickBooks. Most importantly, you don’t want to pay your accountant to do your record-keeping when you can do it yourself.
  3. Predict the future. It’s never to early to start thinking about taxes, especially if you’re a farmer or rancher. Farmers and ranchers can improve their tax returns through strategic purchasing and selling to maximize the benefits of each calendar year. Some experts even recommend doing trial tax returns in May, September, and December, so that if a financial problem is looming, you’ll have time to offset it with expenses or to prepare for it with savings.
  4. Don’t cut off your nose to spite the taxman. It’s very easy to go overboard trying to avoid paying taxes. Don’t buy equipment solely for its tax-deductibility. Equipment should be bought only for need. Don’t spend money just to save on the taxes on it. Your accountant will come in handy in these situations to help you determine the best time to buy new equipment. Farmers should stay away from salespeople trying to entice customers with the tax benefits of their products–buy a product because you need it and it will accomplish the tasks you need it for.
  5. Avoid the “H” word. H, as in “hobby.” The tax code is more generous with farms classified as businesses rather than hobbies. Publication 225 gives nine criteria for establishing a farm as a business. Unfortunately, the IRS might not take your word for it, so always keep a paper trail!
  6. Put your home to work for you. Remember to divide farm electricity, insurance, and phone expenses from home expenses, since home expenses can not be deducted from farm income. Farm-related vehicle mileage (currently 44 cents per mile) is also deductible, so keep track of the miles you use your vehicle for business-related trips as well as use on the farm/ranch.
  7. Make your new farm building special. It’s usually best for farmers & ranchers to depreciate equipment quickly (on paper anyway) to get tax-deduction savings before inflation eats away any value of items. General-use building depreciate over 20 years, while special-use buildings depreciate in only 10, so try to make your next new building fit special-use criteria (remember: the faster it depreciates, the less inflation affects your savings).
  8. Section 179. Section 179 says that farmers who gross under $400,000 a year and buy farm equipment can depreciate up to $108,000 of the cost of that equipment on their taxes in the first year. Check Publication 225 for more on this.
  9. Actually pay your kids. Employee wages on a farm or ranch are deductible. The IRS doesn’t care if that employee is a relative or not. Not only are your kids wages deductible, but their clothing may be as well (if it’s needed to perform the job). Just be careful not to “pay” your children so much that they’ll have to pay taxes on their earnings.
  10. Retirement. Don’t forget to save for your own retirement. The Social Security system isn’t reliable and you should NOT rely on it as your sole source of retirement income. Start planning now, whether you plan to retire in 5 years or 25 years. Once again, your accountant can help you make a plan that is best for you.

For more information about taxes relating to farming and ranching, check out this publication that explains in more detail the value of certain tax savings ideas and plans.

The IRS has not evaluated these tips. Please use this as a guide to discuss with a professional tax accountant.

This information is provided courtesy of the Wyoming AgrAbility Project. For more information, visit our website or call toll-free at 866-395-4986.

This information is adapted from Tax Tips for Farmers: Ten Ways to Make April 15th Less Stressful by Craig Idlebrook. Located on the Maine Organic Farmers and Gardeners Association website.

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