Tax management strategies

Published on Wednesday, 30 November -0001 00:00
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By Greg Dvergsten, Farm Bus. Instr.

Now is the time to be thinking about tax planning and management strategies, rather than next February when you need to file your farm tax return. Tax management skills implemented year around, and especially prior to year end, are a vital component of good overall farm business management.

With the current volatility of farm commodity prices and production input costs, tax considerations become even more important in the decision-making process. The management of most farm businesses requires the handling of a large volume of money for current operating expenses as well as considerable capital investment. Farm revenue, unfortunately, tends to fluctuate greatly from year to year for a number of reasons. However, since the majority of farmers utilize a cash accounting system, this is where tax management must begin. Generally, after tax dollars will be the greatest when the year to year variation in taxable income can be held to a minimum. Therefore tax planning should begin early enough in the year so that the proper timing of sales, operating inputs, and capital investments can occur. Try to avoid wide fluctuations in taxable income from year to year.

An attempt should also be made to maintain taxable income that will at least equal your standard deductions and exemptions; and hopefully, high enough to utilize any tax credits you may be allowed. Many of these deductions and credits do not carry forward and are lost if you do not report income high enough to cover these items. This is especially a concern if you are carrying a larger commodity inventory at the end of the year compared to the inventory brought in at the beginning of the year.

Any building improvements and equipment needs that have been put off during the lower profit years may fit in nicely on higher return years. This can give you some added expenses and deductions on a year that you need to offset income through the use of 179 depreciation expensing and bonus depreciation. However, the business manager should be cautious, and purchase capital needs that fit into the farm's typical cash flow and meet the goals and objectives of the business, not just the tax goal.

If you have not already done so, tax planning and management for 2010 should be done now. All that is really needed is an up-to-date set of farm records, and the previous year tax information to check for any deferred income from prior years and remaining depreciation. If you would like to learn more about tax management strategies for your farm business, please find a farm business management instructor at

Greg Dvergsten is a Farm Business Management Instructor at Northland College in Thief River Falls.