Looking Ahead to Tax Season: Helping Farmers Prepare

Education Business | 10.11.2023
With agriculture tax season right around the corner, Merchants Bank’s Ag Bankers Matt Schuldt and Ken Graner help answer a few of the most common ag tax questions.

1. How does equipment depreciation impact agriculture taxes?
Farmers and agricultural businesses might look to equipment depreciation and Section 179 to help reduce their tax burden. Depreciation is an accounting and tax term meaning to spread the cost of a physical asset over its useful life. Typically, equipment depreciates over 5-7 years, though some specific types of farm equipment may have different depreciation schedules. The cost of the equipment is deducted gradually over its useful life, reducing taxable income by a fraction of the equipment's cost each year. It’s this depreciation expense that may offset income and lower tax liability.

Section 179 of the Internal Revenue Code allows farmers to write off the cost of qualifying equipment in the year it is in service rather than depreciating it over several years. If you are evaluating what equipment qualifies for depreciation, reach out to a qualified tax advisor to ensure you are following the best ag tax practices. 
2. What are farm deductions and credits?
Farm Deductions are operating expenses needed to keep the farm running. For example, farm deductions may include seed, fuel, fertilizer, insurance, wages, veterinarian, interest expenses, and much more.

Farm Credits are adjustments to the amount of tax that needs to be paid. An example of a farm credit might be a fuel tax credit, which is used to offset the cost of using fuel and encourage fuel efficiency. Understanding tax laws and how they relate to farming can be overwhelming. Work with your ag qualified tax advisor to find where your business may benefit during agriculture tax season.
3. Why may it be beneficial to keep consumer and business finances separate? 
While planning for tax season, it is often beneficial to keep your business finances separate from your personal finances. Not only does it make bookkeeping easier, but it also simplifies the process of finding tax deductions. By separating business expenses from personal ones, it becomes clear which expenses may qualify to be deducted. Plus, only business expenses are tax-deductible.
4. When is the best time to start reviewing your farm's financial situation?
Staying on top of your farm’s finances is likely a priority. Although how often a financial review happens may vary depending on the size of the farm, many check their incoming and outgoing expenses monthly. Financial awareness includes a range of practices, from watching for fraudulent transactions to keeping within budget; many of which play a role in tax season. Consult a tax advisor when reviewing bank account information and making financial decisions relating to the sustainability of your farm.
5. Do you have any other tips or important things to know when getting into the tax season?
When you decide to start planning for ag tax season, it’s critical to choose a tax preparer who has a sufficient understanding of the farming industry and your specific type of operation. A few specializations within the industry include hogs, cattle, dairy, and crops. The more your preparer understands about your farming operation, the easier the process may be.

Consulting with a tax advisor who specializes in ag may help set you on the right path. They might have valuable insights into optimizing your financial strategy and maximizing your returns. Reach out to an expert today and get the guidance you need for a successful year.

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