Managing Taxes for Farmers
For many farmers, tax mangement is something we think about only once a year -- when taxes are due. Tax management is actually an ongoing process that takes place throughout the year with any transaction -- purchase or sale.
Good tax management means paying what you owe -- no more, no less. A new publication, actually a revision of an old publication, is available to help farmers with tax management. Income Tax Management for Farmers is a North Central Region Farm Management publication that has just been revised. It's available, along with a number of other farm management publications from the Midwest Plan Service, who print and distribute publications for the North Central Farm Management Extension Committee of which Kentucky is a member. The new tax pub is designated NCR2 and can be purchased for four dollars by phone, fax or on the Web. Midwest Plan Service's phone number for ordering is 1-800-562-3618 or go to their Website at http://mwpshq.org.
Pay your children cash wages for farm work they do and deduct these as a farm business expense. The wages should be reasonable, the work identifiable, and the pay should be made regularly. The parent can still claim the child as a dependent if they are under 19 or a student and the parent pays more than half their support. Wages paid to children are not subject to social security tax until a child is 18.
Consider trading rather than selling capital assets, especially land. Capital gains taxes can be quite significant on assets with a low basis, like land you've held for a long time. So investigate tax-free exchanges of like-kind assets.
Develop and use a good record-keeping system that keeps track not only of operating expenses and income but also capital items, livestock or other goods bought for resale, and loan principle and interest payments. At the very least, keep all farm receipts in a separate farm checking account and pay all farm bills from that account. This will give you a separate record of farm income and expenses and prevents co-mingling of farm and family expenses.
Don't put off tax management and know when and where to seek qualified advice. Farm taxes have many unique aspects. Find someone who deals with farm taxes on a regular basis and who stays current on the changes in tax laws. Tax management is a daily process not an annual event.