4 Tax Items to Cross Off Your Operation's 2023 Checklist
The end of the year is closing in. Are you thinking about taxes? According to Paul Neiffer, farm CPA at CLA Connect, you should be.
Here’s a tax checklist Neiffer recommends based on events in 2022.
1. Be Specific When Writing Prepaid Expenses
Historically, Neiffer says farmers have taken advantage of “prepaid expenses,” but supply chain struggles have put a damper on that system.
“Producers can go to, say, a local cooperative and request a certain amount of fertilizer or diesel. That can be done now, but it’s getting tougher with availability,” says Neiffer. “This is when we run into a valid prepaid issue.”
In order to obtain a valid prepaid, a farmer has to request a certain quantity of a product. If a supplier isn’t able to provide that quantity, it isn’t a valid prepaid on additional business expenses for the year.
“So many farmers think they can go down to the local coop and put a deposit down on a product for large sums of money,” says Neiffer. “We’ve had several clients go through audits and fail on that front, despite our warnings. It just doesn’t work.”
For producers to take advantage of these last-minute prepaid business expenses, Neiffer suggests they lock in a “specific item, for a specific quantity, at a specific dollar.”
While preparing final prepaid expense checks, Neiffer says it’s equally as important to consider the checks handed out given by the government.
2. Stay Off the Tax Treadmill
Farmers sometimes climb on a tax treadmill ride that can last, in Neiffer’s experience, 40 to 50 years. With COVID-19 aid revenue attached to the tax treadmill in recent years, Neifer says it might be even harder to hop off in 2022.
The Biden administration released various phases of Emergency Relief Payments (ERP) to producers this year. These types of payments are similar to crop insurance and yes, they can normally be deferred one year, but the farmer can only defer to the year after damage was incurred.
“These payments are for damage that occurred in 2020 and 2021,” Neiffer says. “2022 is the latest you could defer 2021 payments and since producers collected them this year, they’re stuck with reporting these payments in 2022.”
Neiffer feels some ERP phase 2 payments might be deferrable, assuming it was for 2022 damage. However, “at the speed that FSA is proceeding,” he doesn’t think those odds are looking good.
The plans for unwanted revenue and deferments don’t stop at ERP.
3. Draft a Plan for Unwanted Revenue
With the ongoing drought in the West, some producers have been forced to make changes in the size of their operations.
Chip Flory, AgriTalk host, questioned Neiffer on whether cattlemen who are selling numerous head due to lack of feed and resources can plan a deferment.
“The good news is yes,” says Neiffer. “If a producer normally sells 500-head in a year and this year they had to sell 1,000-head, they get to take that extra 500-head and either defer for one year, or up to four, 5 or 6 years—depending on how long the drought goes on.”
Once the drought is over, Neiffer says cattleman could reinvest in the herd, even if it’s breeding stock.
“We had a rancher last year who kept track of how much livestock they had to sell due to the drought,” he says. “Based on the regulations, we were able to defer another $200,000 based on how the calculations were done.”
Another important calculation to consider tracking this year, according to Neiffer, is the adjustments in inflation.
4. Consider How Inflation Might Work in Your Favor
IRS released inflation adjustments this week for 2023. At a “whopping” 7 percent, Neiffer says this is the time when inflation can work in favor of anyone’s pocketbook.
“Because each tax bracket is going up by 7%, everybody is going to be able to participate in the benefit of that 7% increase,” he says. “That increase is actually greater than the exemption was until about 20 years ago, so that’s really good news for most of our farmers.”
The 2023 tax inflation adjustments will also be reflected in:
• Lifetime estate tax exemption
• Annual gifts
• Standard deductions
Neiffer says the bottom line is inflation helps us with our taxes, but in very few other ways.
More on taxes:
No, You Really Can't Defer Your ERP Payment
Paul Neiffer: When Can Inflation Help You?
When Can You Defer Livestock Sales Due to Drought?
The Social Security Donut Hole
