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Why Agribusinesses May Not Want to Defer Income This Year
Why Farmers May Not Want to Defer Income This Year
We anticipate having many conversations this fall with clients who say, “Why do you want me to recognize more income this year!”
Normal tax planning for farmers (and other businesses) is to defer income into the next year and perhaps accelerate expenses into this year. For 2012, our planning advice may take a 180-degree turn.
Under current law, we know that the maximum federal income tax rate is 35 percent. For 2013, the maximum top rate will be the 39.6 percent federal rate plus a new 3.8 percent Medicare surtax on higher income earners. (The surtax applies to modified adjusted gross income that exceeds $250,000 for married couples filing jointly, $125,000 for married but filing separately, and $200,000 for all other filers.) The result is a top rate of 43.4 percent plus, in many cases, an additional phase-out of itemized deductions and exemptions which may effectively add another percent or two. This top rate is more than 20 percent greater than the 2012 rate and, along with state income taxes, results in a combined top income tax rate exceeding 50 percent.
Therefore, for 2012, our income tax planning strategy may involve accelerating income into 2012 from 2013 or using a flexible strategy that allows clients to accelerate income if 2013 rates stay at their current levels.
Farmers have certain unique tax options that most other businesses do not enjoy. For example, one of these options involves the use of deferred sales of grain. Under this option, the farmer would normally report these sales when the cash is collected in 2013, however, the farmer may elect to accelerate the sale income into 2012 (the actual year of sale).
The benefit of this option is that you can wait late into 2013 to determine if rates will actually increase or not. If rates rise, you could accelerate income into 2012 and reduce income for 2013. If rates remain the same, then the farmer would report the income as normal in 2013.
As a result of the uncertainty in rates, it is even more important this year to properly estimate your taxable income for 2012 and 2013. Once these calculations are performed, you can develop the strategies necessary to properly “swap” income between this year and next. Once final rates for 2013 are determined (assuming Congress does not change them late next year), the optimum amount of income can be booked in the proper year.
Effective tax planning is flexible. By being aware of the potential changes in tax rates, you can adapt and still accomplish your business goals for this year.
Paul Neiffer, Agribusiness Principal
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