
Many farmers file and pay their taxes by March 1. It is likely better to make an estimated tax payment on January 15 and pay the remainder on April 15.
Vanessa Bechtel and I taped an Ag Insight session last week on farmer’s estimated tax payment options. Many farmers like to file and pay their income taxes by March 1 since that allows them to skip the estimated tax payment required on January 15. However, in today’s tax environment and lower interest rates, in most cases it is actually better to make the estimated tax payment on January 15 and then wait three months (or six months in 2020 and four months in 2021) to pay the remaining taxes owed.
The process is extremely simply to pay the estimate. It is the lower of 100% of the prior year’s tax or two-thirds of this year’s expected tax. Let’s look at a couple of examples.
Julian owed $2,500 in tax for 2020 and expects to owe about $40,000 of taxes this year. He is required to pay the lower of (1) $2,500 or (2) $26,667 on January 15. He elects to pay $2,500 on January 15 and then pays the remaining $37,500 on April 15. If his cost of funds is 4%, he saves about $165 of carrying costs by making the January 15 estimated tax payment instead of filing and paying on March 1.
Julian the next year expects to only owe $15,000 of tax for 2022. Therefore, he pays a $10,000 estimate on January 15 and pays the remaining $5,000 on April 15. In this case, paying on March 1 would have incurred about $75 of carrying costs to April 15 and paying $10,000 on January 5 incurred $100 of carrying costs. He would save $25 by filing and paying by March 1.
Many farmers invest in outside pass-through ventures such as an ethanol plant and many times those k-1s are only available late in February. Plus brokerage Form 1099s are now showing up very late in February. These late forms create a struggle to properly prepare farmers tax returns by March 1.
The economic reason for filing by March 1 compared to a January 15 estimate is very small and in most cases non-existent and the non-economic reasons are even greater for making the estimate.
One last thought on this is that many farmers will no longer qualify as a farmer for estimated tax payments due to the following:
- Gross farm income has to be at least two-thirds of total income and gains on selling farm equipment is not farm income for purposes of estimated tax payments. If you are not a “farmer” you then have to make four quarterly tax estimates.
- As farmers create other entities for trucking or other non-farm operations, this gross income can easily put non-farm income over the one-third level.
The bottom line is that most farmers should simply pay one estimate payment on January 15 and then have plenty of time of maximize tax savings by filing on April 15 (or whatever the tax due date is).
Want to learn more? Complete the form below and we'll be in touch. If you are unable to see the form below, please complete your submission here.Contact us