A tax tidal wave of epic proportions is emerging on many farms that have had an offensive game strategy in recent years, pushing taxes forward. Strong profits, particularly in the grain industry, and aggressive farm tax strategy using accelerated depreciation are the major culprits. Prepaying expenses and deferring income into future years is also creating a large deferred tax liability on farm balance sheets.
The deferred tax wave that is looming on the horizon may start washing ashore in 2013 and beyond, creating havoc on cash flows and operational strategies. Changes in depreciation laws, health care costs, self-employment taxes and increased tax rates on higher income earners are variables that will increase taxes paid by 10-20% for many businesses. Add to this higher land values with higher real estate tax rates, and you can see how these factors could be catalysts for the increase of production cost per unit.
Fully realize that any current assets that are sold, such as inventory, and receivables that are collected with lack of offsetting expenses, could result in up to a 60% increase in taxes when you include federal, state and payroll tax. Combine this with the aforementioned hikes on health care, payroll taxes and income taxes, and you can see that tax coffers are really going to enjoy the profitable part of the agricultural sector.
When constructing your balance sheet this year, work closely with your lender and accountant to ascertain your deferred tax liability. As a recent accountant on the speaking series representing LarsonAllen LLP stated, producers need to include accounting and tax strategies as a high priority for management especially in 2013, but also for subsequent years, as well.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.