As producers begin their annual reflection upon the past year and shift the focus into next year, planning considerations around tax and financial strategies become top of mind.
With the election ahead and many uncertainties around potential policy changes ahead – it’s important to stay focused on what can be planned for at year-end, as well as what makes sense for the long-term future of your operation. With this in mind, Pinion tax advisors have compiled a list of ‘today’s tax environment, opportunities, challenges, and pro tips’ to provide a high-level look at important tax considerations for your farm or ranch operation, entity structure, and long-term wealth plan – where things stand today.
Today’s tax environment:
- Widening of marginal tax brackets as compared to 2023
- Increased standard deductions ($29,200 MFJ, $ 14,600 Single – up $1,500 and $750 from 2023, respectively)
- Annual gift exclusion increased to $18,000 per donee (up from $17K in 2023)
- Lifetime gift exemption increased to $13,610,000 (up from $12,920,000) – exemption amount slated to sunset at the end of 2025
- Bonus depreciation of 60% on new/used assets with a useful life of 20 years or less. Will step down to 40% in 2025, 20% in 2026, and 0% in 2027
- Section 179 depreciation limit increased to $1,220,000 on purchases up to $3,050,000 (up from $1,160,000 and $2,890,000, respectively, from 2023) – examples include farm machinery, breeding livestock, grain bins, and farm buildings
- Continued use of Section 199A (20% deduction on qualified business income) – slated to sunset at the end of 2025
- Flat 21% corporate tax – “permanent (only as permanent as the decisions in Washington, DC)”
- Increased retirement and HSA contribution limits
Opportunities:
- With many tax rules slated to go away in 2025, maximize benefits now. Tax rates likely won’t get better; now is actually a good time to be paying tax
- Opportunity to recognize more income than in previous years at lower rates, maximize 199A deductions (permanent tax savings, not a deferral), and take advantage of favorable capital gain/qualified dividend rates
- Lots of flexibility in agriculture to accelerate or defer income
- Crop insurance deferral, deferred payment contracts, equipment purchases/accelerating depreciation, CCC loans, prepaying expenses
- Setup/manage retirement plans to maximize benefits and enhance employee loyalty
- Opportunities for federal tax credits for starting up new plans.
- Utilize farm income averaging to have current year income tax at prior year rates (if income is up in current year, have it spread over 3 previous years to utilize unused low brackets)
- Look into whether your state has a PTE tax regime
- Allows payment of state taxes at passthrough entity level vs. at individual level to avoid SALT cap
- Use the “bonus” lifetime gift/estate exemption (i.e., the amount over the amount it is slated to revert back to) while you still can
Challenges:
- Navigating issues between Section 179 and bonus depreciation
- Ordering rules, basis issues, income limitations
- Challenging ag economy – continued high input costs, lower prices on raised commodities
- Net operating losses carryforwards can only offset 80% of current year income (have to pay some tax to utilize losses)
- Complexity – need to work with an advisor that understands the implications of decisions and specific rules to follow to ensure compliance / mitigate risk
Pro tips:
Get organized and start planning early.
- Get books up to date, gather harvest information, think about upcoming income / expenses, and schedule a meeting with your tax pros
- If applicable, reduce tax liability with farm income averaging, deferral of crop insurance proceeds and/or livestock sales due to disaster, bonus depreciation, deferred payment contract, prepaid expenses, and charitable giving of commodities
Maintain flexibility.
- It is not uncommon to have late tax “extender” packages, tax bills pass with retroactive rules, etc.
- Consider extending your business and personal returns to see if there is changing legislation that will impact you, get a glimpse at the next year’s operating results, etc. before finalizing prior year tax returns
Think about and communicate your objectives.
- Nearing retirement? Looking to transition out in 5-10 years? In growth mode?
Find an advisor that specializes in your industry to ensure no stone is left unturned for opportunities.
Pinion tax advisors are experts in food and agriculture, helping farmers and ranchers with tax planning and navigating their complexities with thoughtful strategies for long-term success.
Reach out to a Pinion advisor to discuss how to minimize your tax obligations.
