As farmers, we're all about getting the most value for our money, particularly when margins are tight. You should have the same mindset when it comes to getting the most value from your CPA. A client recently reminded me of the old saying, "More money is made with a pencil than hard labor."
Staying ahead of deadlines is key to making the most of your CPA. If the first time you meet with your tax professional is in February, his or her mind is already focused on the quickly approaching deadlines. In February, your CPA is acting as a historian, going through your prior year results to tabulate and organize your data in order to prepare a historical tax return. If you start planning early and schedule a meeting in November or December, your CPA will have a completely different perspective - and more time - when approaching your financial review and returns.
How proactive are you about preventive maintenance in the middle of harvest? Other than greasing equipment, most farmers are too busy to stop for a thorough inspection, let alone anticipate any problems. The same applies to tax accountants. As tax returns are coming in the door and filling file cabinets, your accountant is currently in their process management mode. At this point, the time for proactive and effective tax planning has disappeared like the last sunset of December. Tax season has officially begun. Of course, there are still opportunities in reporting and deferring, but so many opportunities in result of being proactive and planning in advance are long gone.
During harvest do you carry a pad and pencil in the combine to jot down your maintenance requirements for when the machine is tucked back into the machine shed? Chances are your answer is no. This is why in preparation of harvest season, it is important to have your local service mechanic perform a maintenance checkup well in advance. You must think about your accountant and tax preparation in the same way. In November and December, their thoughts are focused on what can be done before the new year rolls around, both in terms of tax planning and tax savings initiatives. Schedule your appointment with your accountant as soon as you have an idea of where you stand prior to year-end.
In addition to meeting early, challenge your accountant to share tax savings initiatives that you should be implementing before year-end, and into the new year. Consider the following:
- Do your children work with you on the farm? If so, are you doing the proper steps in paying them for their services, either in non-cash commodities, or cash wages, depending on their age? If your child is over the age of 18, it may be beneficial for you to pay compensation in non-cash commodities. If your child is under 18, cash wages are acceptable and will also avoid social security taxes from a parent sole-proprietorship.
- Should your spouse be an employee if they are assisting you with the farm operations? If so, what are the implications of compensating your spouse and what fringe benefits would be available to them as an employee?
- Look at all of your household expenditures and determine if you can convert those expenditures into a legitimate business expense. When looking to your itemized deduction Schedule A, start by reviewing your health and medical expenses. If your spouse is a bonafide employee of your farming operations would a medical reimbursement plan be appropriate?
- Look at your charitable deductions in comparison to your total itemized deductions. Are you receiving a tax benefit for all of your charitable deductions? If not, consider gifting raised grain to your favorite charity.
- Contribute to your retirement plan, or set up a retirement plan with automatic contributions in 2016.
There are numerous opportunities for the tax-savvy farmer. You simply have to challenge your tax accountant - and allow ample time to explore what is best for your situation.
Note: This article is published on my Farm Journal Tax Column. View my column post here.