Custom operators could have more control over their taxes than they think. But to gain that control, most will have to change their attitudes, says Greg Anderson of Ihlenfeld, Skatrud and Anderson, CPAs.
“I like to get people to think about taxes a little differently,” says the certified public accountant based in Manitowoc, WI. “Most approach it as a once-a-year event much like going to the dentist. Maybe if they were to do some tax planning throughout the year, they could mold their tax situation to get better results.
“The tax code is still chock-full of opportunities and loopholes, all still legit and legal, to take advantage of. And the bulk of them are slanted toward business owners,” Anderson says.
Instead of tax preparation, which in most cases means filling out the required forms — or paying someone to do so — look to a professional tax accountant for a year-round strategy, he suggests.
What stops us from hiring tax advisors? Here's one misconception, Anderson believes.
Many farm-related businessmen don't consider themselves businessmen — and don't think they're “big” enough to qualify for tax loopholes. They won't qualify unless they hire an expert to find those loopholes, he says.
“Custom harvesters should be choosing tax advisors the same way they expect customers to choose custom harvesters. Yet a lot think if they can't do their own taxes, they're failures. Actually, it's a sign of strength because they're realizing, ‘This is beyond me.’”
Get advice from a firm that deals with taxes 24 hours a day, he adds. Those who have their farm management advisors do their taxes, for example, are often still in the tax preparation stage.
Tax planning, on the other hand, involves a one- to two-hour meeting with a tax accountant for information gathering. Then the accountant does his or her homework and reports back with some “what if” scenarios.
“By the time you're done it may cost you $200-300 for a tax planning procedure. Some people think, ‘That's $200-300 I normally wouldn't spend; why should I do that?’ But if you walk out of a tax accountant's meeting with a roster of ideas that can save you $1,000 or more in taxes the first year, that's a pretty good tradeoff.”
One of Anderson's “what if” strategies involves looking at how your taxes were prepared the previous year. Then he sees, for example, what the cost would have been if you had incorporated or formed a limited liability company.
“A lot of operators could save taxes by incorporating their businesses,” he says. “Another benefit they would get: an extra layer of liability protection from the sue-happy society we're in. I find it hard to believe that people aren't in some type of protective entity (such as a corporation or an LLC).”
“Everybody likes to play ostrich; they bury their heads … hoping the world will pass them by.”
— Greg Anderson
With one dairy farm, Anderson convinced the owners to incorporate and take advantage of family fringe benefits, saving $30,000 the first year. “That's going to be a continuing savings,” he says.
Fringe benefits include medical expenses that can be reimbursed and deducted from the business.
“You can set up these fringe benefit plans just within the family or even include your other employees. You can also set up housing allowances that you can write off on your taxes because these people have to be on call.”
Custom operators, much like farmers, may also be looking at their harvesting businesses as their retirement nest eggs. Don't, Anderson says.
“If 98% of your net worth is tied up in this crop operation, it really means you've put all your eggs in one basket.”
Look for ways to invest some of your income so it won't all be tied up in your business, Anderson suggests. Allocate available capital into retirement accounts, a personal investment portfolio, rental property or other non-business assets.
And ask yourself some questions: Can you estimate what your business is going to be worth in five years? Who do you plan on selling it to?
“If you have a key employee, maybe you want to lock that person in with a buy-sell agreement,” Anderson suggests.
Also, have your accountant look at the estate tax laws and learn how to protect your family's assets in case of an injury or unexpected death.
The above are smart business moves that tax accountants can give advice on, says Anderson. Yet few business people make them.
“Everyone loves to play ostrich; they bury their heads in the sand hoping the world will pass them by and nothing will happen to them. Well, if you can picture the ostrich, keep in mind which part of him is sticking out there,” says Anderson.