The Importance of Understanding Your Tax Information
As we welcome a new year, it is important to close the old year's year-end business transactions properly. There are several reminders to consider as that all-important date of April 15 approaches. Hopefully, you visited with your accountant prior to the start of the new year. Proper year-end planning is critical in understanding what your farm's tax liability will be and in evaluating the financial position of the business. Preparation is key in your farm's business management plan.
Too often, accountants run into clients who never want to pay taxes if it can be avoided. However, a successful business that has generated income does pay taxes. The objective is to minimize the amount of taxes over the lifetime of the business versus focusing on one year. This is important to remember when you are having this conversation with your accountant. One area that is often misused is the 179 expense. Many times, the professionals have clients telling them they want to write off all of that new tractor. However, they put that tractor on credit. This means if you 179 expense that tractor completely and not just depreciate it, you will not have anything to offset that payment you'll be making. In addition, should you want to go for a loan, a lender will ask to see your past three years' tax returns before deciding to lend you money. Multiple years of loss on tax returns paint a very negative picture of your farm operation.
It is extremely critical to have important conversations with your accountant regarding the future plans you have for your operation.  To have those conversations, you need to be prepared for your meeting with your tax preparer. One key element in that is organization. Make sure you have all the income, expense, asset, and liability information ready and in an organized format. This will make the often-dreaded meeting bearable for all involved. Utilizing tools such as Penn State Extension's Pennsylvania Farm Account Book can be the first step to help manage your farm's critical business records that are often overlooked. This can be ordered online or at your local extension office. There are also computer software programs such as Quicken® and QuickBooks®. The Penn State Dairy Business Management team can assist you in the setup for these programs.
Year-end review of the chart of accounts can also improve data quality for the next year. The chart of accounts is the infrastructure for how your financial data is organized, regardless of whether you use paper records or computer software. Sometimes accounts are no longer needed, or some changes are needed due to changes in the business. Making sure the accounts being used are relevant to the business not only will make reviewing data easier, but can also prevent unwanted errors in the data. It can also be a good opportunity for members of the business to get together and evaluate what questions they would like to have addressed with the financial data. Identifying these end results will assist in identifying what data is needed and how it should be collected.
When collecting and reviewing records for tax preparation, it is a great time to review the business's financial position and evaluate production costs and cash flow plans. Regardless of the financial tool used to collect the records, use the data to make these calculations, or pay your accountant to do them as they do your taxes. Were changes implemented last year successful? Are different changes needed to ensure a stronger new year?
Think about your future. Eventually, all farmers will retire or want to pass the farm business to the next generation. Have you contributed to your Social Security at all during your career? How are you going to survive those retirement years? My colleagues and I often see many producers not thinking about that next step in their lives. Even if you are only in your 20s, it's never too early to start planning. Succession planning or transitioning a farm operation are important concepts to consider and investigate.
Lastly, it is important to review tax documents annually. They can be confusing, but it's important to review those tax documents. It is important to understand what numbers are being reported. Business owners signing the tax forms could be held liable if audited by the IRS or the state. Asking questions and staying up to date on changes occurring with taxes is the responsibility of the owner and not just the tax preparer. So, ask questions if you do not understand where a number is coming from.
It is important to be in the know about your business's financial management. While you'll most likely want to be in the fields or caring for your cows, it's important to have those conversations with the professionals that you are paying to complete your taxes. If you don't understand, ask. If you've asked before, ask again. These professionals are there to assist you and guide you in those important financial decisions. The Penn State Dairy Business Management team can assist you, too, in some of those critical business management needs. It's crucial to stay organized and have a team of professionals in your corner to help your business succeed.
