Ready for Tax Season? Here's What You Should Know

*Editor's Note: This article was originally written by Chris Torres, interviewing Farm Credit East Senior Tax Consultant, Dario Arezzo, and published on American Agriculturist. Click here to read the full article.

The official tax season won’t start for another month but planning for tax season is well underway on many farms.

“A lot of producers are meeting with their tax planner to see what their tax liability will look like in 2022,” says Dario Arezzo, senior tax consultant with Farm Credit East.

Proposals that would have eliminated stepped-up basis as part of President Joe Biden’s Build Back Better Plan as well as proposals that would have lowered the estate tax threshold have largely been placed on the back burner, so there’s no need to be anxious about paying Uncle Sam more in either of these cases, he says.

But Biden’s infrastructure bill did eliminate the Employee Retention Credit retroactive to Sept. 30. It allows qualified businesses to claim a 70% tax credit on qualified wages up to $10,000 per quarter – maximum of $7,000 per employee per quarter — if the business was either fully or partially shutdown due to a government order (the less likely qualifier for traditional producers) or if a qualifying business saw a more than 20% decline in gross profit in a given quarter compared to the previous year.

So how should you be preparing for tax season? And is there anything new to think about before you sit down and file your taxes this winter and spring? Arezzo provided some insight during a recent conversation.

What should you not overlook when filing your taxes this year?

I would say for 2021 … and even 2020, the No. 1 thing that can save producers money is the Employee Retention Credit.

Regardless of it going away, a lot of producers — and maybe even their adviser — aren't aware they qualify. Not many folks are taking the time to compare revenues year over year. For example, if you showed $100,000 of gross revenue in January through March of 2021, and $500,000 in gross revenue for that same period in 2019, that is a significant drop — more than 20% —so you would qualify for employee tax credits.

Granted, there are a lot of exceptions and rules. For example, you get up to 70% of an employee’s wages and qualified health plans, up to $10,000 (per quarter). So if a person is making $10,000 for that quarter, you would get a $7,000 tax credit for that person.

Now, there are some gyrations where you need to reduce expenses and that gets into tax planning. But people need to be aware whether they qualified prior to the fourth quarter. And if so, are they taking into account all the gyrations involved with qualifying for it with applying and reducing expenses?

At its basic level, if the government had you close, modify, or partially close your retail farm stand or other business, you could also qualify for this credit and get the money you paid for your employees back. I think most people are missing this for 2021. There are also special rules available that are quite lucrative for certain startup businesses.

Also, toward the end of 2020, the government made an adjustment stating that people who received PPP (Paycheck Protection Program) loans and retention credits could claim both, though this takes talking to a tax professional.

You normally have three years to fix and amend a past tax return, so not all is lost is these credits weren’t claimed yet.

What federal tax proposals, or legislation, should producers keep an eye on?

So far, it's been good news as far as pending legislation.

We've all been keeping an eye on the Build Back Better bill in the House. There was talk earlier in the year of getting rid of step-up in basis, so when people die, for example farmers with farmland, their land gets valued up at the current value at the date of death. So, if I bought land at $100 and it's worth $1 million when I die, it gets passed on to the farm worth that million dollars for determining gain on a future sale.

That was subject to possible repeal, and has some income tax ramifications associated with it under some other legislative proposals. It seems to have not made the bill, which is really good news for farmers.

Along the same lines, there was a lot of talk around the estate tax thresholds with the estate and gift tax exemptions going down in 2022. As of right now, that seems to have not made its way into the bill either. A lot of folks were worried about estate planning earlier in 2021 with regards to those changes. Some still are … because even if the estate and gift exemptions don’t change under this legislation, we know that unless something else takes place between now and January 2026, the estate and gift exemptions will go down.

Also, keep a close eye on possible changes to State and Local Tax, or SALT, and its potentials impacts. If you recall, people could only deduct up to $10,000 of their state and local taxes. So that's a big challenge, particularly for higher-income tax states like in the Northeast and into the West.

In the House and Senate bills, SALT looks to be going up. So for producers who are paying a decent amount of state and local taxes, particularly here in the Northeast, that could be a potential help.

A lot of states have created SALT workarounds for S Corps. or partnerships. For example, if you pay a tax at the partnership or S Corp. level, you can deduct that as an individual and it won't count against your $10,000 limitation.

What are some good financial management tips for year-round management?

It's so basic but it's so critical. The building block of any good tax management and mitigation strategy always begins with good records. The better the accounting, the better items are categorized. The more up to date those records are on a continuing monthly basis, the better folks like myself can do our job.

However you manage your records, whether you do them yourself or rely on professionals, having really sound records and accounting is critical to keeping an up-to-date picture of what's going on throughout the year. This enables your tax accountant to take proactive measures to benefit your business.

What are the biggest mistakes you see producers make regarding taxes?

The biggest mistake would be looking at things on a one-year basis and not taking a multi-horizon approach. And this is where I really believe having a relationship with a tax professional, where you're looking at a three-, five-, 10-year windows, to put a plan in place.

In other words, maybe it doesn’t make sense every year to pay the lowest tax that you can. Maybe we optimize tax buckets.

For example, maybe the next generation is coming back to the farm next year or the year after, and maybe the farm has a high debt load. We can begin to pay down some of that debt and optimize some lower tax brackets now to get the farm ready for that transition.

A lot of farms will over prepay or over tax plan. For example, a dairy farmer sells raised cows from their herd. Those are treated like stock. They're capital gains. So, if you're a taxpayer paying 0% capital gains, as a married couple let's just say you have a threshold of at least $80,800 in that 0% bucket. Maybe it makes sense to fill up that threshold with raised cow sales and not prepay because you're going to pay, in some cases, 0% tax on your raised cows anyway.

Along those same lines, maybe you financed a $500,000 piece of equipment. It may not make sense to write off that piece of equipment under accelerated depreciation tools in 2021. As you pay down that debt over the next few years, you're going to have higher taxes with those debt payments back. You're already matching depreciation with your debt repayment schedule.

In a nutshell, by working with a tax advisor, you are taking a long-term approach to tax planning that fits the family's vision versus a short-term fix and kicking decisions down the road.