Agriculture & Farming

Most farms qualify to use cash basis accounting, which offers significant tax deferral advantages, income is recognized when received and expenses are deducted when paid, allowing farmers to manage taxable income through the timing of grain sales and prepaid input purchases. However, large agribusinesses may be required to use accrual accounting. SMAART analyzes your specific situation to determine the optimal method.

Farm income averaging (Schedule J) allows farmers to treat current-year farm income as if it had been earned equally over the current year and the prior two years, which can significantly reduce tax in high-income years. It is particularly valuable in years with large commodity sales, insurance settlements, or land sales. SMAART models the tax impact before recommending the election.

Cash-basis farmers can generally deduct prepaid expenses for seeds, fertilizer, feed, and other farm inputs purchased before year-end for use in the following year, subject to a limitation of 50% of other deductible farm expenses. This is a powerful tax deferral tool that SMAART helps clients utilize systematically within applicable limits.

Farm land can be subject to significant estate taxes upon death of the owner. However, several strategies can minimize this burden including the Section 2032A special-use valuation, qualified family-owned business deductions, installment payment of estate taxes under Section 6166, and strategic lifetime gifting. SMAART coordinates with estate attorneys to build comprehensive farm succession plans.