Part 1 of Year-End Tax Planning addressed the need for meticulous records to get full benefit of the Paycheck Protection Program in 2020. In part 2, John Barnard, owner of John M. Barnard, CPA, PA, a certified public accounting firm in Statesville, covers the importance of recordkeeping/accounting systems, year-end equipment purchases, and other considerations to get in place. John is one of two appointed directors on the Carolina Farm Credit Board of Directors. Here is his advice:
Use a System that Works for You
“There’s a multitude of systems out there that people use, from Quickbooks to having a CPA firm maintain their records,” says John. While he maintains monthly and annual records for clients, as do most CPA firms, he encourages you to use a system that works for you. (See our blog “Keeping Good Farm Records” for info on software programs.)
“I often tell my agricultural clients, don’t think of your business as a small business. A lot of them have massive operations that still operate like a small business but they really aren’t. They are a big business. But no matter your size, recordkeeping is huge. And that’s never more true than in today’s world, especially with the pandemic. You need to be on top of what your cash position is, what your cash flow is, what your expenditures are, what your fixed costs are, what your variable costs are.”
Year-End Purchases of Farm Equipment
When it comes to other considerations, such as year-end equipment purchases to help provide tax relief, John says tax laws have remained consistent with the prior year in terms of how things are deducted and what’s deductible.
John says that he often receives calls from farmers at the end of the year as they are trying to determine whether to buy a tractor or other large piece of equipment before year-end or whether they need to wait until January.
“It’s a timing issue. I never tell anybody to go buy something they are not going to need for 10 or 12 months, just to get it into December. But if they are going to buy in early January, it might be better to buy on December 30 to help with the current year-end tax situation. Or vice versa, they may not need it in 2020 and it may be more beneficial to purchase in 2021. The key is to buy things you need and can use. Upgrades need to be planned, not just spur-of-the-moment type things for tax purposes.”
Major decisions lead back to good recordkeeping. “You’ve got to know where you stand so you’ll know whether you need to buy something or not. If you don’t need new equipment, be glad that you can operate without spending the extra money to operate. People have tightened up during this pandemic time and a lot of new equipment is not being bought. Farmers are good at tightening things up when they have to and maintaining their assets the best they can during the tough times and finding ways to efficiently expand during the good times and not over expand. That is the key.”
John mentions other items that are part of the normal operations for year-end:
- Having thorough records so you can produce W-2s and 1099s.
- Knowing when to sell or not sell in terms of commodities.
- Making sure you are setting aside retirement funds, whether in a traditional IRA, ROTH, or SEP. It pays to look at the various options and what may be best for your circumstances; an important consideration for year-end tax planning for 2020 is that you may make an IRA contribution up to when you file your return or until April 15, 2021, whichever comes first. IRA contributions may or may not help you on your 2020 tax return but it’s important to both plan for retirement and use available tools to reduce your taxes legally.
In our blog “Kick Off 2021 with Wise Tax Planning Strategies,” John shares six tips that need to be part of every farm’s plan.
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By Leah Chester-Davis