Spring into Tax Planning and Record Keeping

As field work and spring planting kicks off across the Northeast, many farmers are making significant investment in equipment, crop inputs and labor. While these expenditures are essential for a successful harvest, they also present opportunities for proactive tax planning and sound record keeping. By aligning your spring activities with tax efficient strategies, you can optimize deductions, manage cash flow effectively and set the stage for a smoother year-end process.

Equipment and Input Purchases: Maximize Deductions Early

The spring season often brings substantial spending on machinery, repairs and farm inputs. If you’re investing in capital assets or stocking up on supplies, consider how these costs will impact your tax situation for 2025.

Accelerated Depreciation Options

• Section 179 remains available for new and used equipment, but keep in mind the annual investment and deduction limits. Farmers in states like New York need to be mindful of the Investment Tax Credit which precludes property on which Section 179 is taken.
• Bonus Depreciation (Special Depreciation Allowance) allows a first-year deduction of 40% of the basis of property placed in service in 2025. While we wait for a potential new tax bill from Congress that could bring Bonus Depreciation back to 100%, these are the rules we need to consider. Farmers and their advisors need to continue to be mindful of the states that do not recognize the Bonus Depreciation allowance.

Repairs vs Capitalization

• Distinguishing between repairs and capital improvements is crucial. Repairs can often be fully deducted when paid for, while improvements that extend the life of equipment or facilities must be capitalized and depreciated. On a farm, this distinction is not always black and white.
• Farmers should keep detailed documentation and work with their tax advisors to understand what expenditures represent. Then consider strategies such as electing to capitalize their repair costs for greater tax optimization in certain situations.

Input Payments

• For cash-basis taxpayers, inputs like seed, fertilizer or chemicals can be deducted in the year paid, subject to certain compliance restraints set by the Internal Revenue Service.
• Cash basis tax records can differ substantially from accrual management records when inputs are prepaid. Good records and clear communication with advisors are important to understand both systems and ensure the year-end goals are appropriately managed.

Seasonal Labor: Plan Ahead to Save Time Later

Taking the time to strategically hire your employees and get them appropriately set up via your payroll system in advance of your busiest time of the year, will benefit you in the long-term.

Payroll Setup and Classification

• Accurate classification of workers (employee vs independent contractor) is essential as misclassification can lead to penalties.
• Ensure proper wage reporting, pay frequency and withholding procedures for employees.
• Obtain W9s and set up 1099 vendor tracking within your systems for independent contractor payments.

Potential Tax Credits

• Farmers should work with their advisors to explore eligibility for any employment related tax credits at the federal or state level.
• Many of the federal tax credits available offer incentives for hiring individuals from targeted groups or those who reside or work in targeted geographic areas.
• Northeast states may also offer tax credits for farm employers meeting certain criteria. The key to obtaining these tax credits is accurate record keeping during their employment.

Establish Strong Record Keeping Practices

The beginning of the season is an opportune time to enhance your record keeping systems, which can lead to significant efficiencies at tax planning time and year end.

• Consider implementing digital record keeping solutions to improve accuracy, accessibility and communication across the farm management team and your external advisors.
• Monitoring expenses by enterprise or crop varieties may aid in decision making and tax reporting. The start of the season is a great time to implement this level of reporting.
• Engage with your tax and business advisors early. A review of the previous year’s filing process can present opportunities to identify better record keeping or retention points that will optimize the process this year.

Benefits of Proactive Planning

While the demands of the spring planting season are immediate, dedicating time to tax planning and preparation now can result in meaningful savings and reduced stress later. Whether it’s making significant purchases, hiring seasonal workers or implementing an improved record keeping system, a forward-looking tax strategy with a team of advisors positions your agricultural business for success.