bight green corn field with orange sunrise

Year End Tax Strategies

Looking to Purchase Equipment to Reduce Your Tax Burden?  Consider a Cash Bin Instead!

Tax planning for 2023 may be more important than ever.  In talking to many business owners, ag producers, and suppliers, many manufacturers are struggling to keep up with demand.  As a result, if you would typically be looking to make capital upgrades by year-end, you may be out of luck.  Here is a typical scenario I hear often at year-end. 
“My accountant says I need to spend $60,000 before year-end.”
In some cases, this is easy, buy equipment or capital assets.  However, if you have pre-paid all the expenses you can,  delayed delivery of grain, and either don’t need that pickup or piece of equipment or, this year supplies are tight and you simply can’t get it.  At the Investment Service Center, we can partner with you and your tax professional to consider a far-reaching plan to take advantage of tax brackets, retirements plans, flex spending accounts and more.  Here are a few options to consider. 

Purchase a Cash Bin Instead of a Grain Bin.

Grain bins with money inside them
Oftentimes, especially when talking to farmers, I have a hard time convincing them that setting up a retirement plan is an option worth considering.  I would contend that if you are in the situation described above, it’s something you need to rethink.  Consider that pickup purchase you are willing to make, but quite frankly don’t really need this year.  Why not buy a unique piece of equipment for your operation…a cash bin (aka retirement plan).  You read it right, not a grain bin, but a cash bin.  Just like any other farm asset, a retirement plan is simply a place to store your income until you need it (just like your grain bin).  Just like you build a bin to store grain, consider a retirement plan to store income for the future.  Consider the hypothetical example below:

Or, what about considering a $60,000 cash bin? A married couple in this situation could set up a solo 401k plan. The farmer and his wife would both able to contribute $22,500 each to their 401k ($45,000total). Given the income in this hypothetical example, they would also be able to contribute 25% of their $85,000 income ($21,250) into profit sharing. This would reduce their income by $66,250. Just like purchasing a $60,000 pickup truck, they now have an asset which should appreciate over time. The average rate of return of the S&P 500 index is approximately 10%. So, in 15 years assuming average hypothetical returns of 10% that asset could be worth an estimated $276,742.

One pushback I get from some clients is that if they need to liquidate or sell that pickup they can, but not the retirement account. I never encourage clients to liquidate a retirement plan, but let’s consider the worst-case scenario. Let’s say after 5 years you need access to that cash. At this time, the value (using return assumptions above) is now worth 106,696 If you withdraw money from your 401K before you’re 59 1/2, the IRS usually assesses a 10% penalty. So, if you withdraw $106,696 from your 401k you would have a $10,669 penalty (and pay taxes on the income). So, based on a penalty of 10% you would receive $96,027 after the 10% penalty. Not a bad investment. I know that farm equipment holds its value pretty well, but I’m guessing it would not appreciate that much. The cool thing about the “cash-bin” is that it’s a diversified asset. In the case of the farmer, I was working with, he had very few assets outside of agriculture. If agriculture is in a slump, the assets he is accumulating to fund his retirement are likely worth less. The “cash-bin” is a non-farm income-earning asset (and one could even argue it’s the color green)!

Other Tools to Consider:

There are many tools available to assist with managing tax liability, however many of them need to be taken advantage of prior to December 31 and involve careful planning.  Some other potential options include:

  • Gifting commodities to charity.  A farmer who actively engages in farming can have significant tax savings by donating grain directly to a charity.  The charity makes money by selling the donated grain and the farmer gets tax reductions greater than just donating cash.

  • Qualified charitable distributions (QCDs) QCDs are a unique tax strategy that allow individuals who are at least age 73 and have traditional and/or inherited IRAs to distribute up to $100,000 per year directly from their IRA to a 501(c)(3) nonprofit with no federal income tax consequences. Gifts made to grant-making foundations, donor advised funds, or charitable gift annuities are excluded from these rules. Making a QCD will reduce the value of your IRA, thereby potentially reducing your RMDs when you are obligated to do so in future years. This is an option for you even if you do not itemize your deductions. Currently, QCDs are limited to $100,000 per year. As a result of the SECURE Act, deductible traditional IRA contributions made beginning at age 73 may reduce your QCD amount. Additionally, if you wish to take a RMD and make a QCD, consider making the QCD first if a RMD is required for the year ("first money out" rule). Please consult with your tax advisor.

  • Consider "bunching" charitable contributions - if you regularly give to charity but the standard deduction is greater than your itemized deductions, you can put multiple years of charitable contributions into a donor advised fund (DAF).  Then you use the amount contributed to your DAF as a deduction (itemized).  In future years, you would make contribution from your DAF and take the standardized deduction.  Learn more about charitable giving here.
  • Funding a Health Saving Account - you can contribute $3,650 for self-only and $7,300 for families.  Additional $1,000 catch up contributions are allowed for taxpayers 55 or older.

  • Capital loss harvesting – if you have reportable capital gains, selling securities in your portfolio that would create a loss may help to offset other recognized capital gains.  In a year with volatility in the market, this might be a way to take advantage of market swings.

How We Can Help

Every situation is unique.   If you think you might be faced with a similar situation at year-end, let’s get together and discuss your specifics and see what solutions we can identify.  The key is timing.  Many of these decision have to be made prior to December 31 and require careful planning and consideration.  Let’s Team Up!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Rates of return are hypothetical, are provided for illustrative purposes only, and do not reflect the performance of an actual investment.