Tulare County

Orchard Notes (November/December 1999)

In This Issue

• Winter Tree Fruit Meeting
  
• Tax Tips for the End of the Year
  

Cost: $20 per person/includes lunch and a printed proceeding.
Preregister no later than Monday, November 22, 1999.
Note: Payment will be accepted at the door - but no guarantee of lunch.

We have applied for 3 hours of PCA/CCA credit.
For further information contact: Kevin R. Day (559) 733-6485.

Name(s): _______________________________________________________

Address: _______________________________________________________

Amount Paid: ____________________________________________________


Send checks payable to UC Regents to: c/o Joann Coviello, Kearney Ag Center, 9240 S. Riverbend Ave., Parlier, CA 93648

Tax Tips for the End of the Year

As the calendar year comes to a close all agribusiness people should give their income tax situation a close review to see whether some last minute adjustments might save money. A number of year-end strategies have evolved over time, and I suggest that you discuss the subject with your accountant or tax preparer to get the details of any strategies that might fit your needs. The purpose of this note is just to highlight some of the common tax strategies to get you thinking about your tax situation.

Pre-pay Expenses in 1999

Pre-paying operating expenses prior to January 1st will enable you to reduce your taxable income for 1999 if you use a cash accounting system (as most agricultural producers do). Just write your checks for upcoming expenses before the end of the year. All bills paid can be included in your 1999 tax return if you use a cash accounting system. This strategy is useful if you have had a good 1999 and expect 2000 to be less profitable.

Defer Revenue Until 2000

If you use a cash accounting system, you only have to report revenues received during the calendar year on your 1999 tax forms; therefore, cash received after January 1st will be reported next year. This means you will not have to pay taxes on deferred revenues for a year. To defer revenue, you might delay invoicing (billing) your customers until January.

Two things to remember before deciding to defer revenue: (1) this only postpones taxes, it does not eliminate them, and (2) deferring revenues means you do not have that amount of cash to use, which could put you in a cash bind around the end of the year. This deferral strategy is useful if you have had a good 1999 and expect 2000 to be less profitable or if you expect to be able to defer revenues again next year. In the long run, being able to carry forward or go backward your profits or losses may enable you to accomplish the same "profit smoothing" to pay the least amount of taxes allowed.

Consider When to Take Capital Gains

Take capital gains before January 1st if you have had a poor 1999 or if you expect 2000 to be more profitable than 1999. This strategy is similar to deferring revenues in that you are deciding in which of two tax years you will pay the least tax. Check with your accountant about this - there have been recent changes in the laws affecting capital gains.

Consider Capital Gains on Inventory Changes

Some operators may be subject to taxes on the increased value of their inventories. Talk to your accountant to see whether this applies to you. If it does, build this extra tax into your planning for cash needs.

Expense Capital Purchases

If you have purchased any asset for use in your business during 1999 (such as a truck, tractor, computer, irrigation system, wells, etc.), consider reporting the item as an "expense" up to the maximum allowable amount or the value of the item, whichever is less. Amounts above the expense ceiling have to be reported as a depreciable item, resulting in a lower current deduction. Expensing almost always results in lower taxes overall, for a profitable firm. If you had a net loss this year, but you have been profitable in the recent past, it still might be best to take the maximum expense on a purchase this year so that you can carry back a larger loss against previous profits and possibly get a tax refund.

Purchasing Damaged Tree/Vine Replacements This Year

If you have decided to replace trees or vine crops which were damaged by drought, flood or a freeze, purchasing any materials to do so before January 1st enables you to claim some of that cost as a current expense which can be deducted on this year's tax report. Amounts above the expense ceiling have to be reported as a depreciable item, but starting the depreciation schedule in 1999 rather than later benefits you in that future deductions are available sooner.

Refinance Now

If you have decided to refinance any part of your business, do so as soon as possible. There are two reasons for the urgency in this tip: (1) the length of time it takes to complete a refinancing may cause you to miss being able to claim any financing expenses in 1999, and (2) interest rates are very low at present and are already showing signs of increasing. If you can complete a refinancing deal before January 1st, some expenses incurred may be deductible this year.

Shift Personal Expenses to Your Business

Some agricultural producers can reduce their total tax bill by shifting expenses from their personal account to their business account. One example of this has been the recent success of plans aimed at making medical expenses deductible by participating in a pooling operation run by a commercial firm.

Transfer Income-Producing Assets Into Trusts

People using trusts as part of their estate plan can reduce their personal tax burden by transferring assets into trusts held in the name of beneficiaries, such as children or grandchildren. If an income-producing asset is gifted into a trust before January 1st, the income it generated this year may be taxed at the beneficiary's tax rate, rather than the giver's rate. This arrangement does not eliminate the need to pay taxes on the income, but it may reduce the total tax paid. See an accountant or attorney for specifics on how to accomplish this transfer.

If a gift is made to a charitable organization, a tax deduction is received for the calendar year in which the gift is given. Therefore, if such gifts are planned, make them by year's end.

Check for Special Taxes on Products

Some products are subject to special taxes that may influence a producer's year-end strategies. For example, dairy producers are assessed a levy if they produce more milk than they did in the previous year. If a dairyman produces too much milk, he forfeits the levy on 13.25 cents per hundredweight. This is essentially a tax on production. Public or private organizations may have special fees, levies, etc. that may be paid in certain situations. Therefore, all producers should be aware of these payments and include them in their cash planning.

Summary

A number of year-end tax strategies have evolved over time. Some of the most common have been listed in this note. I suggest that you discuss the subject with your accountant or tax preparer to get the details of any strategies that might fit your situation. The time spent doing tax planning could be well rewarded.