It has surely been a most interesting year with many unusual situations. The coronavirus pandemic has affected many areas of our lives and businesses that we believed to be fairly stable. Weather, transportation, shipping and a reduced workforce has had a major impact on our farm operations. Commodity prices continue to be volatile and surely attractive on at least the crop side. Some livestock industries continue to struggle with the high-priced feed inputs. Crop input prices for 2022 look to be greatly affected by both the transportation issues and influence of current crop pricing. So, what lies ahead for 2022, we can only predict. But, we can only assume volatility will continue.
The one assured thing is taxes. As it is now November, I am in hopes you have begun to look at assembling a tax planning strategy. Now is the time to plan and likely review the plan again as you get closer to the end of the year. Dairy producers have many tools in their toolbox to implement. Below are just a few points to consider.
Owing tax is a good thing. It means you are most likely profitable. That is not to say you should pay more than you need to, so planning is critical.
Plan for a longer term than just 2021. What are your capital plans for 2022? If you’re planning a growth strategy and capital investment in 2022, perhaps this is the year to implement prepay strategy or income deferment as next year you will likely have significant depreciation.
Use the 179 deduction. Using 179 expensing is generally not a bad thing, but in my opinion, using it in excess of the amount you paid as money down or cash can put you in a bind the following years. Depreciation is a great way to off-set principle payments on a loan, but if you expensed (179 deduction) the entire amount the first year, yet have a loan the following years, you will find that taxes will become more of an issue in the remaining years of the loan. You will have what is called debt in excess of basis. In other words, the tax basis in the new machine, for example, is zero due to using the 179 deduction while you still have debt on the machine. This may also cause some taxable issues if you plan to have a sale or implement a farm transition process.
Prepaying expenses for the next year is permissible up to 50% of your typical annual expense and may be beneficial. After all, if you prepay feed for $50,000 and you’re in a 20% tax bracket, you save $10,000 in tax (this year). Even if you borrow the money for a few months at 5%, the cost is only a little over $200 per month for interest. Generally, prepaying feed is a wise tax maneuver as you will use that prepay up in a few months. Instead of buying the feed each month, you apply an equal amount to the loan.  
Deferring income can also be a tax strategy. Deferring crop, milk or cattle sales into the next year may allow you to even out your income from year to year. This, however, requires some multi-year tax planning to have the best outcome in the long run. One point to remember, if you generally sell corn in both years and you decide to defer corn sales made in the current year to the next year, tax x law allows you to defer income to the next year or bring back into the current year. This may be a real benefit if you find that you could have had more income in the current year. However, you must treat the entire contract the same – defer all or use it all in the current year. Therefore, the use of small deferment contracts is a strong suggestion. This is a great tool for flexibility right up to filing tax.
One caution, if you defer income with a company, there is a risk of not getting this deferred income should the company go bankrupt in that time frame. Generally, this is a small risk with most agricultural companies.
Remember to utilize the traditional IRA to help put funds into your retirement planning. The limit is $6,000 per person or $7,000 if over 55 years of age.
In summary, plan early and revise as you progress through the balance of the year. Use your farm management person to provide some ideas, work closely with your tax accountant to create a long-range plan and utilize the tax tools for the best tax advantage for your operation. Leave the door open as much as possible for adjustments right up to filing your taxes.
    Tom Anderson is a Farm Business Management faculty member at Riverland Community College.