A preparer’s insight into managing tax efficiently
Kristen Murray, Farm Tax Specialist
We believe you should understand your options when you make decisions about your business that could affect your tax liability. Management of tax liability should be approached with several considerations in mind. Listed below are three potential options for managing tax efficiently in a low income year. Low or negative taxable income can provide an opportunity for recognition of additional income free from tax.
Equipment – Trade vs. Sell
If you have been thinking about trading a depreciated piece of equipment, you may want to consider selling it and investing the proceeds in a new piece of equipment. The ordinary gain from the sale of the old equipment could be offset by a business loss, resulting in no tax due. The sale proceeds could then be re-invested in new equipment, providing additional depreciation for use in future years.
IRA Conversion – Traditional vs. ROTH
As long as you are of qualifying age, converting a Traditional IRA to a ROTH IRA can prove beneficial in a year with negative taxable income. When you convert a traditional IRA to a ROTH you are required to claim the amount converted as income. If you have negative taxable income to offset the converted amount, you will not pay tax on the conversion nor will you pay tax on a later qualified ROTH distribution. Similarly, if you own stocks that have significant gains (in which your basis is low), you can sell and claim the capital gain potentially tax free. Additionally, after 30 days you can reinvest the proceeds in the same stock resulting in an increase in your basis and effectively reducing capital gain on future sales.
Income and Expense – Accelerate and Defer
Knowing your business income position at year end is important when opting to accelerate or defer income and expenses. Unlike the previously stated mechanisms available for tax planning, decisions in this area can have an effect on both income tax and self-employment tax. If you are certain you will experience a business loss at year end, opting to sell additional inventory or raised crops will allow for recognition of additional income potentially free from both self-employment and income tax. Deferring expenses can produce a similar result in that your loss will be decreased and the expense preserved for use in a future year.
A Word of Caution
The opportunity to manage your tax liability requires that most action be taken prior to year-end. After the close of a calendar or fiscal year, the tools available to modify your tax liability are limited. Yankee’s educated staff of farm tax professionals is here to provide tax planning services as well as answer general tax questions.
Back to all Articles