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Advanced Tax Planning for Next Year for Farm Businesses

By September 17, 2020December 1st, 2023No Comments

Tax planning well in advance of the tax deadline is highly beneficial—just like planning and doing things ahead of time can produce the same advantages. Canadian small business owners should know this very well.

Due to the COVID-19 pandemic this year, most Canadians got to enjoy a (much needed) extended deadline that just passed on June 1, 2020—which is unusual compared to the April 30 deadline to file taxes.

Although early tax planning is important for anyone including business owners or employees, farm and agricultural business owners in particular can benefit greatly from proactive tax planning. Careful planning takes time, but with the right knowledge and steps, it can position farm businesses well ahead to shaving off dollars off of the next tax bill. 

Advanced Tax Planning: At a Glance

The standard tips for year-end or early tax planning are simple for all small business owners: 

  • Defer income and taxable capital gains until the following tax year,
  • Bring anticipated tax deductible expenses and capital losses into the current tax year.

But there are specific strategies that farm businesses can leverage for taxes, including ones that other business types can’t take advantage of.

Interested in how early tax planning can help save your farm business money come tax time? 

Whether you’re tax planning right after tax season or at year-end, proactive planning can only do you and your farm business good. Follow these 5 quick tips to get started right away: 

1. Defer cash grain tickets

What are cash grain tickets? 

Cash grain tickets are a tax planning strategy for farmers to defer taxes. Farmers can deliver a listed grain—such as wheat, oats, barley or canola—to a licensed elevator and receive payments for that grain in the year following the year of delivery. Cash grain tickets are a strategy for farmers to smooth income between years of high and low production. Due to the volatile nature of both markets and production, “deferred cash purchase tickets are a commonly used tool by farmers,” says Jack Froese, President of Canadian Canola Growers Association. 

These deferred tickets are still a great business tool to balance income throughout the year. It even helps to avoid access swings in taxation levels.

2. Leverage cash accounting

Also known as cash-basis accounting, cash accounting is an accounting method that farm businesses can use to record business income and expenses when cash is received and/or paid. 

Under the Canadian Income Tax Act, eligible farm businesses hold special status for certain provisions, including opting for cash accounting to report on business transactions for tax purposes. This accounting strategy can greatly reduce the business’ net farm income prior to year-end.

Read more here:

3. Look into cash advances for crops

The Agricultural Marketing Programs Act in Canada allows farm businesses eligible to receive cash advances for purchase of crops. Treated like loans, these payments can help put cash in your pocket, but do not have to be included as income until the crops are sold. 

4. Prepay for farm input

Another common practice for farm businesses is to provide prepayments to suppliers for various farm materials, such as fertilizer, chemicals, seed, feed, etc. However it is important to note that prepayments for these inputs are only considered a deductible expense when: 

  • The supplier is able to delivery the goods
  • The goods are delivered and used in the farm operations
  • Both the quantity and nature of the goods meet farm requirements
  • The goods are purchased with a verbal or written agreement. 

5. Increase cash expenses

Another way to reduce taxes amongst farm businesses in Canada is to increase inventory purchases—but to the point where you don’t create a loss. This strategy can help defer income over several succeeding years; however it also has a downside. This strategy can create a large tax liability when the time comes to sell the farm or exit the overall business, assuming profit would have been realized prior to purchase of inventory. 

Tax Planning Benefits Farm Businesses: Start Today!

There are numerous moving parts to consider for any business and it’s especially so for farm businesses. When reading these tips, ask yourself: Is my farm business ready to start tax planning ahead of time? Are there tips mentioned that I haven’t already started using? 

Whatever that might be, execute the quick tips above when tax planning your farm business for next year. You never know, you might just be able to shave more dollars back into your pocket than you think.

Looking to simplify the way you approach farm accounting for next year? Start today with Kashoo’s 14-day free trial to see what other farmers love about Kashoo (including saving time).

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