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Paying some tax now can lower taxes during transition

Many farmers commonly buy equipment at the end of the year to lower their tax liability, but for someone who is considering a farm transition soon, that might not be a good idea.

Mark Schmitz is a farm transition planner with Wisconsin’s Farm Center.  He tells Brownfield farmers should talk to their tax professionals before buying equipment if they will be retiring and either selling or passing the farm down soon. “All of a sudden when it comes time to sell that piece of equipment, you might have what the IRS would call depreciation recapture, which would trigger a big ordinary income tax liability, so that’s something to keep in mind.”

Schmitz tells Brownfield it’s not always bad to pay some taxes prior to retiring. “It shows that you’re making a profit. It helps smooth things over with your lender a little bit, and it just keeps you from kicking the can down the road a little bit and piling up all of that income when you don’t have any expenses to offset it.”

Schmitz says it might not make sense to hold on to an idle piece of equipment just to avoid tax liability, so he says farmers should work with their tax professionals years before transition so they know when to change their buying habits.

Schmitz spoke to Brownfield during the Professional Dairy Producers Business Conference in Wisconsin Dells, Wisconsin Wednesday.