Smart tax planning involves some tax avoidance. It also involves some smart tax paying. 

One of the oldest plays in the farmer's tax playbook is tax avoidance. It sounds borderline bad. It is not. Everyone likes the sound of paying little to no taxes, and there is nothing wrong with wanting that. 

It is just not always the best play. 

Smart tax planning involves some tax avoidance. Where it differs from some of the coffee shop strategies is that it also involves smart tax paying, and knowing which one you are doing. 

So let's talk about it. On a high taxable income year, avoiding a large tax bill is usually top of mind. That year does not always come from a bumper crop, either. It can be a prior year insurance payment finally hitting, prevented planting, cull cows that went early because the pasture was dry, or a deferred contract from last fall settling this January. Plenty of tall returns come out of years that felt like a grind the whole way through. 

Whatever put the number there, the instinct is the same, and it is usually a good instinct. 

NOT A FARMER? 

You do not have anywhere near the same set of levers, and this one is written for people who do. Here is the part that still applies to you. 

If you are buying equipment every year to expense your way out of a tax bill, you are running the same play with fewer tools and the same consequences. If you are holding invoices in December and chasing them in January, same thing. 

Not sure whether any of it fits your situation? That is a twenty minute call. Set one up and we will look at your actual position instead of guessing at it. 

Deferring is a tool, not a fix 

Before we get to the list, one thing has to be said, because it changes how you read everything on it. 

Deferring is a strategy. It is not a quick fix, and the difference is that a strategy has an off ramp. 

Here is what happens without one. Defer a hundred thousand this year. Next year that hundred thousand lands on top of whatever you actually earn, so now you need to defer a hundred and fifty to stay level. The year after that, more. Three or four years in you are not smoothing income anymore. You are on a treadmill, and the only way to stay on it is to defer harder every single year. 

That is robbing Peter to pay Paul, and it only works if Paul needs it more than Peter. Do it once with a reason and it is planning. Do it every year on reflex and Peter is out of money. 

Prepay does the same thing from the other direction. This year's prepay already took next year's deduction, so next year you have to prepay more to get the same relief. Year one it is a strategy. By year five it is a requirement, and you are buying December inputs with cash you wanted in March. 

The treadmill runs fine right up until it stops, and it stops the same way every time. You want to sell. You want to retire. The market turns, or you drop acres, or you get sick, and you cannot afford to defer. Then all of it shows up at once, in the worst year you have had in a decade. 

I have sat across the desk from the end of that. A retired producer with a pile of deferred income and nothing left to offset it, paying tax at rates he spent thirty years avoiding, in years he had no business paying anything at all. 

None of that is an argument against deferring. It is an argument for three things before you do it. 

Know your why. Know your off ramp, meaning what year this lands in and what makes that year different. And know how you keep it from snowballing, which mostly means banking some of it along the way instead of rolling all of it forward. 

Now, the toolkit. 

The toolkit 

We have gone through most of this before, and the links go deeper than I will here: 

• Stockman Exchange and deferred payment contracts 

• Prepaying expenses 

• Bonus depreciation and Section 179 

• Paying kids 

• Retirement plans (check out Kassidy's new article on that) 

• And a handful of others depending on your situation 

Every one of these works. Every one of them also has a cost. Every timing move has a due date attached, one you have moved rather than removed. Every purchase costs real money. Every deferral and every prepay has a consequence next year. 

Does that mean you should not use them? Absolutely not. It means you should have a framework for when you pull a lever and when you happily bank your after tax dollars. 

Three options, and that is the whole list 

Strip the names off and there are only three things you can do with a high income year. 

One: spend real money to save money 

Cash leaves the operation and you get a percentage of it back. The savings will always be less than you spent, because that is how a deduction works. That does not make it a bad move. It makes it a purchasing decision. 

Business spend. Equipment, buildings, real assets. If it makes business sense, spend the money and take the deduction with a clear conscience. If it does not, you paid a dollar to save forty cents. 

Retirement spend. Different animal, and worth understanding before it gets lumped in with the rest. 

If it is just you, a SEP or a solo 401(k) gives you a smaller deduction than people expect. The contribution comes off after self employment tax is figured, so you save the income tax rate and not the SE layer on top of it. Prepaying inputs beats it on that comparison every time. 

What you get instead is that the money is still yours. It grows without being taxed along the way and it comes out at retirement rates, in years you may well be sitting in a lower bracket, with no self employment tax attached. Weaker deduction, better place for the dollar. 

Add employees and the trade changes. Now the deduction gets bigger because you are funding other people's accounts alongside your own, and that money is genuinely gone. It is a good thing to spend money on and a real benefit for keeping people, but it is not the same conversation as sheltering your own income. An operation with four employees looking at a plan to fix a December number will find that covering those four is most of what it saves. 

Kassidy's article covers which plan fits which operation, and with employees in the mix that is the harder question. 

Two: rob next year 

Push income into next year, or pull expenses back into this one. Those feel like different tools and they are the same move from opposite ends. Either way this year gets better because next year gets worse. 

Prepaid inputs mostly live here, not in option one. The fertilizer does not disappear because you paid for it in December, so nothing about the operation actually changed. All you did was move a deduction out of next year. The exception is a real discount. When the December price beats the spring price by enough, the purchase justifies itself on its own and the timing is a bonus on top. 

Here is what option two actually costs, and it is the part nobody says out loud. Next year has cheap brackets sitting there waiting for you. The low rates, the standard deduction, room before things start phasing out. Move this year's income into next year and it fills that cheap space first, which shoves next year's own income up into the expensive brackets behind it. 

You did not just move a dollar. You displaced one. 

That is Peter and Paul again. It works when Paul needs it more than Peter, and it is a bad trade when they need it about the same. 

Three: bank it 

Pay the tax and keep the rest. On a hundred thousand dollars of extra income at a forty percent marginal rate, that is forty thousand to the government and sixty thousand that is yours, settled, sitting in the account. 

Banking is not the absence of a decision. It is the decision. It buys cash in March, next year's cheap brackets left alone for next year's income, and every lever still loaded for the year you actually need one. 

In a year that looks about average, with no real read on what is coming, that is often the strongest of the three. 

First and foremost: you have a business to run 

Make the marketing decisions that make sense. 

If the wheat market is bullish and you have reason to bin it and hold until spring, do it. If the fertilizer you need is at a discount today that you will not see again, buy it. Pending the banker or the partners, of course. 

That is the whole point of not letting the tax tail wag the business dog. Those decisions get made on their own merits and our job is shaping the tax around them. 

The middle ground: short deferrals and easy prepays 

Then there is the area where it can genuinely go either way. 

Do you take the December check from Western Livestock, or do you have them make it out to Stockman Exchange and take it on January 2nd? Operationally that is almost a moot point. Same cattle, same buyer, same price, and you get paid a few weeks later. Tax wise it can be a big number. 

This is the one place where the tax tail is allowed to wag the dog, and nobody should feel bad about it. When the operation is genuinely indifferent, let the tax decide. That is the cleanest money in this article. 

One caution. Cheap to time is not the same as free to defer. Running that check through the exchange costs almost nothing to execute, but it still moves income into a year you cannot see yet, and it still fills next year's cheap brackets ahead of next year's income. Cheap timing means you get to make the call on tax merits alone. You still have to make the call. 

Count what you know 

Here is where the real decisions live, and most of what you need is already sitting in front of you. 

You know what you have sold year to date. You have a fair idea what is in the bin, what the calves are worth, and roughly when they go. That is not a forecast. That is an inventory. Start there and the rest gets easier. 

The most useful question I know is this one: how many crops am I selling this year? 

Not how much income. How many crops. 

If you are marketing a year and a half of production because last year's grain went out this spring alongside this year's harvest, and next year you are back to one crop at best with nothing carried over, you have a real answer. This year is high. Next year is lower. And you did not have to guess at a single price to know it. Paul needs it more than Peter, so prepay some input or push a sale and you have smoothed something real. 

Run it the other way and the answer changes. One crop this year, an average year by any measure, and no idea what next year holds. Nothing in that position argues for moving money into it. That is a year to bank the after tax dollars and keep your levers loaded, because tax certainty is worth something and you already have it. 

That is the default. A deferral has to beat it, not tie it. 

Two ways I look at it: against a normal year, or in crop years. Both get you to the same place. And if you are in the trades, backlog does the same work. Signed jobs that will bill next year are your grain in the bin. 

Then there is the piece you cannot count but can estimate. MBE, ECO, SCO. You already know those payments arrive a year behind and land in a year that had nothing to do with the loss. That delay is a nuisance most years. In a planning year it is information. If you have reasonable confidence a claim is coming, you know the shape of next year before most people know anything about next year, and that is exactly when pulling income the other direction, into this year, with a CCC loan election is worth a look. 

Same framework, opposite lever. The mechanics on that one and on the prepay limits are in Farm Income Timing Strategies. If your big number came out of a crop insurance payment, start with Can You Defer Crop Insurance Payments, because those rules are specific and they are not optional. 

Equipment deserves its own paragraph 

Trading machinery for the sake of the deduction seldom pays off. Replacing a worn out combine with one that cuts twenty percent faster and does not put you down in the middle of August is a real business decision, and it comes with a real tax opportunity attached. 

That is the whole distinction. Seldom does the tax savings justify the equipment without a true business need underneath it. When the need is there, Section 179 is a genuine subsidy on a decision you had already made and you should take it. When it is not, you spent sixty cents of real cash for a machine you did not want, and the deduction comes back at you as recapture the day you trade it. 

The other version of the story I told earlier lives here. Not the retiree with a pile of deferred income, but the operator in his fifties with good ground, a healthy equipment line, and nothing at the bank, because twenty years of profit went into next year's inputs and machines he did not need. 

Current limits and the placed in service rules are in Section 179 and Bonus Depreciation. Placed in service is the part that catches people. Ordered is not the same as running. 

Know what a dollar actually costs you 

One more thing, because every decision above depends on it and almost nobody has the number. 

Your marginal rate is not your bracket. For a sole proprietor three things stack on the next dollar: the federal bracket, self employment tax, and Montana. In the middle of the range that is north of forty percent. 

Here is the part that surprises people. Your marginal rate is often highest in the middle, not at the top. Clear the Social Security wage base and the next dollar can cost you less than the last one did, even in a higher federal bracket. 

Two operations in the same federal bracket can be fifteen points apart on what a dollar really costs them. Anyone making a December decision off a bracket table is guessing at the most important number in the calculation. 

Not everything is black and white 

Some of these calls are obvious and some of them are close. 

A December check pushed to January 2nd costs almost nothing and might save you real money. A machine you did not need costs you sixty cents of real cash to avoid a tax bill you could have paid. 

The instinct to keep more of a good year is the right instinct. Kicking the can is not wrong either. It just has to be a move instead of a reflex, and it works when Paul needs it more than Peter. 

So here is the ask, and it is a small one. Run the projection now, not in December. Know your marginal rate, know how many crops you are selling this year, and know what levers you are still holding for next year. Every decision in this article gets easier once you have those three things in front of you. 

And if you have never asked whether you are smoothing or on the treadmill, that is the conversation to have. Call the office. 

Swanson Agency. Montana Roots. Future Focused.