March 1 is approaching and if you’re a farmer, you likely believe March 1 is your deadline to have your taxes filed and paid. In some instances that is true, but there are many factors to consider.
Unlike other business owners, farmers do not have to make quarterly estimated tax payments. This is for good reason as farm income can be highly variable from year to year making it difficult to estimate what the current year tax may be. Because of this exemption from quarterly payments, farmers historically have had to file their taxes and pay by March 1.
A farmer only has a March 1 deadline if they are a “qualified farmer” in the eyes of the IRS and owed tax in the prior year. A “qualified farmer” is someone who has 2/3rd of their gross income from farming. The March 1 deadline does not apply if the following circumstances apply:
The farm showed a loss in the prior year and did not owe tax.
You and your spouse have tax withholding payments from W-2 jobs that cover your current year tax.
Tax credits offset your current year tax liability.
A farmer can extend their deadline to the normal tax deadline of April 15 by making one estimated tax payment by January 15. This payment is the lessor of prior year’s tax payment or 2/3rds of the estimated current year tax. The best way to determine the amount of what this payment should be is to work with your trusted ELO advisor.
Farming is a very capital-intensive industry where the cost of capital should be considered when making decisions. The decision of when to pay tax is no different. Depending on where the farmer’s current year tax amount lies, it may make the most sense to make a January 15th estimated payment or even to not worry about the March 1 deadline at all.
The IRS is currently charging 3% interest on “late” tax payments. A farmer’s line of credit interest rate is likely higher than that making it make economic sense to not worry about the March 1 deadline. Let’s take a look at an example to illustrate:
The farm had a tax liability in the prior year of $10,000. The farm had a good year, and the current year tax liability is estimated to be $50,000. Let’s assume the farm’s line of credit interest rate is 4.5%. If the farm pays the $50,000 by March 1, the interest cost of that payment (net of tax) to April 15 is $216. The IRS’s interest will only be $74 for waiting until April 15 to file and pay the tax. In this example, the farm should not worry about the March 1 deadline.
The business side of farming continually is becoming more complicated. The list of information requested from your CPA seems to grow every year. Many times, farmers don’t have all their information until mid-February and in some instances not until March. Because of the growing complexity, it is becoming more and more difficult to get the tax return completed by March 1. Extending your tax deadline might not only make economic sense but it may relieve some stress with completing the tax return.
MEET THE AUTHOR
ADAM BORMANN, CPA
AN AGRIBUSINESS PROFESSIONAL WITH ELO CPAS & ADVISORS, A LEADING SOUTHEASTERN SOUTH DAKOTA ACCOUNTING AND CONSULTING FIRM WITH OFFICES IN SIOUX FALLS, MITCHELL, YANKTON, HURON, CHAMBERLAIN AND MILLER.