Of all the perceived foes faced by farmers in the unending battle for survival, few are more despised than taxes. Minimizing your tax bill for many producers assumes a priority over all but the most deeply held values.
The IRS has largely circumvented animosity in the general populace by cleverly placing themselves in the position of being the party that sends money back to citizens. Farmers, on the other hand, usually forward an entire year’s assessment at the very last instant possible in February. It might be that if everyone had to actually write a check for their income taxes, similar antipathy would be commonplace, and the system would collapse.
Whatever the reason, farmers will go to some great lengths to reduce the size of that check. And there exists an entire industry to advise and assist (for a modest fee, of course) this agricultural urge.
I find myself constantly intrigued by tax minimizing schemes. However, I have also discovered these plans usually exact a cost, sometimes subtle and often completely unexpected. Nevertheless, tax minimizing is widely accepted as an ultimate good, like higher yields - if your taxes are lower, then life is, by definition, better. I am no longer so sure.
The first unwritten cost may be simplicity. Often the increased record-keeping makes the gain less appealing. Witness the number of larger-than-needed pickups being purchased to avoid the “light truck” rules. The more involved the scheme, the greater the loss of straightforward operations. For example, there continues to be a fascination with various forms of artificial business structures, such as corporations, limited partnerships, and more exotic legal concoctions to realize significant tax savings. Putting these devices in place, however, means you have to farm and live with them long term, often beyond the economic conditions that made them appropriate.
Adopting a business structure for tax purposes may create management irritations. This action runs directly opposite the current (and, I think, laudable) social trend of simplifying our lives. And the complications can be considerable. Interlocking corporations that hold land, own machinery, or do the farming often mean consulting an attorney and/or accountant to carry out a simple transaction. Adding an extra layer of off-farm supervision erodes the intimacy of command and control that may be a part of what you like about being a farmer. If you cherish the “Lone Ranger” style of farming and find value in being able to respond rapidly to events, perhaps creating an artificial entity to save a few thousand bucks may cause regrets. Sole proprietors, on the other hand, can operate almost intuitively, as the tax code was designed around them, and not vice versa. I find it helpful to think about what I intend to do with the money such schemes will produce. If the proceeds are used to help fund relaxation and recreation, I recalculate whether adding to my hassle load to earn enough to escape my hassle load is a rational strategy. Above all, make sure you understand what it takes to cancel this business life-form you have created. The IRS is not amused by those who change their minds.
Secondly, minimizing taxes can also mean losing some of the special status that has traditionally been afforded to family farmers. Exemption from estimating taxes or withholding SS tax for children under 18 are examples of significant benefits directed to family (sole proprietor) businesses. Similarly, transforming your family into “employees” places them under the well-meaning, but perhaps unnecessary, care of OSHA, EPA, workmen’s compensation, etc. These programs, designed to protect workers from an indifferent employer, may be far more intrusive than you like.
Similarly, any simplification of the tax code, if actually accomplished, will most likely not center on corporate returns, but focus on individuals. For example, the recent legislation to gradually increase the deductible portion of health insurance for the self-employed negates one of the most persistent reasons quoted for business restructuring.
Third, the single-minded pursuit of lower taxes, can subvert your personal priorities. The enormous business of estate tax planning can overtake the preservation of the family in the stampede to curb the tax bill. Ironically, this is most often the case when the estate is of considerable size. Insuring that the inherited portions are really huge, as opposed to merely huge, may seem the most loving and responsible parting gesture. However, unless every complicated legal step demonstrates the grantor’s sense of love and fairness, the gift may do more harm than good to the family. Intricate legal structures that are only partially understood can leave in their wake years of ill feelings.
Finally, constant outrage at your tax bill may be the product of misinformed thinking. Consider these points: 1. Americans pay astonishingly low taxes compared to the rest of the world. I just returned from Denmark, for instance, where my friend contributes a breathtaking 65% of his income. 2. Farmers enjoy special tax privileges that the vast majority of Americans do not. Earning income in January and not paying any taxes on it till the following March is one example. 3. Many farmers have enjoyed a comparatively favorable “balance of payments” with the US Government. (Subtract your farm program payments from your tax bill.)
At the very minimum, our tax system is at least based on the idea that if you don’t have or earn wealth, you don’t pay much. If you think your share is too high, I would suggest comparing your 1040 with other sectors of the economy before wailing too loud. I always recall one neighbor’s philosophy: After you pay your taxes, you get to keep all the rest.
Relentless effort to decrease your tax bill may have significant payoffs for your checking account, but this attribute alone does not determine whether it is a good thing or not.