It’s the start of a new year and people around the world are making resolutions for things they would like to change or improve in 2022.
While many popular resolutions focus on personal aspects, such as losing weight or finding a new job, I developed a list of five tax and financial resolutions for Christmas tree growers. If you are already doing all of these recommendations, keep it up! If not, try to implement at least one in 2022.
1) Elect Capital Gain Treatment
Electing capital gain treatment for the sale of Christmas trees is the #1 way most effective way for Christmas tree growers save taxes.
According to an analysis I performed, an average, full-time grower would save $27,782 each year in federal income taxes by switching to the capital gain method.
If you’re looking to implement only one tax-saving strategy in 2022, this would be the one to pick. Also, make sure to follow these recordkeeping and tax preparation tips if you switch to the capital gain method.
2) Organize Your Books and Records
When I worked as an IRS agent, most businesses, farms, and individuals I audited owed additional tax because they did not keep organized books and records. Even though they likely incurred the claimed expenses, the business and owners could not prove the expenses or they did not keep records according to IRS requirements.
Don’t make this mistake…keep organized books and records.
The first step is to pick the right recordkeeping system. I recommend Wave Accounting, but there are many other good options such as Quickbooks or even a spreadsheet.
After picking the right system, make sure you set up your system correctly, get on a regular schedule to input income and expenses, and save receipts and other necessary documentation.
3) Make Your Children Millionaires
With a hot employment market and increased market wages, many Christmas tree growers are having trouble finding good workers for their farms.
Do you employ your children? If not, you’re likely missing out on some tax savings, as well as the opportunity to make your children millionaires.
A Christmas tree farm solely owned by an individual or couple often do not have to withhold or pay employment taxes on wages paid to their children.
Also, these wages are often tax-free to the children due to it being offset by the child’s standard deduction.
Since the children have earned income (wages), they can contribute to a Roth IRA, the earnings of which will never be taxed.
If you employ your child for 10 years and he or she earns and invests at least $6,000 per year in a Roth IRA, the child will have over $4 million tax-free at age 65, even if the child never saves another penny for retirement! Even if the child invests only $1,000 per year, they will still have over $669,000 at age 65!
Read the full article here for more details.
4) Perform an 80/20 Analysis of the Prior Year
January and February are perfect months for Christmas tree growers to reflect on the prior year and analyze what worked at the farm and what didn’t.
One method of analysis is 80/20 Analysis. This type of analysis is based on the 80/20 principle, which states that 80% of outputs often come from only 20% of inputs.
As an example, a Christmas tree grower can analyze profits by species, customer type, or geographic area. Often times, profits disproportionately come from only a few species, customers, or geographic areas. Focusing on these sources that provide the most profits can increase profitability and efficiency.
80/20 analysis can also be used to analyze and decrease expenses.
Doing a proper 80/20 analysis can lead to increased profits and decreased expenses, and help make 2022 your most profitable year ever.
5) Take a Proper Inventory Count
Whether you elect capital gain treatment or not, the IRS will want to see an inventory count of your trees if you are audited.
In addition to complying with tax requirements, an inventory count is also important with regards to future planning and also ensures you are capturing tax deductions for culled trees.
Although it may seem time-consuming to count all the trees on your farm by species and height, it won’t take as long as you think. Two or three workers can often count 15,000 trees or more per day. You can also utilize drone technology to map the farm and count the trees. The slower winter months are a perfect time to perform an inventory count!
Interested in learning more or need help implementing the above tips? Contact Andrew!
