Author’s Note: This article first appeared in the Great Lakes Christmas Tree Journal.
Summary
Christmas tree growers should utilize bonus depreciation, 179 expense, and the De Minimus Safe Harbor Election when possible to improve cash flow. Also, tax law allows most Christmas tree growers to delay or even avoid making estimated tax payments, which can keep significantly more cash in a grower’s pocket.
Continued Phase-Out of Bonus Depreciation in 2024
There are few tax law changes from 2023 to 2024. However, a significant change affecting many Christmas tree growers is the continued phase-out of 100% bonus depreciation.
Beginning in 2017, the Tax Cuts and Jobs Act allowed 100% expensing of business asset purchases. For example, a Christmas tree grower who purchased a $15,000 tractor between 2017 – 2022 could immediately deduct the full $15,000 purchase price on his tax return.
However, beginning in 2023, 100% bonus depreciation decreased to 80%. In following years, the bonus depreciation percentage decreases by 20% each year until it expires on January 1, 2027. For 2024, the bonus depreciation percentage is 60%.
For example, if the same Christmas tree grower instead purchased the $15,000 tractor in 2024, he could only immediately deduct 60% of the $15,000 price ($9,000) and would have to depreciate (deduct) the remaining 40% ($6,000) over the tractor’s useful life (generally seven years).
A Christmas tree grower may be able to deduct 100% of the cost of asset purchases in 2023 and beyond by utilizing Section 179 expense. However, Section 179 expense is limited to the amount of net income a grower reports on their tax return. For example, if our same grower who purchased a $15,000 tractor in 2024 had a net profit from his Christmas tree farm of $10,000, he would only be eligible for a $10,000 Section 179 expense deduction. The remaining $5,000 would be depreciated over the tractor’s useful life.
Increased Importance of the De Minimis Safe Harbor Election
Due to the continued phase-out of bonus depreciation, every Christmas tree grower should consider making the De Minimis Safe Harbor Election. This provision allows a Christmas tree grower to fully deduct the cost of any asset purchase up to $2,500. The De Minimis Safe Harbor Election greatly simplifies bookkeeping and will permit a Christmas tree grower to deduct the full cost of small equipment or other assets in the year of purchase.
Further, an asset’s cost may be deducted under the election regardless of whether it is new or used. However, this treatment under the election is not automatic; a special statement must be attached to the tax return indicating the De Minimis Safe Harbor Election is being made by the grower.
A Christmas tree grower should continue to carefully plan their asset purchases in 2024 and future years to utilize the De Minimis Safe Harbor Election, bonus depreciation, and Section 179 expense to the maximum allowable extent.
How to Improve Cash Flow in 2024
Since there are few significant tax law changes for 2024, the remainder of this article will focus on a topic that most Christmas tree growers must deal with: how to improve cash flow in months without revenue.
Cash flow is simply money flowing in and out of a business. A business that has positive cash flow has more money coming into the business (through sales or other payments) than going out of the business (through expenses or other outflows). Negative cash flow means cash outflows are greater than inflows.
Due to the seasonality of Christmas tree farming, most Christmas tree farms have positive cash flow in the final quarter of the year, but have negative cash flow for the rest of the year.
One way to improve Christmas tree farm cash flow is to pay estimate tax payments at the right time.
General Rule
Generally, the IRS requires taxes to be paid evenly throughout the year. For example, regular tax payments are simple for an employee because the employer withholds tax payments from each paycheck and sends the amounts to the IRS on the employee’s behalf.
Self-employed individuals, such as Christmas tree growers, must similarly make regular estimated tax payments to the IRS. Generally, the IRS requires four estimates by the following dates each year for individuals:
| Period of Time | Estimate Due Date |
| January 1 – March 31 | April 15 |
| April 1 – May 31 | June 15 |
| June 1 – August 31 | September 15 |
| September 1 – December 31 | January 15 (following year) |
Please note that the due dates and information in this article applies to individuals, whether they are sole proprietors or owners of a pass-through entity (non-taxable entity), such as an LLC, partnership, or S-corporation. C corporations are similarly required to make estimated payments; however, the rules differ slightly and will not be covered in this article.
If a grower does not pay enough in estimated taxes to cover his tax bill, he may incur an underpayment penalty. Generally, a grower will not incur an underpayment penalty if he timely pays at least 100% of his prior year tax liability (110% if AGI > $150,000) or 90% of his current year tax liability. It is safest to base the estimates on the prior year tax liability because it is often difficult to accurately estimate current year income and tax.
Underpayment Penalty Example
Doug Firr had a total tax liability of $15,000 in 2023. Doug Firr has a total tax liability of $17,500 in 2024, with an AGI of less than $150,000.
Doug is required to make estimated payments totaling the lesser of (1) 100% of his 2023 tax liability of $15,000, or (2) 90% of his current year (2024) tax liability of $17,500, which is $15,750 (90% * $17,500).
Doug is required to pay at least $15,000 in estimated payments to avoid an underpayment penalty in 2024.
The underpayment penalty may also apply if a grower does not make payments throughout the year when income is earned. For example, a Christmas tree grower also sells a significant number of balled and burlapped trees in Spring for landscaping. The grower will likely incur a penalty if he only makes an estimated tax payment on January 15 of the following year because he did not pay a timely estimate for the Spring B&B tree sales.
The B&B example brings up an important point. A grower should not have to pay estimated taxes when he has not earned any income. Fortunately, the IRS has two exceptions to the general rule that estimated taxes must be paid in four equal installments throughout the year.
Farmers and Fishermen
The IRS has a special rule for farmers and fisherman because income from farming and fishing can vary greatly from year to year.
To be considered a “farmer,” at least 66.66% Christmas tree grower’s total gross income as shown on the tax return must have been from farming activities for the current tax year or the prior tax year. Christmas tree growing is considered “farming,” as well as other farming activities that involve cultivation or raising agricultural commodities, such as growing crops or raising livestock.
If a grower is considered a “farmer” for estimated tax purposes, then the IRS only requires one estimated tax payment, due on January 15 of the following year. The required estimate amount (to avoid a penalty) is the smaller of (1) 66.66% of the grower’s current year tax or (2) 100% of the grower’s prior year tax.
Alternatively, a farmer does not have to make the January 15 payment if he files his individual tax return and pays all taxes due by March 1. If a grower is unsure if he will be able to file his tax return and pay the entire balance due by March 1, he should make the January 15 payment.
Farmer Example
Doug Firr is a Christmas tree grower who earned $75,000 from Christmas tree growing, $20,000 from raising livestock, and $30,000 from a part-time, non-farming job in 2023. Doug is considered a “farmer” in 2023 because at least 66.66% of his total gross income was from farming activities ($95,000 / $125,000 = 76.0%).
Doug is only required to make one estimated payment on his $125,000 gross income, due January 15, 2024. Alternatively, Doug could forgo the January 15 estimated payment by filing his tax return and paying the entire tax due by March 1, 2024. Either way Doug avoids an underpayment penalty.
Annualized Method
If a grower does not qualify as a “farmer” because he has income from other sources (such as wages, interest, or dividends) that exceeds 33.33% of his total gross income, the grower may still be able to avoid an underpayment penalty and improve cash flow by using the annualized method.
The calculations for the annualized method are complex; however, the method generally only requires a payment when a grower earns income. A grower takes his income for a quarter (or other period of time) and annualizes it to calculate an estimated total year income. A grower would then owe an estimate based on the annualized total year income. A worksheet regarding the annualized method can be found in IRS Publication 505.
If a grower does not earn any income from his farm during a quarter, an estimated tax payment is not required for the farm income. However, a grower might still owe an estimated tax payment based on other income he has for that quarter.
Conclusion
All Christmas tree growers should attempt to improve their cash flow in months without revenue. Paying tax estimates at the right time can significantly improve a grower’s cash flow. As this article is an overview of estimated taxes, there are many more nuances that a Christmas tree grower should review with an accountant to determine the best time to make estimated tax payments for his individual situation. As always, feel free to reach out with any questions or comments.
