Consider Retirement Plans in Year-end Tax Planning for Your Farm or Agribusiness

Peter Bender

As the end of 2017 rapidly approaches, it is time to start thinking about year-end tax planning for your farm or agribusiness. While year-end planning can involve a variety of topics, one tool that is often overlooked in the agricultural community is the use of retirement plans. Depending on the type of plan you have set up, the use of retirement plans can offer planning options both before and after the end of the year for self-employed farmers or small agribusiness owners.

The options for plans available to self-employed individuals or small businesses involved in farming vary depending on how much you want to contribute to a retirement plan and how many employees you have, if any. Retirement accounts allow you to set aside money for your retirement on a tax deductible basis, which saves the owner tax dollars now. The money in the account grows tax free and is not taxed until you take a distribution from the account when you are in retirement. Your options include the following:

  • Individual Retirement Account (IRA) – these are accounts that can be set up and funded for the owner and their spouse. They are low-cost, easy to establish and can be set up and funded up until the due date of the individual’s personal tax return, not including an extension, which is generally April 15. Provided they have wages or earned income from their farming operations of a similar amount, a farmer and their spouse can each fund up to $5,500 in 2017 and 2018, plus an additional $1,000 if they are over age 50.
  • Simplified Employee Pension (SEP-IRA) – these are IRAs with higher funding limits that are established by an employer for the benefit of the owner and their employees. This type of plan works well for a taxpayer who wants the flexibility to fund more money to his retirement account in years when he has greater profits. It is similar to a profit-sharing plan in that the owner can fund a discretionary amount from 0% to 25% of their earnings in any given year. Also, the owner can decide what percentage to fund up until the due date of his personal or business tax return, including an extension. This provides greater flexibility after the year is over. One thing to keep in mind with a SEP-IRA: If the owner chooses to fund money for himself in any given year, he must also fund that same percentage for all eligible employees who worked for the business in that year. While this is a great benefit to offer your employees and will hopefully generate added loyalty from them, it does increase the cost to the employer, although all contributions will be tax deductible to the business.
  • Savings Incentive Match Plan for Employees (SIMPLE-IRA) – A SIMPLE-IRA is another type of retirement plan that can be set up by small business owners. This type of plan allows for the owner and their employees to defer a portion of their pay (i.e., elective deferrals) into the plan on a pre-tax basis. This money has to be deposited in the employees’ accounts as soon as possible, but no later than 30 days after the end of the month during which it was withheld from the employees’ paycheck. Also, the employer is required to fund either a matching contribution or a profit-sharing contribution to the accounts of any eligible employees, subject to certain limitations. This money must be funded by the due date of the employer’s tax return, including an extension. The maximum amount of elective deferrals an owner or employee can fund into their account for 2017 and 2018 is $12,500. If those individuals are over age 50, however, they can fund an additional $3,000 in elective deferrals. Please note that a SIMPLE-IRA does need to be established before the end of the tax year, generally by October 1, for any contributions to be made for that particular tax year.
  • Additional qualified retirement plans such as 401(k) plans or profit-sharing plans are also allowed to be established by agribusinesses. However, these are generally used for larger companies as they are more costly to establish and administer.

So, as you work through your year-end planning with your key advisors, remember to think about funding any retirement plans you already have in place, or establishing a new plan to help reduce your tax bill when filing your 2017 tax return.

Should you have any questions on the above material or if you would like to discuss establishing a retirement plan for your farming operations, please contact one of the Yeo & Yeo Agribusiness Services Group members.

Peter Bender

Peter Bender

CPA, CFP®

Peter J. Bender is a Principal in the audit department of Yeo & Yeo’s Saginaw office. He is a member of the firm’s Agribusiness Services Group, the Employee Benefits Group, and the Estate Planning Group. His areas of expertise include tax, planning and assurance service for agribusiness clients. He is a Certified Financial Planner®. Pete serves as chairman of the Michigan Association of CPAs Agribusiness Task Force.