When the weather turns cold, many farmers are stuck inside doing books for the last year.

Figuring out what happened last year and where money was made and spent is necessary to meet tax filing obligations.

It is easy to just focus on the past, making sure that you aren’t paying a huge tax bill by doing some deferrals or prebuys at year-end.

This can be reactive because next year you are in the same situation, spending money between Christmas and New Year’s to avoid a tax bill.

When tax returns are due, many people only focus on the tax bill and getting the filing filed instead of the next steps for the next year.

We also need to look at the big picture.

Are you looking out the rear-view mirror for what happened in the past or looking out in front to plan for the future?

Here are a few tips for proactive farm planning.

Up-to-date accounting

Digging through a stack of records for the last year over winter (or worse yet, in April or June) isn’t fun. Very few other industries would run multimillion-dollar farm operations with bookkeeping done yearly.

Fortunately, new technology can help keep up to date with bookkeeping.

QuickBooks Online, with automated downloads from banks and credit cards, paired with an app called Dext to take pictures of receipts, can improve your bookkeeping.

An app can be helpful to take a picture of a receipt right at the dealership before it gets lost in a stack of papers in the truck.

The downside with QuickBooks Online is that it isn’t geared toward farming and doesn’t track inventory and personal portions of expenses well.

Farm Credit Canada’s AgExpert Online is specifically designed for farming operations. It is similar to AgExpert desktop but it can be accessed anywhere online. FCC has released a new app to take pictures of receipts and upload them into AgExpert Online.

Whichever accounting method you use, getting the books up to date more frequently will help you understand your business.

This includes making decisions on updated real costs of production and cash flow. Up-to-date books means we can run proactive tax estimates to confirm where the cash basis taxable income is at.

Accrual financial statements

Did your farm make a profit this year?

Cash basis taxation means that many farms don’t have accrual financial statements.

Cash basis can be deceiving, especially if it is managed to avoid tax bills through prebuying and deferring. For example, an input payment in November could be paying off last year’s inputs that are owing or buying next year’s inputs.

Accrual financial statements add in the receivables and deferred revenue, inventory, prepaid expenses and any payables at year-end. This gives the true picture of profitability.

If your farm isn’t profitable, the faster you are able to cut costs or improve revenue the better.

It’s much better to know the problem and make a plan to fix it than running for years with losses without even knowing it until it becomes a big issue.

Understanding profitability will also be helpful for lenders, who will appreciate knowing where the farm is really at. It’s also helpful for proactive tax planning.

If you are just showing $25,000 of cash basis net income every year to avoid a tax bill, but your farm is making $500,000 of accrual profit each year, you have a tax nightmare in the making.

Even when your farm is incorporated, it’s a lot better to pay tax at 10 per cent on the first $500,000 in Saskatchewan over the years to match profitability.

Avoiding tax at all costs, only to pay tax at a high rate when the income is no longer manageable, doesn’t make sense.

Proactive tax planning

Where will your farm be in five years? What can we do now to plan? This includes succession planning options for the next generation.

We often recommend that farming children get experience and equity so they can make some business decisions with a small part of the operation first. On the grain side, this often involves a child farming a quarter or two of land to start.

Does the legal ownership align with actual contributions?

Working for nothing but a promise of “sweat equity” inheritance in the future can cause issues down the road. It’s best when everyone is paid for the work they do.

The split of profits and legal ownership should make sense. This is the best time of year to review your ownership structure and confirm if any changes need to be made.

If there is no successor for your farming operation, are you maximizing the use of your personal tax brackets and low corporate tax rate to minimize the tax bill in the last year of farming? Will you plan for a land sale, renting out the land or gifting it to the next generation?

Proactive tax planning will help your farming operation succeed in the future.

A good understanding of where finances stand currently can help you and your advisers look to the future and make informed decisions to help reach your family’s goals.