Benefits to Farmers of Paying a Q4 Estimate in January Rather than Filing by March 1
When it comes to paying tax estimates, the IRS recognizes that farmers’ income is seasonal and doesn’t require them to pay in estimates quarterly. Instead, they’re allowed to either pay one fourth quarter estimate due January 15 and have until April 15 to file their 1040 and pay the remaining tax due, or they can file their return and pay their tax by March 1. With recent tax law changes, March 15 due dates for other tax forms, and the volatility in grain prices, the advantages to paying a Q4 estimate and having until April 15 to file the 1040 have become significant.
There are many benefits to paying a Q4 estimate and having 6 additional weeks to file a return. First, it allows farmers to collect all their information and still have sufficient time to thoroughly review their return and tax strategy. Investment companies and pass-through entities (partnerships, S Corps, and trusts, for example) aren’t required to file 1099s or K-1s until March 15. If farmers are lucky enough to receive their statements before then, they frequently come the end of February which allows minimal time to get the information input into the tax return, review the return, allow for discussions with the farmers, and coordinate any retirement and healthcare contributions that are due by March 1 that are dependent on tax return results.
Next, having additional time to file puts farmers in a better position to forecast what the next year’s commodity prices will look like. It’s important to look at the big picture when doing tax planning to minimize the tax liability over a lifetime and not get caught up in one tax year. The plan that was created in the fall may change if prices or other situations change significantly since harvest.
Finally, new tax law means new tax forms. The IRS has to draft and finalize the new forms, and the tax return software has to update for these new forms. This means delays in when returns can start being filed. In the past this has been as late as the last week of February leaving only one week to get March 1 tax returns filed.
A common concern amongst farmers about paying a Q4 estimate in January rather than waiting and paying 100% of the tax and filing by March 1 is the cost of interest between January 15 and March 1. However, if a farmer pays the estimate January 15 annually, then their annual payment is still every 12 months. It just occurs on January 15 instead of March 1. The transition year to a January 1 estimate is the one time that they’re “paying their money early.” This cost of interest is most likely minimal compared to the potential tax savings it may bring. The additional time helps determine if the tax plan from the fall is still the most efficient plan, it allows the farmer until April 15 to make certain retirement and healthcare plan contributions that create additional tax savings, and it prevents the burden and cost of filing amended returns due to receiving investment and K-1 information after the 1040 is filed.
What’s always been done in the past may not be the best option moving forward, especially in a time of significant tax law changes and tax filing delays. If a farmer chooses to pay a Q4 estimate in January, the estimate is the lesser of 66 23⁄ % of the current year tax liability or 100% of the prior year tax liability. We’re happy to assist clients with tax planning and answer questions related to paying a Q4 estimate.
