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Filing on the cash basisâ€"helps tax management B. L. McCorqnurl'm’e. Ontario Mirtfsrri' of Agriculture and Food. Guelph All farmers have the privilege of using the cash method to figure their taxable income, In fact. most farmers ttse this method to figure their income for tax purposes. Reporting income on the cash basts has some very definite advantages when it comes to tax management. However. to make use of tltese advantages you must act before the end of your tax year which is in most cases December 3 lst. This also means Some extra figuring by some member of the family. Under most Circumstances. you will be subject to less tax if your taxable income is relatively level or stable from-year to year. Your objective then is to even out your income subject to tax and. if special steps are taken before vear end. you can make certain legiti- mate ttdjustnients which will decrease or increase tax- able income. it is sound business management to put one's busi- rtch in the most advantageous tax position, Good tax management has a real effect on the success of the business. However. tax decisions should m)! be over emphasized. Though important. they are only one of the factors in good farm management decision mak- ing. Tax decisions should always be in terms of the overall benefit to the farmer. Income is reported in the year it is received and cite pcnses are deducted only in the year they are paid. Therefore. before the end of the year. November 30th is a suggested time. you may wish to take some time to calculate your income and. expenses for tax purposes for the first eleven months. By estimating your income and expenses for December and providing an estimate of capital cost allowance and other adjustments. you can come up with an estimated net income from farm- ing. How does this compare with previous years? Should adjustments be considered and if so what would be the effect ofthese adjustments on taxable inâ€" come? Since high levels of income are taxed at higher rates than l0w levels ofincome. one‘s life time tax pay- ments can be reduced by reporting moderate amounts of income each year. income can be evened out by in- creasing income in low income years and decreasing income in high income years. As an example. based on l977 income tax rates in Ontario. if your taxable income was $13000 in 1977 and 52.000 in l978 you would pay a total of $3542 in income tax. However. if your taxable income was $8.000 in 1977 and 37.000 in 1978. the tax payable for the two years would be $3283. Avsaving in tax dollars ofjust about $259. This is a substantial return for some tax planning efforts. Reducing income will naturally decrease taxes payable or at least defer the taxes until some future time. However. reducing reported income every year is not necessarily the best way to save tax dollars in the long run. 28 It may be to your advantage to adjust Upv w. your taxable income in order to i (1) take advantage of personal exemptions. ll- cal expenses. education deductions. or charitab]. nations which are lost if they are not used up it current year. (2) take advantage of losses carried forward i m prthous years. (3) allow maximum contribution to Canada 1 sion Plan or contributions into a registered retired ings plan. For livestock farmers the livestock inventory p sions provide a very simple and convenientiuti make an upward adjustment to your taxable hit in order to carry forward losses and thus not lost- sonal and other exemptions that can only be UN. the current year. Wages paid to sons and daughters of farm ftini for work done can help to reduce the income tax The amount of the wages should be reasonable an line with the amount of work that is done and ha regard to the age of the child. Further information eluding example calculations using 1978 figure- eontained in the Fact Sheet “Family Member Wage Barnesâ€"1978". This fact sheet may be tained from any agricultural representative’s ofiit Other legitimate means of adjusting taxable come if reporting taxable income on the cash I» and which may be considered if consistent with g farm management practices. are as follows: To decrease income (I) Where feasible postpone sale of farm products 1 the collection of proceeds until next year. Before year end pay up all current operating penses and outstanding charge accounts (cg. It. seed. livestock fertilizer. repairs. etc) and pureli and pay for as many of next year‘s opera' needs as appropriate. Wait until next year to collect for custom v. done this year. Pay family members before the end of the yeat appropriate amount for work performed on farm. Pay for any tile drainage or land clearing \ii completed and not paid for. To increase income (I) Sell farm products and collect the proceeds bet year end as well as collect from customers. (2) Wait until next year to pay for operating expert incurred this year including expenses as for i drainage and land clearing work. (3) Pay family members next year for work perform on the farm during the current year. ‘ There are many various and legal ways in wh n the farm business can manage tax affairs. By dot g some figuring and estimating your taxable ineomc In early December, it may be possible to even out you taxable income and thus save tax dollars. .i,. hie lit‘ (3) (3) (4) (5)