We just past the notorious March 1 deadline and farmer tax season should slow down a little bit now.
In tax time we focus on interest paid because most farmers report their taxes on cash basis; we only get the deduction when the interest is paid. A lot of you have received Form 1098s that shows your mortgage information and has that ever important “mortgage interest received from payer(s)/borrower(s)” box.
You only get to deduct the interest portion of those mortgage payments because the rest is going to your loan principle. It’s important that we separate the interest and principle payments because new, larger loans generally have a higher portion of interest, and interest decreases as you pay the loan.
Since the interest amount changes every year, it’s important to have information available that separates the principle and interest portions.
The 1098s are only required for mortgage interest – i.e. real estate – but we all know that the loans on your iron and your line-of-credit have interest as well. Some vendors and banks provide year-end loan and interest information that will split out the total payments for the year. If you haven’t seen one these from a large vendor of yours, ask and see if they have it. It gives you and your tax preparer something to double check your accounting information against to make sure you’re getting all the deductions you should.
While we focus on interest paid in tax season, one thing you want to remember about interest is that it is an expense every day you have that loan; this is accrued interest. Accrued interest builds until you make your cash payment (and deduct on your taxes).
Accrued interest is important when we analyze cost of production because it keeps our revenue and expenses in the same period; That way we can get a more accurate representation of profit and loss.
Some of you may have financed crop inputs in 2020 but didn’t make the payment until January 2021. When we are working on your taxes, we consider that a 2021 expense because that was when you made the payment. However – when we are looking at your cost of production – we show that as a 2020 expense because the financing goes with your 2020 crop inputs.
The more you know about how loans and taxes work, the better chances you’ll keep more money in your bank account.