After years of drought, high feed costs and minimal taxable income, many producers may face their largest tax bills in recent memory amid record-high profitability.

Ryan Scheck, a certified public accountant (CPA) and principal at Adams Brown, a firm that serves seven industries including agriculture, with tax, audit, accounting, technology and financial planning, says the most effective strategy is actually the least exciting one: Know where you stand before year-end.

“The biggest thing I encourage producers to do is start the conversation early,” Scheck says. “The best planning opportunities are usually available in October and November. By the last week of December, a lot of options have disappeared.”

Leveling Spikes: Farm Income Averaging and Depreciation

One strategy Scheck says producers often overlook is farm income averaging. This allows farmers and ranchers to apply a portion of their current year’s farm income to unused lower tax brackets from the prior three tax years.

“It doesn’t eliminate income, but it can lower the federal tax rate applied to that income during unusually profitable years,” he adds. “Depreciation planning is another area that deserves attention. Just because a producer can write off 100% of an asset doesn’t necessarily mean they should. Sometimes it makes sense to preserve deductions for future years rather than using them all immediately.”

Once producers project where taxable income is going to land, they can evaluate several tax-planning tools.

Focusing too much on taxes can be just as much of an issue as not planning for them at all. Scheck warns producers that tax planning should not become the business plan but rather support the business.

“Every year I see producers who become so focused on avoiding taxes that they lose sight of the economics,” he says. “Just because something generates a deduction doesn’t automatically make it a good investment. Spending $100,000 to save $30,000 in taxes still means you’re out $70,000.”

The best year-end planning opportunities are usually investments that the producer already needs to make.

“The tax deduction is certainly part of the equation, but it should be viewed as helping offset the cost of a good business decision rather than creating the reason for the purchase,” Scheck says.

Shelby Bass, spokesperson for AgAmerica, a nonbank agricultural lender that provides customized financing solutions to farmers, ranchers and agricultural landowners, agrees with Scheck.

“A purchase should make sense operationally first and from a tax standpoint second,” Bass says. “I’ve seen producers buy equipment they didn’t really need simply because they were focused on reducing taxable income. The common thread is that these investments should solve a problem or improve performance. If they happen to provide tax advantages as well, that’s a bonus.”

Preserving Working Capital: Equity vs. Liquidity

While tax planning is important, lowering a tax bill shouldn’t be the sole objective. Instead, advisers recommend preserving liquidity and strengthening the operation over the long term.

“When making these decisions, producers should ask themselves whether it improves the overall business or simply reduces taxes for one year,” Bass says. “The strongest investments are typically the ones that improve cash flow, reduce costs or create additional revenue opportunities over the course of multiple years.”

In Bass’ experience, the producers who tend to be best positioned aren’t necessarily the ones who find a last-minute deduction. They’re the ones who treat tax planning as part of a larger financial management strategy.

“Timing income and expenses can play a major role from year to year, especially in today’s higher-cost operating environment,” Bass says.

Uncertainty is the only certainty producers can plan on, so Bass recommends building a strong year-end strategy for investments that not only reduce taxes where appropriate but also position the operation to weather challenges and capitalize on opportunities in the years ahead.

“A common mistake is confusing equity with liquidity,” Bass adds. “A producer may have substantial land equity on paper but still struggle with working capital and cash flow. That’s why understanding financial benchmarks like break evens, working capital, debt structure and liquidity is so important.”

Beyond Machinery: Off-Farm Wealth and Retirement Planning

Both experts say tax planning should start before the end of the year by regularly updating budgets and projections, as well as having conversations with tax professionals. This will better prepare both parties for tax season.

“When most producers think of year-end tax planning, they immediately think about buying equipment. In reality, some of the best planning opportunities involve no additional capital purchases at all,” Scheck says.

He notes retirement planning is also frequently overlooked and something he has helped clients with. Many producers have substantial wealth tied up in their land, livestock and equipment but relatively little accumulated outside of the operation.

“Retirement plans can provide current tax deductions while helping diversify a family’s long-term financial position,” he says. “Good planning requires knowing where income is headed and evaluating options before year-end. Waiting until December often turns strategic planning into reactionary planning.”

For the past several years, producers have had to focus on survival, managing costs and preserving cow numbers. Now that producers are finally seeing things shift, Scheck says the goal isn’t to pay the least amount of tax possible.

“The goal is to use today’s profitability to make decisions that improve the long-term health of the ranch and put the operation in a stronger position for the future,” he concludes. “Producers shouldn’t view taxes as the enemy. Taxes are generally a byproduct of profitability.”

What Are Producers Investing In?

Ryan Scheck, CPA at Adams Brown, says equipment is top of the list for most operations. This includes tractors, loaders, feed trucks, trailers, feeding equipment and similar assets which often qualify for accelerated depreciation deductions.

Breeding livestock can also provide significant tax benefits through accelerated depreciation deductions while simultaneously improving the long-term productivity of the herd, Scheck shares.

“Facility improvements are another area where we see a lot of investment,” he continues. “Fencing, water developments, corrals, processing facilities and livestock handling systems can generate tax deductions while addressing operational needs.”

Technology has also become increasingly important for producers. Herd management software, EID (electronic identification) systems, scale systems and data management tools don’t always receive as much attention, but they can have a meaningful impact, Scheck adds.