It depends on your profitability, cash flow, and upcoming operating needs. Prepaying expenses may provide tax benefits, but it also reduces available cash.
As the calendar year winds down, ag producers face several decisions that can significantly affect their operation's financial position heading into the next season. You may consider prepaying expenses, deferring income, purchasing equipment, or combining different strategies.
The right decision depends on more than this year's tax bill. Each choice you make before year-end influences your cash flow, borrowing capacity, and operating flexibility for the year ahead. Recognizing the trade-offs can help you make choices that strengthen both your tax position and your financial outlook.
Key takeaways
Year-end tax decisions should support your operation's long-term financial goals, not just reduce this year's tax bill.
Prepaying expenses and deferring income can offer tax benefits, but each has different impacts on cash flow and working capital.
Consider how today's decisions may affect your financial flexibility and borrowing capacity next year.
Reviewing options with your financial officer, tax officer, and farm accounting officer can help you make informed year-end decisions.
How will today's decisions affect next year's financial position?
While reducing taxes might be on your mind, the better focus at year-end may be how today's decisions will affect next year's financial position.
Reducing taxable income can be valuable, but doing so at the expense of working capital or liquidity may create challenges when it's time to finance inputs, manage market volatility, or seize growth opportunities.
Before making any major tax-related decisions, evaluate where your operation stands today and what financial flexibility you may need in the coming year.
Your AgCountry Farm Credit Services (AgCountry) financial officer, tax officer, and farm accounting officer can help evaluate how financial decisions may affect profitability, cash flow, working capital, and long-term business goals.
Prepaying expenses versus deferring income
Two of the most common year-end strategies are prepaying expenses and deferring income.
When prepaying expenses may make sense
Prepaying expenses allows you to purchase eligible inputs such as seed, fertilizer, chemicals, or feed, before year-end while taking the deduction in the current tax year.
Potential benefits may include:
Reducing this year's taxable income
Locking in input prices
Planning for known expenses ahead of the next production cycle
However, prepaid expenses also use cash that may be needed later. Before committing significant dollars, consider how the purchase could affect your working capital and operating flexibility.
When deferring income may make sense
Deferring income shifts taxable revenue into the following tax year. This strategy can help smooth income between years and reduce current-year tax obligations.
The trade-off is timing. Delaying income may lower your tax liability today but could affect cash availability for operating expenses, debt service, or planned investments.
The right approach depends on your operation's financial position, anticipated income, and cash flow requirements.
How your year's results can influence your strategy
If you had a strong financial year
Operations with strong profitability may have more flexibility to explore tax-planning strategies. Prepaying expenses, evaluating equipment purchases, or strategically deferring income may help manage taxable income while maintaining a healthy balance sheet.
Even in a profitable year, avoid spending money solely to create a tax deduction. Every dollar spent still needs to support the long-term goals of the business. A year-end review with a financial officer, tax officer, and farm accounting officer can help identify opportunities to manage taxable income while keeping broader business objectives in focus.
If you had a tighter year
For producers facing tighter margins, preserving cash may be more important than maximizing deductions.
In these situations, maintaining liquidity and working capital often provides greater value than pursuing aggressive tax-saving strategies. Focusing on financial flexibility can help position the operation to navigate uncertainty and respond to future opportunities.
Neither scenario has a universal solution. The right strategy depends on your unique financial circumstances, priorities, and goals.
Considering equipment purchases before year-end
Equipment purchases are often part of year-end planning conversations, particularly when producers are balancing operational needs with potential tax advantages.
If equipment is needed to improve efficiency, productivity, or reliability, year-end may be an appropriate time to make the investment. But tax benefits should support the purchase decision, not drive it.
Understanding Section 179 and bonus depreciation
Section 179 allows eligible businesses to deduct the cost of qualifying equipment, subject to annual limits. For tax year 2026, businesses may deduct up to $2.56 million in qualifying purchases, with the deduction beginning to phase out when qualifying purchases exceed $4.09 million.
Bonus depreciation provides another opportunity to accelerate deductions. Under current law, qualifying property placed in service after January 19, 2025, is generally eligible for 100% bonus depreciation.
Together, these tools can significantly reduce the after-tax cost of equipment ownership, but eligibility and outcomes vary based on individual tax circumstances.
Financing can be part of the strategy
Many producers assume they must pay cash to realize available tax benefits. In reality, financing may allow an operation to acquire needed equipment while preserving cash and maintaining operating flexibility.
Loans, conditional sales leases, and true tax leases each offer different advantages depending on cash flow needs and tax objectives. For example:
Conditional sales leases may provide depreciation benefits similar to traditional financing while offering lower payments.
True tax leases may provide consistent deductions over the life of the lease rather than accelerating them into a single year.
Financing can help conserve working capital for crop inputs, livestock expenses, or unexpected challenges.
When evaluating equipment purchases, consider the entire financial picture, including its effects on cash flow, debt capacity, tax implications, and long-term operational goals.
Protect working capital while investing in equipment
When equipment upgrades are necessary, paying cash isn't the only option. Financing through AgDirect® can help eligible producers acquire needed equipment while keeping more cash available for inputs, operating expenses, and future opportunities.
This approach may be especially valuable at year-end, when operations are evaluating tax strategies alongside cash flow needs. A financing solution that aligns with your goals can help support both operational efficiency and financial flexibility heading into the new year.
A simple year-end planning checklist
Before December 31, discuss these questions with your business services team:
How did my operation perform financially this year?
Do I expect next year's income to be higher, lower, or similar?
Would prepaying expenses strengthen my overall financial position?
Is deferring income appropriate based on my future cash flow needs?
Are there equipment purchases that my operation truly needs before next season?
How would a purchase affect working capital and borrowing capacity?
Could financing help preserve flexibility while meeting operational needs?
Your answers can help guide decisions that support both tax efficiency and long-term financial health.
Year-end decisions rarely affect only your tax return. They can influence cash flow, borrowing capacity, and financial flexibility throughout the coming year.
AgCountry's business services team can help you assess the broader financial impact of year-end decisions, from tax planning and accounting support to strengthening your operation's financial position for the year ahead.
Frequently asked questions
1
2
Not necessarily. Deferring income can reduce current-year taxes, but it may also impact future tax obligations and near-term cash flow.
3
No, not usually. Equipment purchases should first address an operational need. Tax benefits should be considered a secondary advantage.
4
Yes, in many cases. Financing may allow eligible producers to acquire necessary equipment while preserving cash flow and still accessing available tax benefits. Consult your tax adviser regarding your specific situation and Section 179.
5
Ideally, discussions should begin before the final weeks of the year. Earlier planning provides more options and better visibility into potential outcomes.
6
AgCountry's business services team can help producers evaluate tax planning strategies, review financial records, assess business performance, and better understand how year-end decisions may affect next year's cash flow and profitability. Working alongside your lender and tax officer can provide a more complete view of your operation's financial position.
AgDirect® is an equipment financing program offered by Farm Credit Services of America and other lenders, including participating Farm Credit System Institutions.
