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Serving: IA

End-of-year income tax tips

Rod Swoboda Tractor in drought damaged corn field during harvest
TAX PLANNING: Farmers have experienced a wide range of unusual things they'll need to account for when filing their income tax for 2020.
Learn to handle unique farm income sources to save on 2020 income taxes.

It has certainly been a year of challenges. COVID-19 triggered major economic damage, a once-in-a-lifetime derecho flattened fields and pummeled grain bins, and drought compounded the damage. Because of these disasters, most farmers received some unexpected payments in 2020. These payments kept many farmers afloat through a very tough year, but proper management of this income is important to maximize its benefit.

The following summarizes key payments received by cash basis farmers in 2020 and their tax consequences:

ARC-CO and PLC payments. The 2018 Farm Bill retained (with some adjustments) the Agriculture Risk Coverage and Price Loss Coverage programs created by the 2014 Farm Bill. Farmers began receiving these payments in October 2020 for their 2019 crops. All Iowa farms enrolled in PLC should receive a payment for corn-based acres, while some farms enrolled in ARC-CO for soybeans will receive a low payment. In Iowa, almost no ARC-CO payments will be made for corn acres, and no PLC payments will be made for soybean acres. Iowa State University economists have estimated the PLC payment for 2019 corn in Iowa will average $16.17 per acre.

Farmers must include these payments in gross income (subject to self-employment tax) for the year in which they are received.

Market Facilitation Program payments. Many farmers received a third round of 2019 Market Facilitation Program payments this past February. These were the final payments provided by the program intended to compensate farmers for damage stemming from trade disruptions. The 2019 MFP payments to Iowa farmers totaled $1.6 billion, with the 2020 payment comprising 25% of the total. 

Farmers must include these payments in gross income (subject to self-employment tax) for the year in which they are received.

CFAP 1 and CFAP 2. The Coronavirus Food Assistance Program was created by USDA to compensate farmers for losses associated with COVID-19. CFAP 1, unveiled in May, compensated producers through a combination of $9.5 million in Coronavirus Aid, Relief and Economic Security (CARES) Act funding and $6.5 million in Commodity Credit Corporation funding. The first round of payments were paid in June, with the second round in August. As of mid-October, about $10 billion had been paid to farmers through CFAP 1, with nearly 10% of those payments made to Iowa farmers.

CFAP 2 was announced Sept. 18, with applications allowed through Dec. 11. CFAP 2 may issue up to $14 billion in additional payments to farmers. USDA had issued $6 billion in CFAP 2 payments by the third week of October, with Iowa farmers receiving $604 million of those payments.

Farmers must include CFAP payments in gross income (subject to self-employment tax) for the year in which they are received. 

Syngenta settlement payments. Beginning in March, eligible producers and crop share landlords began receiving interim payments from the $1.5 billion Syngenta settlement. The interim payments totaled about 65% of the overall payment. The administrator expects to issue final payments during late fall or early winter of 2020.

Because the Syngenta payments are intended to compensate recipients for lost profits from farming, farmers must report the payments as ordinary income, subject to self-employment, for the year in which they are received.

Crop insurance. Many Iowa farmers will receive crop insurance payments in 2020, stemming from crop damage incurred because of the devastating derecho or drought.

Generally, cash basis farmers must include proceeds from crop insurance and federal disaster programs in gross income for the tax year during which they receive the payments. The tax code, however, provides a special deferral provision for insurance proceeds received as a result of “destruction or damage to crops.” Farmers who meet the requirements of the statute may elect to include the proceeds in gross income for the tax year following the destruction or damage. This one-year deferral protects farmers from recognizing excessive income in one year when their regular practice would have been to sell the crop in the following tax year.

Crop and livestock sales. In 2020, farmers will have income from crop and livestock sales, some of which may have been unplanned. For example, grain bins destroyed by the derecho may cause farmers to sell grain earlier than expected. Additionally, the relief payments detailed above, all of which must be recognized in 2020, may cause some farmers’ 2020 income to be higher than expected, while 2021 may be lower.

Farmers concerned about this income bunching can defer income from the sale of crops or livestock in the year of the sale by deferring receipt of payment until the following year through a deferred payment contract. Under such contracts, a farmer can sell a commodity in 2020 but will not receive payment (or trigger income tax liability) until 2021. One of the best features of these contracts is their flexibility. If when filing tax returns for 2020, it would benefit the farmer to recognize income from the deferred price contract in 2020, the farmer can elect to report constructive receipt of the income in 2020, the year of the sale. This election is made by reporting the income from the sale on the 2020 Schedule F.

Other COVID-19 relief payments. Many farmers, like most Americans, received economic impact payments, also called “stimulus payments,” in 2020. These were $1,200 payments ($2,400 for a couple) and $500 for children under 17 years of age. These payments are not included in gross income and will not generate tax liability.

Many farmers also received Paycheck Protection Program loans in 2020. When forgiven, the proceeds of the loan are not included in gross income and will not be subject to taxation. Current guidance from the Department of the Treasury, however, provides that expenses paid with the loan (if it is forgiven) are not deductible. There is broad support for Congress to change this rule, but it is unclear whether that will happen.

Meantime, it may be best for farmers to wait to apply for forgiveness until more is known. Some farmers also received Economic Injury Disaster Loan advances in the amount of $1,000 per employee (up to $10,000). These advances reduce PPP loan forgiveness. They are also included in gross income.

End-of-year considerations. This year, more than ever, farmers should consider consulting with their advisers for year-end tax planning. Farmers have a number of tools available to help manage the timing of their income. Some of these options, however, are only available through year-end. Also, farmers who receive insurance on the Marketplace must ensure that income stays below 400% of the federal poverty limit or they will have to fully repay premiums paid on their behalf in 2020. 

Avoiding income spikes and dips prevents overall income from being taxed at unnecessarily high tax rates. Some common income management techniques for farmers include:

  • income averaging
  • prepaying expenses
  • making contributions to retirement accounts
  • gifting grain to a charity
  • carefully timing the purchase or sale of assets
  • entering into or electing out of deferred payment contracts
  • properly managing depreciation and expensing decisions

Tidgren is an attorney and director of the Center for Ag Law and Taxation at Iowa State University.

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