Although 2020 income taxes are not due until 2021, a lot of important financial decisions made now can have a big impact on farm taxes and when they are paid. One important resource is The Farmer’s Tax Guide for use in preparing 2020 federal income tax returns. This resource is available now online.

This free and helpful guide, Internal Revenue Service publication 225, dated Oct. 15, 2020, provides a review of what’s new for 2020 and 2021 and important reminders. The IRS has created a page for information about recent developments affecting the publication at IRS.gov/Pub225. 

The Farmer’s Tax Guide explains how the federal tax laws apply to farming and can be used as a guide to figure taxes and complete the farm tax return. Forms and publications can be downloaded at irs.gov/forms/pubs. 

People are considered in the business of farming if they cultivate, operate or manage a farm for profit, either as an owner or a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. It also includes ranches, orchards, ranges, plantations and groves. 

New this year

Some new items and changes for 2020 include the Coronavirus Food Assistance Program and any direct payments for eligible commodities adversely affected by the coronavirus pandemic to help offset sales losses and increased marketing costs associated with the pandemic. 

CFAP payments are agricultural program payments that must be included in gross farm income. This amount is reported on Scheduled F, lines 4a and 4b.   

For 2020, the standard mileage rate for the cost of operating a farm car, van, pickup or panel truck for each mile of business use is 57.5 cents. Another change is the maximum amount a farmer can elect to deduct for most section 179 properties placed into service in 2020 is $1,040,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2,590,000. 

The Payroll Protection Program loan and forgiveness debt rules say that expenses cannot be deducted that are allocable to a PPP loan that is later forgiven.   

The CARES Act revised the provision in the Tax Cuts and Jobs Act to change the treatment of qualified improvement property places into service after Dec. 31, 2017, to 15-year property under the modified accelerated cost recovery system.

The maximum net self-employment earnings subject to the Social Security part (12.4%) of the self-employment tax for 2020 is now $137,700. There is no maximum limit on earnings subject to the Medicare part (2.9%), or if applicable, the Additional Medicare Tax (0.9%). 

Generally, file form 1099-MISC if you pay at least $600 in rents, services and other miscellaneous payment in your farming business to an individual such as an accountant, an attorney or a veterinarian who is not your employee. 

Payments made to corporations for medical and health care payments, including payments made to veterinarians, generally must be reported on form 1099-MISC.

The IRS has redesigned form W-4 for 2020. You should make new form W-4s available to your employees and encourage them to check their income tax withholding for 2019. There also is a new form 1099-NEC to report nonemployee compensation paid in 2020. Form 1099-NEC will be due Feb. 1. 

Keep records

Tax records are not the only type of records that need to be kept for the farming business. Loan and payment records, profitability and other financial records, labor records, pesticide application records, soil testing and soil fertility records, legal documents, production records and marketing records are some of the kinds of record keeping that are important. 

Records (including electronic) used in the preparation of farm income taxes generally need to be kept for at least three years from when your tax return was due or filed or within two years of the date the tax was paid, whichever is later. 

Employment tax records need to be kept for at least four years after the date the tax becomes due or is paid, whichever is later. There are other records that must be kept for longer periods of time — for example, insurance, assets, creditors or depreciation.

Birkley is an MSU Extension educator emeritus and owner of Spartan Ag.

Source: MSU Extension, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.