Though time is running short, agricultural producers do have a few weeks left to review their financial situations and identify ways to reduce their 2006 tax bills. The 2006 tax system is largely similar to last year’s, except for a few minor benefits that expired at the end of 2005.
“There aren’t any surprises for 2006 taxes,” says Jose Pena, economist with Texas Cooperative Extension in Uvalde. “Ninety-nine percent of the benefits that expired, like the research and experimentation credit and the welfare-to-work credit, don’t apply to farmers.”
The war in Iraq, the huge federal deficit and controversy over the last tax package have caused a stalemate in Congress as far as new tax laws go, Pena explains.
Pena says the Section 179 expensing option for depreciable property used in business was increased to $108,000 to account for inflation. This can be used on computers, office furniture, equipment and vehicles, along with other tangible business property.
“The SUV ‘loophole’ has been eliminated, so that means the expensing option is capped at $25,000 for SUVs with loaded weights between 6,000 and 14,000 pounds,” Pena says.
The full expensing deduction is available for heavy non-SUVs, providing they are equipped with a cargo area of at least 6 feet in interior length and have an integral enclosure that fully encloses the driver’s compartment.
Also producers should be aware of some standing provisions covering drought-related livestock sales, says Dan Childs, an agricultural economist at the Noble Foundation in Ardmore, Okla.
“The tax implications of cattle sales caused by a drought are fairly straight-forward,” Childs says. “Two different tax treatments apply.”
The first option covers draft, breeding or dairy animals. If a producer sells more animals than normal, he or she can elect not to recognize any gain if they use proceeds to purchase replacement livestock within two years from the end of the tax year in which the sale takes place.
“The time period is extended to four years when the sale of animals in excess of normal was in a natural-disaster-designated area,” Childs says.
The new livestock purchased must be used for the same purpose as those sold. Only the additional animals sold in excess of normal sales can be replaced without recognition of gain. The entire sales proceeds must be reinvested in at least the same number of animals as sold for no gain to be recognized. If the sales proceeds are reinvested in exactly the same number of animals, then the new animals will have the same basis as the animals sold. If a lesser amount than the sales proceeds is invested, a portion of the gain will need to be recognized. If more than the sales proceeds is invested, then the difference is added to the old basis to establish the new basis.
“A producer can choose not to recognize the gain from the sale of animals in excess of the normal amount of sales by attaching a statement with the required information to their tax return,” Childs says.
The second option applies to all livestock and allows for a one-year postponement of reporting the sales proceeds from livestock sold due to drought in excess of the number ordinarily sold. The animals do not have to be replaced as in the first option. Reporting sales proceeds is simply deferred for one year. However, several requirements must be met: a producer’s principal business must be farming; a producer must use the cash method of accounting; a producer must show that the livestock would normally have been sold in the following year; and the weather-related conditions that caused an area to be declared eligible for federal assistance must have caused the sale of livestock.
“Again, a document containing the necessary information must be attached to a producer’s tax return indicating that an election has been made to defer the gain,” Childs says.