By Judy Gilbertson
Farmers are generally aware that when they have a good year a corresponding tax bill goes along with it. When times are tighter, the necessity of tax planning may not seem as vital to your financial health. It is helpful to bear in mind that the potential deductions, credits, tax bracket management or even reducing your deferred tax liability are all considerations that need to be addressed even in the down times.
Advances or deferred grain contracts
Several options are available for years in which you may want to accelerate income. Working with your elevator to take advances on grain sales or creating deferred grain contracts are a couple of options. Advances are income once you receive the check and are included on your Schedule F. Deferred grain contracts are advantageous as you can elect to pull them into the current year or, if not needed, leave them in the following year. These work best at tax time if you have several different sized contracts that you can pick and choose from to maximize their effectiveness. The caution is to not include that income the following year when you actually receive the check.
Another option for accelerating income is to take a Commodity Credit Corporation (CCC) loan. CCC loans can be treated either as a loan or as income. Electing to treat CCC loans as income allows you to record the receipt of the loan proceeds as income in the current year, thereby establishing its tax basis. The following year, any gain or loss over basis is all that is recorded on your Schedule F, thus accelerating much of the grain sales income to the year the loan was received.
Farmers are aware that if income is too high an election to defer crop insurance proceeds to the following year can be made. In reverse, on a low income year you could choose to amend the prior year tax return to defer the crop insurance into the low year to better utilize the lowest income tax brackets for both years.
There are also several options for tax management on the farm expense side of the Schedule F. One option is electing to amortize fertilizer. Fertilizer that is used up with immediate benefits to the current year is not eligible. However any fertilizer applied that will have carry-over value to the following year can be elected to be split between the two years. A statement from an agronomist is recommended to be retained in case of IRS audit.
Electing the use of straight line depreciation on purchases is also an option to slow down current year expenses. The standard depreciation method for farm assets is high on the front end and dwindles down each year thereafter, eventually switching to straight line anyway. Making the straight line election will give you the smallest amount of first year depreciation of all the general depreciation methods.
Also related to depreciation is not electing the $2,500 Repair/Supply Policy in the low year. Putting tools and equipment on the depreciation schedule that could be written off immediately with the election slows the expense. This is an annual election that can be changed from year to year. Also, reviewing all repair bills to ensure that all betterments, restorations or adaptations have been capitalized and depreciated, thus reducing the Schedule F Repair Expense and spreading the costs out for future tax savings.
Prepaying expenses such as seed, chemical and fertilizer is a common way to reduce the current year tax liability in the good years. It also helps to analyze whether the discount offered by the company is worth any tax bracket change between years. Prepaid rent as it applies to farmers is an option as long as it is not for a period longer than 12 months. Caution should be exercised with this prepaid, as it could cause a problem with doubling up income for landlords.
All in all, consistent tax management is vital to your operation’s success. Make an appointment with your tax specialist to review these and many other options that may work for you farming operation.
Gilbertson is a senior tax specialist with AgCountry Farm Credit Services, Fargo, N.D.