As a challenging 2019 winds down, it is time to start thinking about your income taxes. While there have been no major tax laws passed in the past two years, the following are some ideas to always consider that may help minimize your income tax liability:
Tax deferral. A farmer who receives crop insurance or disaster assistance payments in 2019 may be able to defer paying the tax on that income into 2020. If a farmer’s regular practice is to sell crops the year after harvest, and if the farmer is a cash basis taxpayer (and most of you are), then you can elect not to pay the income tax from crop insurance or disaster payments in 2019 and defer that tax until 2020.
Likewise, if a farmer sold livestock because of drought, flood or other weather-related conditions in 2019, the farmer could defer paying the tax on that income until 2020 or later. The farmer again must be a cash basis taxpayer, and the area where his or her cattle are kept must be eligible for federal assistance. Beef livestock that were sold early are eligible for tax deferral, but dairy livestock are not.
C-corporation. Corporations can be taxed as C-corporations or as S-corporations. Many farms operate as and are taxed as corporations. President Donald Trump’s 2017 Tax Cuts and Jobs Act generally lowered the tax rates applied to C-corporations. However, a farm taxed as a C-corporation is not eligible for something known as the “qualified business income tax deduction,” but S-corporations are eligible for that deduction, which can be significant for farmers.
That said, a C-corporation can make an election with the IRS to instead be taxed as an S-corporation. If your farm is currently taxed as a C-corporation, now may be the time to discuss with your tax preparer about changing to an S-corporation. To make the election, a simple form is filed with the IRS.
Section 179. Section 179 of the Internal Revenue Code allows a farmer to deduct up to $1 million of the cost of qualifying property placed in service in 2019 rather than depreciating the cost over a period of years. It is noted that if the farmer spends more than $2.5 million on new qualifying property in 2019, that can limit the amount of this deduction.
The Tax Cuts and Jobs Act expanded the types of property available for this deduction to include roofs; heating, ventilating and air conditioning; fire protection systems; and security systems.
Income averaging. According to the IRS, not enough taxpayers take advantage of a tax planning tool known as “income averaging,” which is a savings tool only available to farmers and fishermen. Essentially, income averaging allows the farmer or fisherman who has a high-income tax year to go back over the last three years and “fill up” unused lower tax brackets from those prior three years. As a farmer’s income can fluctuate wildly, this tax rule actually has some logic to it. It is used by filing a Schedule J with the farmer’s tax return.
Selling the farm. If you have decided to retire or try another line of work, you are likely to encounter significant tax issues in selling farm assets, although those can sometimes be minimized. First, it is almost always beneficial, if possible, to spread the sale over a number of years to “fill up” the lower tax rate brackets.
Second, if your farm or personal property is marital property and you reside in Wisconsin or another community property state (there are eight others), and you or your spouse dies, it is possible for the living spouse to sell those farm assets tax-free.
Third, income averaging is available to be used in the year you stop farming (see point above).
This article is not intended to be a substitute for legal or tax advice and is for educational purposes only. As always, you should discuss your personal situation with your tax adviser.
Halbach is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.