By Ron Haugen, Farm Economist, North Dakota State University Extension
It is best to try to spread out income and expenses so you don't have abnormally high or low income or expenses in any one year.
Agricultural producers should do tax planning before the end of the year. It is best to start with year-to-date income and expenses and estimate them for the remainder of the year. Do not forget any income that was deferred to 2009 from a previous year. Also, depreciation needs to be estimated. It is best to try to spread out income and expenses so you don't have abnormally high or low income or expenses in any one year. Caution should be used in deferring too much income because it may push you into a higher tax bracket in a future year.
The American Recovery and Reinvestment Act of 2009 passed by Congress extended the increased 179 expense and bonus depreciation.
These are items to note for planning 2009 tax returns:
- New for 2009 only is that new agricultural equipment (except grain bins and land improvements) can be depreciated over a five-year recovery period instead of seven years. The 150 percent declining balance method of depreciation must be used. Used equipment purchased in 2009 continues as seven year property.
- The 179 expense election remains at $250,000 for 2009. It generally allows producers to deduct up to $250,000 of new or used machinery or equipment purchased in 2009. There is a dollar-for-dollar phase-out for purchases above $800,000. The maximum 179 expense deduction is scheduled to revert back to $134,000 for 2010.
- The additional first-year bonus depreciation is available for 2009. It is equal to 50 percent of the adjusted basis after 179 expensing. It applies only to new property purchased in 2009 with a recovery period of 20 years or less. It is scheduled to be repealed for 2010.
- Income averaging can be used by producers to spread tax liability to lower income tax brackets in the three previous years. This is done on schedule J. North Dakota farmers who elect to use income averaging for federal purposes also may use Form ND 1FA (income averaging) for North Dakota income tax calculations.
- Crop insurance proceeds can be deferred to the next tax year if you are a cash-basis taxpayer and can show that normally more than 50 percent of the crop is sold in the year after it is produced. Producers with Revenue Assurance or Crop Revenue Coverage revenue coverage may receive an indemnity as a result of price declines and yield loss. Indemnities from price declines are not deferrable. If is it not line-itemed from the insurance company, contact the company to find out what part of the indemnity is from a price decline and what part is from a yield loss.
- A livestock deferral can be done for those who had a forced sale of livestock because of a weather-related disaster. Two methods can be used. In the first method, income can be deferred to the next year for all types of livestock sold prematurely. In the second method, income from livestock held for draft, breeding or dairy purposes is not taxed if like-kind animals are repurchased within four years (or more depending on weather conditions, disaster declarations or extensions) from the end of the tax year in which the animals were sold. Only the gain on the sale of those animals above and beyond what was normally sold would qualify for postponement.
- For 2009, long-term capital gains and qualified dividends have a zero tax rate for those in the 10 percent or 15 percent tax bracket and a 15 percent rate for those in higher tax brackets.
Here is what producers can do before the end of the year to limit tax liability:
- Prepay farm expenses. Feed, fertilizer, seed and similar expenses can be prepaid. Typically, discounts are received by paying for these expenses in the fall. You can deduct prepaid expenses that do not exceed 50 percent of your other deductible farm expenses.
- Pay taxes or interest. Paying taxes or interest can be done before the end of the year to increase 2009 expenses.
- Defer income to 2010. Crop and livestock sales can be deferred until the next year by using a deferred payment contract. Most grain elevators or sales barns will defer sales until the next tax year. Producers should be aware that they are at risk if the business becomes insolvent before the check is received and cashed.
- Purchase machinery or equipment. Machinery or equipment purchases can be made before the end of the year to get a depreciation or 179 expense deduction in 2009.
Information on agricultural topics can be found in the Farmers Tax Guide, Publication 225. It can be obtained at any IRS office or can be ordered by calling (800) 829 3676. Any questions about these topics should be addressed to your tax professional or the IRS at (800) 829-1040 or http://www.irs.gov.
- December 2009