, Top Producer Business & Crops Online Editor
Now is the time to be planning your year-end tax decisions. This year's volatile markets and input costs make doing a little extra planning extremely important. Read what tax changes occurred this year and how they could affect your farming operation.
George Patrick, an agricultural economics professor at Purdue University, says 2007 and 2008 brought many tax law changes, but most of the changes were rather limited in their effects. He says being aware of these changes could greatly help farmers manage their tax decisions.
Tax planning can be a laborious process, so Patrick provides the following highlights of several tax changes affecting farmers.
Patrick says Section 179 allows taxpayers involved with a trade or business to deduct, rather than to depreciate, all or part of the cost basis of qualifying assets. "Section 179 expensing limit was increased from $128,000 to $250,000 for 2008 and the investment at which the amount of the Section 179 begins to be phased out was increased to $800,000 for 2008,” he says. "Regular depreciation is taken on the adjusted cost basis after any Section 179 expensing.”
Additional First-Year Depreciation
The Economic Stimulus Act was passed to stimulate the economy by accelerating cost recovery, Patrick says. "Fifty percent of the cost of a new asset acquired by purchase or a trade in 2008 can be deducted,” he says. "This is an "all or nothing” situation.”
The 50% additional first-year depreciation is taken on all of the qualifying farm machinery and equipment acquired in 2008, or an election is made to forgo the 50% additional first-year depreciation on all of the 7-year property, Patrick explains.
To defer income farmers must have a bona fide contract indicating that they cannot receive the proceeds from the sale in 2008 until 2009 before the commodity is delivered, Patrick says. He says it should be a written contract that is in place before delivery to avoid "constructive receipts.”
Prepaid expenses can be deducted by cash basis farmers before they are delivered, Patrick says. "It is important that the transaction be a purchase, not just a deposit,” he says. "Quantities of specific inputs should be specified, and it should be treated like a sale by the seller. There should be a business reason for the prepayment, other than reducing taxes.” Patrick says purchases generally should not exceed what will be used in the next tax year.
For further information, Patrick says farmers should contact their tax consultant and advisers.
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- DECEMBER 2008