Agricultural producers should do tax planning before the end of the year, says Ron Haugen, North Dakota State University Farm Economist. It is best to start with year-to-date income and expenses and estimate them for the remainder or the year. Do not forget any income that was deferred to 2008 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," he says. "Caution should be used in deferring too much income because it may push you into a higher tax bracket in a future year."
Haugen suggest you keep these items in mind when preparing 2008 income tax returns in regards to tax planning:
- New this year is a change in the 179 expense election. The 179 expense election has increased to $250,000 for 2008. Generally, it allows producers to deduct up to $250,000 worth of machinery or equipment purchased in 2008. There is a dollar-for-dollar phase-out for purchases above $800,000. The maximum 179 expense deduction is scheduled to revert back to $133,000 for 2009.
- New this year is an additional first-year bonus depreciation available only for 2008. It is equal to 50% of adjusted basis after 179 expensing. It only applies to new property purchased in 2008 that has a recovery period of 20 years or less.
- Income averaging can by used by producers to spread tax liability to lower income tax brackets in the three previous years.
- 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 may receive an indemnity because 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. For 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 or disaster declarations) from the end of the tax year in which the animals were sold. Only the gain on the sale of those animals beyond what was normally sold would qualify for postponement.
- Switch grain loan elections. Grain (Commodity Credit Corporation) loan rules allow producers to make an annual election on whether to treat CCC loans as loans or income. Previously, it was a onetime election that could not be changed without permission from the Internal Revenue Service. It may be advantageous in reducing tax liability to switch methods.
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 2008 expenses.
- Defer income to 2009. 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 2008.
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 www.irs.gov. North Dakota income tax questions can be answered by calling the North Dakota Tax Department at (800) 638-2901 or go to http://www.nd.gov/tax/.
- December 2008