The title of this month’s column might seem counterintuitive to most producers. But there are many times when farmers would like to increase their income.
Most of these situations involve trying to soak up a standard deduction and personal exemptions that might go to waste. Also, most farmers want to at least pay taxes in the 15% bracket to avoid paying higher rates in the future, even though farm income averaging can help mitigate this situation. Other farmers want to show taxable income for banking purposes.
Here are some common options available to increase farmers’ taxable income after year-end.
Option No. 1: Use deferred payment contracts. One of the best ways to increase income is to sell grain using a deferred payment contract. At delivery, you enter into a written contract that calls for payment after your year-end. Because this is considered an installment sale for income-tax purposes, you can elect to accelerate that income into the current year.
This election is on a contract-by-contract basis. You can’t pick and choose the number of bushels to bring into income. It is either all or none. If you elect to accelerate this income, you need to make sure not to double report it in the following year.
For example, Farmer Sue uses a deferred payment contract to sell three separate installments of 5,000 bu. of corn for $20,000 each. When preparing her tax return, she determines she needs to increase her income by $40,000. She elects to take two contracts into income in 2017 instead of in 2018. Sue makes a notation in her books that this income is nontaxable in 2018.
Option No. 2: Elect to capitalize your fertilizer costs. The Internal Revenue Code allows farmers to deduct fertilizer costs even if the benefit extends beyond a year. Yet a farmer might have the option of capitalizing these fertilizer costs on a year-by-year basis. This allows a farmer who applied fall fertilizer for the next year’s corn crop to capitalize those costs on the current year tax return and then deduct them on next year’s tax return.
Option No. 3: Elect to capitalize repair costs. You may elect to capitalize all repairs incurred during the year and then depreciate the repairs or elect to take Section 179 to reduce farm income.
For example, Farmer James incurs $125,000 of repair costs during 2017. He is about $75,000 lower than needed, so he capitalizes his repair costs of $125,000 and takes enough Section 179 and depreciation to get taxable income down to the correct level.
Option No. 4: Do not elect the de minimis safe harbor. Farmers may automatically deduct any item with a de minimis value of less than $2,500. If farmers want to increase taxable income, they can choose to not make this election, then capitalize all items that otherwise would be deductible. They can then take Section 179 or depreciation to push income higher.
For example, Farmer Mary incurs about $65,000 of items that cost less than $2,500 each. Normally, she would deduct them using the de minimis election. But this year, she needs to increase her income by about
$50,000. She does not deduct these items and instead takes enough Section 179, bonus depreciation and regular depreciation to get to the desired taxable income.
Option No. 5: Elect out of bonus depreciation. Farmers who purchase new assets this year can deduct 50% of the cost of the asset using bonus depreciation. The bonus-depreciation deduction can be higher than
farmers desire, so they may elect not to take it. If Farmer Ben buys a combine and planter, and he builds
a hog-confinement building, he can elect to not take bonus depreciation on the combine and planter; to not take it on the building; or to take none at all.
Weigh Choices. It takes time and effort to investigate the avenues to add income to your tax statement. But doing so can be beneficial.