If you’re responsible, it’s likely you’ve already filed your taxes this year. Responsible farmers are also already planning ahead for next year’s filing too, and with that in mind, some tax issues specific to farmers are addressed below.
Chris Hesse, CPA, covered these issues during a session at this spring’s Farm Bureau Fusion conference. He kicked things off with some memorable quotes, including this quip: “There will always be two classes of people who don’t like to pay income taxes: men and women.”
The first thing Hesse discussed was deferred income from crop sales. Deferred income is an agreement to receive income from a sale in the next tax year. For that to happen, though, you’ll need a constructive receipt. This ensures income is taxed no later than when the recipient has a right to demand payment.
“You’ll run into trouble with the IRS if the timing is off,” Hesse said. “Your deferral agreement must be in place no later than the time of the sale. Get a deferral in writing if you’re selling in October and getting payment in January.”
He added that written deferral agreements can be amended. Remember that when you receive the check is when it can be taxed.
“If you’re relying on deferred payment, you’re running a risk,” Hesse said. “Get the income in your hands, then make other tax plans.”
Next was information about installment sales for fixed assets (land and other real estate). Farmers can recapture income recognized in the year of the sale for equipment and most farm depreciable real estate (such as feedlots, dairy and swine facilities, irrigation and storage assets).
Since equipment is subject to depreciation, it’s also subject to recapture as ordinary income. It can’t be deferred.
Prepaid expenses are another tax tool farmers may use. Producers can do this if there’s a business purpose for a purchase, such as insuring against price increases.
There is a limit on prepaid farm supplies. The deduction for prepaid supplies may not exceed 50% of non-prepaid operating expenses (including depreciation). “There are exceptions with a change in business or you’ve met the 50% test in the prior three years,” which is more for new farmers, Hesse said.
He emphasized that rent is not a prepaid farm supply. Farmers may prepay up to 12 months of feed, seed or fertilizer – anything that’s going to be consumed in the next 12 months.
“Be aware of the mailbox rule,” Hesse cautioned. “The income is deductible when the check is placed in the mail.”
To cover equipment purchases, the equipment must be available to be placed in service for intended use in that calendar year – for example, a combine that is dealer prepped and delivered on Dec. 31. Hesse noted the issue recently has been that dealers don’t have the items to deliver due to supply chain issues.
Farmers can also make charitable gifts of commodities. They can transfer ownership to a charity, who then completes the sale. The gift can be current year crop (and non-charitable gifts should use the prior year crop). The benefits of making gifts are for those not itemizing deductions.
“The benefit is from not selling the crop and therefore reporting the income,” Hesse said. “There’s no appraisal because there’s no charitable deduction.”
He said the farmer’s benefit comes from not selling the grain, he added, but it does take a little more paperwork. It can also be difficult to do with things that are highly perishable (such as milk) or livestock (as whoever owns the animals is supposed to feed them).
Another option is utilizing commodity wages – paying employees with a crop. Hesse said the benefit is these wages are not subject to payroll taxes. Again, however, livestock and highly perishable commodities can be problematic.
The last thing Hesse addressed was farm income averaging. He said this provides a benefit when the current year’s income is taxed in a higher bracket than at least one of the prior three years.
“Do this when your income goes up,” he suggested. “And file a Schedule J, not amendments of previous years’ filings.”
As a final piece of advice, Hesse told farmers to do tax planning every year and not rely and what they’ve always done.
“And verify everything with your own tax professional,” he said.
by Courtney Llewellyn