Tax Law Changes Bring Opportunity, Confusion for Farmers
Take the time to develop a tax management strategy. Taking the maximum amount of deductions one year may not be the best option for the long term.
Changes in U.S. tax laws may cause some confusion for farmers, but Purdue University agricultural economist George Patrick said it's all about developing a tax management strategy that is most beneficial to each farm.
"The tax law changes have been almost continuous for a number of years," Patrick said. "We also had an extension of some of the laws from 2008 into 2009, which will primarily affect depreciation and expensing options."
Depreciation and expensing
One provision that has been extended from 2008 to 2009 is additional first-year depreciation on new assets. Farmers can take 50% of the cost of a new farm item as depreciation in the first year. In addition, they can continue to take the normal depreciation on the remaining 50%, which, Patrick said, gives farmers the opportunity for potentially large write-offs. If large write-offs are not needed, farmers can elect not to take the additional first-year depreciation.
One provision that has been extended from 2008 to 2009
is additional first-year depreciation
on new assets. When farmers purchase farm equipment, they also are generally eligible for expensing write-off.
"Section 179 allows farmers to write off the cost of an item, but there is a limit based on each individual farmer's taxable income," Patrick said. "Where this gets confusing is that before they extended the depreciation and expensing options, Congress declared that new agricultural machinery and equipment would be five-year property instead of seven for depreciation. It's important to know that because this is a one-year thing — it doesn't make a lot of difference. It just kind of confuses people because it will be there for a year and then it will disappear."
Smaller tax law changes
In addition to 2008's extensions, there are several smaller tax law changes that farmers should be aware of, Patrick said.
"There are a lot of what I would call fairly minor changes," he said. "Most farmers work with tax professionals to do the actual filing of the return, so they may want to plan on spending a few extra minutes reviewing with their tax professional whether they might be eligible for some of the other changes.
"There are some new energy credits and some changes in educational credits. It's hard to find a change that affects everybody because they tend to be more targeted. But, if farmers can take advantage of some of these things, it's something they likely will want to do."
Existing tax laws
Aside from the changes for the 2009 tax year, there are some pre-existing tax laws that also could prove beneficial to farmers. For example, if a farm has experienced a net operating loss, it can be carried to previous or future years to reduce taxes.
"The law says that if a farmer has a business loss it can be carried back against previous years for a refund on taxes paid, or it can be carried to future years to offset income taxes that would be owed," Patrick said. "The normal procedure would be to carry the loss back two years. So, if we're talking about a loss in 2009, that would be carried back to 2007 to offset some or all of the taxes paid on the 2007 income."
Another means of offsetting taxable income is for farmers to purchase some of next year's inputs before the end of the current tax year.
"Many farmers buy some of the inputs they need before the end of the tax year," Patrick said. "If they make a real purchase, not a deposit, they can go ahead and deduct those expenses in the tax year when the bill is actually paid. This gives farmers the flexibility, if they have a high-income year, to buy some of their chemicals, seed and fertilizer to reduce the income for the year. The thing to remember for prepaid expenses is it has to be a true purchase, it has to specify what is purchased and the price, and farmers have to show a reason for it. But, given the volatility of input prices the last few years, just getting a definite price may be one reason a farmer is doing it."
Conclusion
The bottom line, Patrick said, is to take the time to develop a tax management strategy. Taking the maximum amount of deductions one year may not be the best option for the long term.
"Farmers have to recognize that simply minimizing the amount of tax they pay in one year may not be very good tax management when we think about a period of five years or longer," he said.
Patrick hosted a Webinar Dec. 10 titled, "Income Tax Management for Farmers in 2009." The session will be archived on the Purdue Agricultural Economics web site at www.ag.purdue.edu/agecon/Pages/default.aspx. An income tax management publication also is available online at www.agecon.purdue.edu/extension/pubs/taxplan2009.pdf.
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