Enhance Risk Management Strategies Through Tax Planning
Tax law changes to discuss with your income tax professional.
As 2010 quickly comes to a close, many farm managers have been asking what tax law changes might affect them as they plan for meetings with income tax professionals.
Listed below is a quick rundown of changes farm managers should pay close attention to this year. Remember, income tax planning issues can be complicated. Consult with a tax professional to evaluate plans for individual farm operations.
• On Sept. 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010. This new law extends bonus depreciation, extends and doubles Section 179 expensing, and also removes cell phones from listed property.
The new law extends, through Dec. 31, 2010, 50% first-year bonus depreciation, which had expired at the end of 2009. The extension is retroactive to Jan. 1, 2010.
The new law also extends, through 2011, an additional year of bonus depreciation allowed for property with a recovery period of 10 years or longer, and for transportation property (tangible personal property used to transport people or property).
The new law also increases the maximum Section 179 deduction to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.
One additional change that will affect farmers in this new legislation involves the removal of cell phones and similar personal communication devices from the current classification of listed property. This change effectively lifts the strict substantiation requirements of use and the additional limits placed on depreciation deductions.
• Another pertinent tax-law change (not part of the Small Business Jobs Act of 2010) includes the expiration of the mandatory five-year recovery period for new machinery. Previous legislation mandated that for new farm equipment placed in service during 2009, a five-year cost recovery period was required. This provision of the tax code expired at the end of 2009.
Basically, this means that farm machinery, regardless of whether the farm machinery is new or used, goes back to seven-year property for tax purposes.
Farmers operating on a cash basis (for accounting) may still utilize prepaid expenses. Typical prepaid expenses include fertilizer, chemicals and seed.
A farmer utilizing cash-basis accounting is entitled to prepay up to 50% of the total schedule F expenses reported in any given year.
The 50% maximum includes total cash expenditures as well as depreciation, Section 179 expense and bonus depreciation.
It is also permissible for a cash-basis farmer to defer crop insurance payments received during the current tax year that were attributable to crop loss or damage.
Deferring crop insurance is allowable if the farmer would have normally sold the crop that the insurance payment was received for in the following year.
Crop insurance payments based upon a revenue component are not deferrable. Only crop insurance payments received in lieu of crop damage and/or loss are deferrable under current guidelines.
More educational tips and tools on managing farm businesses can be found on the University of Minnesota Extension's ag business management website, www.extension.umn.edu/AgBusinessManagement.
Additional resources specific to tax planning include: the Internal Revenue Service website, www.irs.gov; the 2010 National Income Tax Workbook from the Land Grant University Tax Education Foundation Inc., available at www.taxworkbook.com; and CCH Tax Briefing: Small Business Jobs Act of 2010 (PDF), www.tax.cchgroup.com/legislation/Small-Business-Jobs-Act-7-23-10.pdf.
Editor's Note: C. Robert Holcomb is an agricultural business management educator with the University of Minnesota Extension.