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Plan 2011 taxes now
For Missouri farmers whose land disappeared under floodwaters last spring, Ohioans struggling with mud, and Texans whose land burned under drought-stoked wildfires, it seems like a cruel joke. But before an assortment of calamities hit, USDA was forecasting that 2011 would bring the second-highest inflation-adjusted net farm income in 37 years – $94.7 billion.
That brings up another challenge. Somewhere, someone is going to pay taxes on some of that income, even if it does shrink. If you're blessed with reasonable weather this year – and even if you're not – and you sold last year's crops at decent prices in the winter and spring, now is the time to plan for reducing taxable income.
Roger McEowen, director of the Iowa State University Center for Agricultural Law and Taxation, says the tax law passed in Congress last December offers several depreciation tools that can help lower taxes on 2011 income.
The tax agreement extends the limit for the Section 179 expensing option for depreciable property to $500,000 for 2011. Next year it falls to $125,000; in 2013, without new legislation, it will fall to $25,000.
That option of accelerating depreciation is available on personal property worth up to $2 million. After that point, Section 179 expensing declines dollar for dollar of value.
Most farmers are unlikely to hit that, McEowen says. “If you buy a farm and equipment comes with it, you could bump up against it. Most people won't.”
The Section 179 expense method of depreciation is potentially available to farmers for a wide array of assets, McEowen says. It can be claimed on machinery and equipment, purchased breeding stock, pickup trucks, and also on tile lines, fences, feeding floors, grain bins, and silos. The property claimed for Section 179 expensing can be new or used.
Some states have also increased the expensing limit to match the federal amount. Iowa recently raised its from $134,000 to $500,000.
The same law also extends the bonus depreciation – at 100%. This applies only to new assets placed in service after September 8, 2010, through December 31, 2011. One type of purchase that qualifies for the bonus depreciation is new single-purpose buildings, such as a machine shed.
McEowen doesn't advise borrowing a lot to make purchases for these generous tax depreciation provisions. “If you've got income, pay debt off,” he says. “Don't get fooled by thinking, ‘I've got debt and I'm only paying 3%.’ ”
McEowen is convinced the economy is vulnerable to inflation. “I think we're in a commodity price bubble (as well as land) because of the devaluation of the dollar,” he says. He thinks the bubble will last for a while, but at some point, commodity and land prices will fall.
Another way to lower taxes on 2011 would be to defer more sales into 2012. But McEowen thinks that will be difficult for many producers who are likely already deferring income into the year after planting and harvest.
“Once you start deferring, if you ever stop, you're going to pile up income in one year,” he says.
Another good change in last December's tax law is that it also repealed a provision in the health care law that required farmers and other business owners to provide 1099 forms to any vendor providing more than $600 worth of goods or service.
Unfortunately, all of these favorable tax provisions are set to expire in 2012.
“Over the last 10 to 15 years, we've had very little permanency” in tax policy, McEowen says.