5 Tax Tips for Farmers
With fall harvest in full swing, tax-planning strategies are critical to keeping more cash in your pocketbook at the end of the year. Meet with your tax adviser soon after harvest to project your taxable income through the end of the year and to ensure that every tax deduction has been considered.
Updated tax information for farmers:
Here are five tax tips every farmer should know:
1. Depreciation rules remain favorable for farmers in 2016.
The Section 179 deduction remains permanent at $500,000 (indexed for inflation in future years) for both new and used farm equipment purchases and purchased breeding livestock. However, this deduction is limited to the taxable income from your business. Bonus depreciation on new assets has been extended until 2020 and can be used on all farm assets with depreciable lives of 20 years or less (including general-purpose farm buildings). Unlike Section 179, bonus depreciation is allowed to create a net farm loss. Plan ahead on farm building construction. Beginning in 2018, the 50% first-year deduction begins to decline and will be completely phased out in 2020.
2. Commodity wages for employees have multiple tax benefits.
Paying an employee’s wages in grain is not subject to FICA or unemployment tax, which passes on payroll tax savings to both employers and employees. Also, spousal employees who are paid in commodity wages can help reduce farm net income and self-employment tax (a 15.3% tax savings). Just remember that as the employer, you must relinquish control of the commodity so the employee bears all the marketing risk.
3. Breeding livestock sales are not treated equally.
A tax accountant who truly understands farm tax laws will ask detailed questions on breeding livestock sales. In a nutshell, raised breeding livestock held at least 24 months before selling are eligible for more favorable capital gains tax treatment. This ranges from 0% to 20%. Alternatively, purchased breeding livestock sales are subject to depreciation recapture and are taxed at ordinary gain rates.
4. Deductions for meals and entertainment expense are not always limited to 50%.
Learn the rules on which farm-related meals and entertainment expenses qualify for 100% deduction and track these separately. A good example is meals paid by the employer for the planting and harvesting crews. Because these are provided on the employer’s work site and are for the convenience of the employer, they are 100% deductible. You may be surprised how quickly your grocery bill adds up as an additional farm deduction.
5. Farm income averaging can still work.
Despite lower grain and cattle prices, your income may still be higher with carryover grain and livestock inventory. Income averaging allows you to shift some of your current year income back to the three prior years and across seven different tax brackets ranging from 10% to 39.6%. Farm income includes more than you might think: crop share rent, wages of S corporation shareholders, and gains or losses on disposition of property (other than land). This is a concept you should discuss with your tax accountant each year.
Well-planned and executed tax strategies before year-end can help you harvest many of the tax benefits available to farmers and ranchers. In turn, that reduces both taxes and stress. Be sure to consult your tax adviser for more details.
This story was written by Julie Spiegel, a certified public accountant for Varney and Associates of Manhattan, Kansas. She specializes in agricultural tax planning, preparation, financial analysis, and consulting for individuals and businesses in farming and ranching. She and her husband manage a fourth-generation farm in north-central Kansas.