Ag Producers Should Do Income Tax Planning Before Year Ends
December 16, 2016
Agricultural producers should do tax planning before the end of the year based on the information known at this time. Traditionally, producers try to do tax planning to limit their tax liability.
With the downturn in the agricultural economy, limiting tax liability may not be an issue, but tax planning is still an important factor.
Some producers may have generated a net operating loss (NOL). Agricultural producers can carry a loss back five years for a refund. They may elect to carry the loss back only two years or elect to carry the loss forward up to 20 years. One important note: Self-employment tax is not refundable.
"In tax planning, it is best to start with year-to-date income and expenses and estimate them for the remainder of the year," says Ron Haugen, North Dakota State University Extension Service farm economist. "Do not forget any income that was deferred to 2016 from a previous year.
"Depreciation also needs to be estimated," he says. "It is best to try to spread out income and expenses so producers don't have abnormally high or low income or expenses in any one year. However, caution should be used in deferring too much income into future years because it may push you into a higher tax bracket."
These are items to note for planning 2016 tax returns:
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Congress has made the $500,000 section 179 expense election permanent. The section 179 expense generally allows producers to deduct up to $500,000 on new or used machinery or equipment purchased in the tax year. There is a dollar-for-dollar phase-out for purchases above $2,010,000.
The additional 50 percent first-year bonus depreciation is in effect. It is available for new property with a recovery period of 20 years or less. It is equal to 50 percent of the adjusted basis after any section 179 expensing. This provision is scheduled to be phased out by 2019.
Income averaging can be used by producers to spread the tax liability to lower income tax brackets in the three previous years. This is done on schedule J. North Dakota farmers who elect to use income averaging for federal purposes also may use Form ND 1FA (income averaging) for North Dakota income tax calculations.
Crop insurance proceeds and government crop disaster payments can be deferred to the next tax year if a producer is a cash-basis taxpayer and can show that normally income from damaged crops would be included in a tax year following the year of the damage.
A livestock income deferral is available for those who had a forced sale of livestock because of a weather-related disaster.
Here is what producers can do before the end of the year to limit their current tax liability:
Prepay farm expenses. Feed, fertilizer, seed and similar expenses can be prepaid. Typically, discounts are received by paying for these expenses in the fall. Producers can deduct prepaid expenses that do not exceed 50 percent of their other deductible farm expenses.
Pay real estate taxes or interest. Paying taxes or interest can be done before the end of the year to increase 2016 expenses.
Defer income to 2017. Crop and livestock sales can be deferred until the next year by using a deferred payment contract. Most grain elevators or sales barns will defer sales until the next tax year. Producers should be aware that they are at risk if the business becomes insolvent before the check is received and cashed.
Purchase machinery or equipment. Machinery or equipment purchases can be made before the end of the year to get a depreciation or 179 expense deduction in 2016.
Contribute to a retirement plan such as a simplified employee pension plan, savings incentive match plan for employees, individual retirement account or solo 401K.