A new tax law offering 30% bonus depreciation may help you park a new combine in your shed. Stan Blunier, a Forrest, IL farmer, factored in that post 9-11-01 tax break when replacing his machinery this fall.
“The bonus depreciation wasn't a deciding factor in my decision to buy a new combine, but it was a contributing factor,” says Blunier. “It might affect my grain sales or input purchases this year, but we're planning on making good use of this opportunity.”
According to Purdue University ag economist George Patrick, machinery purchases like Blunier's — or investments in grain storage or single-purpose livestock buildings — are eligible for section 179 expensing up to $24,000.
“If I buy a new piece of equipment, I can take $24,000 off the top with section 179 expensing. Then I can take 30% of what is left as bonus depreciation and still take my regular depreciation,” Patrick says. “The depreciation options give farmers a lot of latitude in terms of managing their taxes.”
If you choose not to use the additional 30% depreciation, indicate that on your tax return or the IRS will assume you've taken it, causing adverse consequences later.
Patrick, with comments from Blunier, offers these additional tax tips:
Calculate your receipts and expenses before year's end. That's the number-one tip every year, says Patrick.
“If a farmer delayed selling his 2001 crop into 2002 and then got crop insurance proceeds this year, he may find he has two years' crop receipts in one year,” Patrick says. “He may need to defer reporting insurance proceeds or do something on the expense side to take care of that.”
Make sure you have a professional ag tax advisor. “It would really take a lot of time to keep up on all the changes that are made to the tax codes,” says Blunier. “I rely on my tax advisor for help.”
Don't load machinery purchases into the final quarter.
“If, in the last quarter, a farmer buys more than 40% of machinery and other depreciable items that he's put into service during the year, it affects the amount of regular depreciation he can take,” says Patrick.
A farmer normally gets half a year's depreciation, or 10.71%, on any equipment bought during the tax year. If he exceeds the 40% rule, he can only take 2.68% of those purchases, says Patrick. The 40% rule doesn't affect the 30% bonus depreciation.
Review CCC loan treatment. Many farmers treat Commodity Credit Corporation (CCC) loans as loans. Those who previously reported loan proceeds as income can change accounting methods without IRS approval. This allows farmers to move income between years by opting for different reporting methods.
Pay self-employment tax. Self-employment tax contributes to your coverage under Social Security, which includes retirement, disability, survivor and Medicare benefits.
Even farmers who show a loss can qualify for Social Security using the optional farm method — essentially paying self-employment tax on $1,600 of assumed profit.
“I want to make sure that my self-employment tax doesn't get too low,” says Blunier. “I make sure that I maintain my self-employment tax at a level where I can expect some benefits out of it.”
Don't ignore a loss. With a poor crop year for many U.S. farmers, showing a loss on schedule F is a possibility. First, offset farm losses against any non-farm income. If there's still a net operating loss you have two choices, Patrick says.
“If you haven't paid many taxes in back years and you're expecting better years ahead, carry the loss forward. If you've paid a lot of taxes in previous years, carrying the loss back and getting a refund may make a lot of sense. Either way, you're reducing your tax liability somewhere,” Patrick says.
Finance prepaid purchases with a third party. A gray area exists in the tax code that could make inputs purchased through companies' own financing programs ineligible for deduction. If a financing company is too closely related to the company selling the product, IRS could view it as a charge — not an expense.
This has the potential to move many expenses from this year to next. Patrick recommends checking out financing companies closely and, if in doubt, use a third party to finance purchases.
For tax forms or to look up portions of the law, visit www.irs.gov. IRS publication 225, Farmer's Tax Guide, is a good place to start.