Now is the time for farmers to do year-end tax planning and assess farm income, the University of Nebraska-Lincoln Farm Business Association's director says.

Low crop prices pushed 2005's net farm incomes down, meaning farmers may earn less money this year. That means a grain farmer may want to bring in income to this year's tax return by perhaps selling more commodities this year rather than deferring that income until next year, says Tina Barrett.

"A low-income year is just as important to do tax planning with than a high income year," she says. "You can actually save more money in a low-income year so that when a high-income year comes along you don't have to pay as much in taxes."

Barrett says there aren’t a lot of new tax law changes this year, "so take some time and do some extra planning. Tax planning is only as good as the records, so be sure to have solid information to start with."

Farmers should maximize credits and deductions, but should be careful not to prepay too many operation expenses or defer too much income. If they do, net farm income may be higher next year, and farmers could have to pay more in taxes, she says.

A new deduction farmers can take advantage of this year is the domestic production deduction. This deduction, which resulted from World Trade Organization negotiations, is available to anyone who produces a good or service in the U.S. The deduction previously applied to anybody who exported a product, regardless if they produced the product.

This deduction will give producers 3 percent of their net income as a deduction against their taxable income, limited to 50 percent of their wages, Barrett says.

For example, if a farmer makes $100,000 in net farm income this year, a 3 percent deduction would be $3,000, she said. To qualify, a farmer would have to pay at least $6,000 in wages. Wages can be paid to a spouse, but must be paid in cash wages, not in commodity wages.

Anyone who produces a product, such as growing crops or a cow-calf operation, qualifies, she says.

"However, since this deduction is so new, we still don't know if a lot of things will qualify," Barrett says. "We still don't know if custom farming for custom feeding is included and we're not sure when we will get those details. That is why it is important to talk with your tax preparer because each farming operation will be based on an individual basis."

Another slight change this year is the Section 179 Expense Election limit increasing from $102,000 to $105,000.

This election allows farmers to write off the first $105,000 in new or used assets. Also, the bonus election expired this year. This allowed farmers to write off 30-50 percent of an asset's cost in the year of purchase.

For more information about tax planning, contact a tax professional or ask for the 2005 Farmer's Tax Guide, available at local UNL Extension offices or on the Internal Revenue Service's Web site at http://www.irs.gov/publications/p225/index.html.