• Domestic Production Activities Deduction: For 2006, the production activity deduction — sometimes referred to as the 199 Deduction — was 3% of your“qualifying” income and was limited to 50% of the W-2 wages.

  However, in 2007 the deduction rate climbs to 6% and remains at that level for 2008 and 2009. In 2010, the deduction rate reaches a ceiling of 9%.

  Overall, the tax code has been tightened up slightly for the Domestic Production Activities Deduction.

  The key change for 2006 was that only W-2 wages directly involved with the “business activity” would be eligible when calculating the deduction, according to Hoff. Before, all W-2 wages paid were included.

  The IRS refers to it as Qualified Production Activities Income. Only W-2 wages paid out for the qualified activity will be considered for the deduction. You also have to be manufacturing or producing something to use the deduction.

  “Farmers who operated under a calendar tax year were probably not greatly impacted in 2006 since the changes and provisions of this qualified production deduction actually took effect for tax years beginning after May 17, 2006,” says Hoff. “However, for 2007 it's now important to know about the changes.”

  Also, if an LLP or LLC, besides the main farm enterprise, passes the Qualified Production Activities Income test, you may be able to capture an added deduction benefit since it will be combined with any other qualifying production income on Form 1040, according to Hoff.

  This qualified pass-through income will show up on Schedule K-1, and the actual deduction will be claimed on the IRS Domestic Production Activities Deduction Form 8903.

  Additional deductions might also apply if, for example, your spouse (as a sole proprietor filing a Schedule C) is involved with an off-farm enterprise that directly produces something for sale. Hoff recommends discussing this with your tax advisor.

• Delayed Payment Contracts: Hoff cautions producers about trying to get advances in 2007 from elevators or grain dealers when they have a delayed or deferred payment contract stating that payments will be made in 2008.

  If an advance payment is made in 2007 for grain with a delayed payment contract, the IRS could argue it's not a binding contract and consequently tax the entire contract amount in 2007, even though most of the money is received in 2008.

• Self-Employment Tax (SE): The self-employment tax rate is still 15.3%; however, only the first $97,500 (an increase from $94,200 in 2006) of your combined wages, tips and net earnings is subject to the two-part tax (12.4% for Social Security and 2.9% for Medicare).

However, if you have income from Schedule F above $97,500,you will only pay the Medicare tax of 2.9% on the amount above that level. “The Social Security tax amount on that income caps out; however, the Medicare tax portion never does,” says Hoff.

For Additional Information:

• Visit the University of Illinois FARMDOC (Farm Decision Outreach Central) Web site at: www.farmdoc.uiuc.edu/index.html.

  In the left-hand column, you will find a link, “Law & Taxation,” with more information and other sources about tax matters. Below that, you'll also find a blog link called “Farmgate.”

• The University of Illinois Tax School Web site: www.ace.uiuc.edu/TaxSchool/.

• The Farmer's Tax Guide, Publication 225, IRS, is available online at: www.irs.gov/publications/p225/. The 2006 version is available online now, and the 2007 version should be available soon,if not already.