Earlier this fall we shared some tax flexibility ideas, including the use of deferred payment contracts, from Andy Biebl, a long-time farm tax accountant with CliftonLarsonAllen. With higher tax rates likely in 2013, and 2012’s sands running out, we thought we’d offer a few more. The good news is most can be decided in the new year.
Under IRS Section 453(d)(1), any taxpayer can use the installment method to elect out of an installment deferral on any specific disposition of property, and Section 453(l)(2)(A) specifically allows farmers to use the installment method when disposing of property produced in the business of farming. You can elect out of the installment deferral by simply reporting the entire gain from the sale in the year in which the sale occurred, not when the later deferred payment occurs on your tax return. When making this decision, be sure to look into the benefit of farmers’ ability to income average, which may allow even more income to be absorbed at low rates.
If you’ve already prepaid expenses for 2013 in 2012, you can’t “take it back” and claim it in 2012 instead. But prepaid fertilizer can be amortized but you have to include all fertilizer expenses for a particular tax year.
If you bought equipment that became available for use in 2012, you must begin depreciation, but you don’t necessarily have to employ the first-year Section 179 deduction, which can be applied to either new or used equipment, or 2012’s additional 50% first-year bonus depreciation (only on new equipment). Note that tiling is included in the Section 179 depreciation rules if the farmer (not the landlord) made the investment.