Farmers can't control the weather or the prices they receive for their crops, but they can exert a strong influence over what they owe Uncle Sam at tax time.
Tax laws allow agricultural producers the same deductions that small businesses enjoy, with a few added benefits, says George Patrick, a Purdue University agricultural economist and tax specialist.
"A farmer who has made capital investments has the ability to write off a tremendous amount of that investment in the year of purchase," Patrick says. "But the way our tax laws are set up with the standard deduction and the personal exemptions -- if you've got children under the age of 17, there's a tax credit -- you're probably better off taking advantage of those as much as you can. You should not, however, take your taxable income down so low that you don't get those tax benefits.
"As a producer, you need to look at what will minimize your taxes over time. Or, as I prefer to look at it, what's going to maximize your wealth after you pay taxes."
A recent change in the tax code raised the amount farmers can deduct for certain farm-related purchases. In some cases, producers can avoid paying tax altogether -- at least for the current tax year.
"This is the last year that an additional first-year depreciation will be available, where an individual can deduct up to 50 percent of the cost of something new that they've purchased," Patrick said. "Also, Congress has extended the Section 179 expensing allowance through 2007, which allows a farmer or businessperson to write off a purchase of up to $100,000 in the year the purchase is made."
Because farmers often sell grain months after crops are harvested, their income year to year can fluctuate, Patrick says. Such fluctuations have tax ramifications.
"The thing we need to remember is most farmers use a cash method of accounting, so it's when they buy and sell things that determines their income," he says. "If farmers delayed making sales from the 2003 crop until they got some of those high prices back in the late spring and early summer,they may have a tremendous taxable income. They will need to do some year-end tax planning to, maybe, buy some inputs for the 2005 season to manage that taxable income.
"It's going to be important for every farmer to see where they stand financially and run the year-to-date numbers on income and expenses."