For some farmers and livestock producers, 2018 may have been a “good” year from an income tax perspective due to decisions that were made in 2017 which brought additional income into this tax year as well as good conditions for the farm’s production this year.
Therefore, the focus may be to lower taxable income. There are several strategies to do so. Strategies exist that are prior to year-end and some strategies are after the year is completed.
Prior to year-end actions to consider:
1. Farmers and livestock producers might consider delaying sales until 2019. Generally this can be accomplished in one of two ways. First, simply hold onto the production and sell after the first of the year if the farm uses the cash-method of accounting. Second, if the farmer is satisfied with a price being offered now, sell the commodity using a deferred contract with payment of a specified commodity after January 1, 2019, at a specified price per unit of the commodity with a clause that prohibits the farmer from receiving payment any sooner than the contract allows.
2. Farmers might consider pre-paying inputs for 2019 by purchasing the items before December 31, 2018 if they use the cash method of accounting. Generally, there is a limitation to how much can be purchased in advance. A rule discussed in the Farmer’s Tax Guide, IRS Publication 225, is 50% of historic inputs.
3. Capital asset purchases such as machinery and equipment could be purchased and placed into service prior to year-end and be available for post year-end tax planning. HOWEVER, do so only if this is in the long-term business plan of the farm. Said another way, don’t let the tax tail wag the business dog. (Use of the Expensing Election and Bonus Depreciation follows in the next section.)
4. As the year-end approaches, farmers and livestock producers may consider paying property taxes, accrued interest and any accrued rent up to December 31, 2018 to further decrease income. Be aware that limitations in the Internal Revenue Code (IRC) prevent prepaying interest, rents and insurance premiums.
Post year-end tax management strategies
1. TCJA increased the amount of IRC section 179 expensing to $1,000,000 with an investment limit of $2.5 million. Farmers and livestock producers if they purchased depreciable assets in 2018 can make the election to expense all or part of these purchases subject to the rules for section 179.
2. TCJA also allows for Bonus depreciation of 100% of new and used depreciable assets purchased in 2018. The law presumes that farmers and livestock producers will use Bonus Depreciation. Doing so, in some cases, may create a loss which might not be in the best interest of the agricultural business. Farmers have the option to elect out of Bonus Depreciation on a class by class basis; e.g., elect out for all 3-year class life property.
3. Continued contribution to or initial creation of a retirement plan can reduce income taxes. The plans that reduce current year income taxes are: traditional IRAs, SEP-IRAs, SIMPLE IRA, solo 401-Ks, and defined benefit plans (though rare). There are rules which apply when the plan must be established in order for the contribution to be deducted against 2018 income.
Farmers and livestock producers may be more interested in non-deductible retirement plans due to their distributions being income tax free in retirement. These plans are Roth IRAs and Roth 401-Ks for example.
Farmers and livestock producers are strongly encouraged to seek professional tax preparation assistance to address areas of tax management for their businesses. Seeking competent tax advice by someone who is familiar with your business and who can communicate the language of tax in the context of agriculture can help farmers and livestock producers achieve goals relative to income and self-employment tax management.
Sources of information:
IRS Publication 225, The Farmer’s Tax Guide
https://www.irs.gov/pub/irs-pdf/p225.pdf (2017 at this time, will be replaced with 2018 when complete)
Rural Tax Education
Center for Agricultural Law and Taxation at Iowa State University
Guido van der Hoeven, Extension Specialist/Senior Lecturer, Department of Agricultural and Resource Economics, NC State University. Phone 919-515-9071, Email: firstname.lastname@example.org
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