Farmers in North Carolina, like elsewhere in the United States, are working through crop acres to harvest this year’s production.
In parts of North Carolina harvest was affected by Hurricanes Florence and Michael. Year-end tax planning for farm businesses may provide for challenges to get to “that number” which was the target set earlier in the spring of the year. Weather events, commodity prices and external events (tariffs) to the farm economy affect the bottom line as year-end approaches and by connection tax planning.
This article will address two sides of the tax planning coin. First, the situation some farmers may discover is that more income is desired to get to the business’ long-run taxable income target. Secondly a farm business may have had a better-than-average year and the goal is to reduce taxable income to the long-run target. Additionally, this article is offered in the context that tax planning for farmers and livestock producers is a year-long management activity which comes into sharper focus as the harvest season concludes.
Increasing Taxable Income for 2018
1. With the Tax Cuts and Jobs Act of 2017 (TCJA) which was passed in December of 2017, the standard deduction amount was increased. For Married Filing Joint filers the standard deduction is $24,000; for single filers it’s $12,000 and for Head-of-Household it’s $18,000. Farmers will want to be sure to generate Adjusted Gross Income (AGI) of at least these amounts dependent upon filing status. These amounts represent tax free income and if one doesn’t use them the tax benefit opportunity is lost and cannot be carried forward.
2. If possible farmers need to consider selling grain and livestock this year instead of in 2019. This puts income into 2018. Beef cattle producers need to consider market animal weights and their general long-term plan; delaying livestock sales below or above target market weight may reduce enterprise profits.
3. An opportunity may exist to increase farm incomes in 2018 by postponing paying for 2018 expenses (usually purchases in the last couple months of the year) until 2019. Delaying payment of these costs such as: chemicals, lime, and fertilizer, seed, and fuel increases taxable income in 2018.
4. If the farm has incurred a large repair, such as an engine overhaul, consider capitalizing the repair and depreciating the repair. Similarly, farmers may amortize fertilizer and soil amendments such as lime over a period of time instead of electing to immediately expense these costs by reporting the amounts on their business tax form which commonly is Schedule F, Profit or Loss from Farming.
5. Farmers might want to “slow down” depreciation by using the alternate depreciable life of an asset. For example, a $100,000 new tractor in 2018 has a MACRS 5-year depreciable life at 200% declining balance, choosing to use the alternate depreciable life and straight-line depreciation can increase taxable income by $15,000. [$20,000 MACRS GDS depreciation - $5,000 MACRS ADS depreciation) To accomplish this farmers must elect out of Bonus Depreciation discussed below.
6. Farmers may want to delay making year-end payments of property taxes, accrued interest and any large bills due on large repairs (obviously this should be worked out in advance with the vendor as they too have obligations).
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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