If the pandemic taught us anything, it’s that we need to be prepared for anything. Market changes, weather events and other factors made this an incredibly challenging year for almost every industry, including agriculture. As harvest season wraps, it’s time to focus on non-urgent tasks like year-end planning.

When considering year-end tax planning, it is vital that farmers and ranchers not only consider the current tax year but also evaluate what makes sense for the long-term future of their operation. With the prospect of higher tax rates and decreased deductions in the near future, it will be advantageous for farmers and ranchers to develop a long-term tax strategy. This article will highlight a few of the unique tax planning tools available to those in the agricultural industry.

Farm Income Averaging

Farm income averaging is a tool used to spread current year farm income out over the prior three years. This can be used to reduce tax liability when current year income is higher than income in one or more of the prior years. To learn more about farm income averaging, click here.

Deferral of Crop Insurance Proceeds

Farmers who receive income from crop insurance in the year of damage to the crop can defer the recognition of this income into the following year. This can be a powerful tool for farmers whose regular business practice is to sell crops in the year after harvest. It can help prevent showing two years’ worth of crop income in one tax year. For more information on the deferral of crop insurance proceeds, click here.

Deferral of Livestock Sales due to Disaster

As extreme weather conditions affect several areas of the U.S., farmers maybe be forced to sell livestock due to a lack of feed sources. When these forced sales occur, special tax provisions may allow farmers and ranchers to defer the income received on those sales. Click to learn two tax deferral strategies that farmers and ranchers could consider.

Bonus Depreciation & Section 179

Bonus depreciation is yet another year-end tax planning consideration. Farmers who purchased farm assets in the current year can accelerate the depreciation deduction for those assets. Bonus deprecation allows for a 100 percent write of qualified property placed in service in 2022.

Examples of qualified property include:

  • Farm machinery
  • Breeding livestock
  • Grain bins
  • Farm buildings

Section 179 is another method of accelerated depreciation. Section 179 differs from bonus depreciation in several ways. It is limited to $1,080,000 and that limit is reduced by $1 for every $1 over $2,700,000 sent on qualifying assets. It cannot be used to create a loss and can be applied on an asset-by-asset basis to any amount up to 100 percent of the purchase price. It is not available for multi-purpose farm buildings.

Deferred Payment Contract

A deferred payment contract is an installment sale where a cash basis farmer can sell crops in the current year but pay for the commodity until the following year through a deferred payment contract. While payment is deferred until next year, the taxpayer can realize the deferred payment as income in the current year or the following year on a contract-by-contract basis. This added flexibility can be a helpful planning tool. Read our Deferred Grain Contracts article for more information.

Prepaid Expenses

Cash basis farmers and ranchers can prepay for some supplies that can be deducted in the current tax year, but that will be used in the following tax year. Some examples of supplies that can be prepaid include:

  • Feed
  • Seed
  • Fertilizers
  • Similar farm supplies

The amount that can be prepaid is subject to some limitations.

Charitable Giving of Commodities

Farmers that are charitably inclined can gift a commodity such as grain or cattle. A commodity that is gifted to a charitable organization will not be taxed. Not only does this strategy save on income taxes, but it also saves farmers on self-employment taxes – a double benefit. This would provide a better tax benefit for active farmers, especially if they planned to donate to charity anyway. Learn more about eligibility and requirements for charitable giving of commodities here.

Questions?

While the future looks somewhat uncertain, your decisions today can significantly impact your success, or lack thereof, during a recession. All the above areas can be part of a productive discussion with your CPA. Farmers with questions about their specific situation can reach out to Adams Brown’s agriculture team.