“TurboTax and other consumer software programs are great, but they only do the calculations. Business and farm tax returns require more knowledge.” - Andy Biebl, CPA
Many farmers and ranchers across the South continue to reel from drought, while some are profiting from high commodity prices. Whether 2013 has been good for you or bad, you can take steps before year end to improve your 2013 tax outlook.
Paul Gutierrez, professor and Extension economist at New Mexico State University in Las Cruces, recommends that as 2013 winds down, you take time to estimate your income and expenses.
“You can take measures now to defer income to 2014 or prepay expenses for 2014 operations,” Gutierrez says.
Terry Sherrill, a certified public accountant (CPA) in Gruver, Texas, specializing in agriculture, says dry weather continued through the spring in northwest Texas.
“The drought devastated our winter wheat crop, but it's shaping up to be a banner year for fall crops. It will be hit-and-miss for stocker cattle operators, depending on when they bought or sold stock and feed. This adds up to a lot of tax implications,” says Sherrill, who serves on the board of Great Plains Ag Credit and chairs the cooperative's audit committee.
Gutierrez, Sherrill and other experts suggest the following steps.
1. Assess income and expenses. In November and December, take stock of your 2013 income and expenses and work with your tax preparer to decide where you want your taxable income to be. Nonfarm businesses use accrual accounting for tax purposes, where you record actual expenses and income. Because of agriculture's volatility, agricultural producers may use cash accounting.
“Farmers have more flexibility to influence their tax liability,” says Andy Biebl, a CPA with CliftonLarsonAllen LLP in New Ulm, Minn., who writes a tax column for Progressive Farmer and DTN. “You can push your income back and forth from year to year to level it out. And if you experienced a loss in the current year, special rules allow a carryback of the loss to offset the five prior years' income, with refund of those prior taxes.”
2. Make purchases or sell assets. If you're having a great year, you might defer income from sales until 2014, or prepay 2014 expenses. Determine your exact taxable income before you market fall crops, Sherrill says. If you decide to defer sales, you and the grain elevator representative must sign a contract before crops are delivered, and the document should specify that no payment is made prior to 2014, Gutierrez adds. If you purchase next year's inputs now, ensure that the product will be available when needed, Sherrill advises.
3. Decide whether to buy equipment. Farm equipment sales are booming, in part because the IRS Section 179 tax break, which allows you to deduct equipment purchases, may shrink next year.
“For 2013, taxpayers can deduct up to $500,000 of such purchases, subject to some limitations,” Sherrill says. “For 2014, it's scheduled to roll back to $25,000.”
It normally takes seven years to depreciate equipment, but some producers can compress this into a single year. As the Wall Street Journal reported on Aug. 14, “This so-called jumbo depreciation program is scheduled to expire at the end of 2013.”
Using these tools should be part of your business plan, not just a tax strategy. As Gutierrez explains, “It doesn't pay to buy a $100,000 tractor unless you really need it.”
4. Consider deferring income. If you sold breeding or dairy livestock because of the drought, Gutierrez says you may be able to spread the income over two years, giving you time to reinvest. Another IRS provision could allow you to defer livestock receipts if a disaster was declared in your area. You also may defer crop insurance payments to next year to reduce your tax liability, Sherrill adds, but if you already have deferred income from previous years, your 2013 income may run higher than expected.
5. Look into special rules if you sold or leased land. “We're the driest state in the nation, and some New Mexico ranchers are leaving the business — they've had enough,” Gutierrez says, referring to his home state. Land also has sold in Sherrill's area, but the drought may not have been the reason.
“People are getting out because of age and a lack of heirs, or a belief that land values are as high as they can get,” Sherrill says. “Some may have sold land in anticipation of long-term capital gain rates increasing. My advice is, develop an estate and succession plan.”
If you sold your herd and leased your land, Gutierrez notes that you may be able to spread the rental income over several years.
6. Check into depreciating improvements. The drought has prompted some producers to dig new wells.
“Farmers will want to carefully evaluate the optimal method to expense and depreciate the cost of such improvements,” says Gutierrez.
7. Bone up on employee rules. The IRS warns that it's cracking down on contractor versus employee
status. In addition, plan to deduct employee benefits such as health insurance.
8. Seek professional help. “Never do your own taxes,” says Biebl, who recommends seeking a farm tax expert. “With the time it takes to follow IRS regulations and the changes in the system, you could never be assured that you got it right.
"TurboTax and other consumer software programs are great, but they only do the calculations. Business and farm tax returns require more knowledge.”
Biebl estimates that tax preparation may cost up to $2,000 for complex family corporations and partnerships, and for those who sell crops. But missing out on deductions could cost even more. If the IRS audits you, your exposure to penalties can be relieved because you relied on a professional.
9. Get your records in order. Working with an accountant throughout the year helps ensure proper records. Here's what you'll need:
- • IRS forms related to land rents, interest payments, services provided by others and labor expenses
- • Business-related checking account and credit card statements
- • Year-end summary statements from suppliers
- • Tax records for the past three to five years
10. Be prepared for higher rates. Special tax rules may benefit farmers and ranchers, but in the end, ag producers voice the same worry as other taxpayers. As Sherrill says, "They're concerned that taxes will rise."
For those earning more than $250,000, the worry may be well-founded.
"The new Net Investment Income Surtax of 3.8 percent on higher bracket taxpayers with certain investment income could cause additional tax," Sherrill says. "There is also a 0.9 percent surtax on earned income for higher earning taxpayers."
This article provides general suggestions, but you must follow specific tax rules to avoid penalties. Consult a professional tax preparer for advice on your situation. For more information, go to the IRS Publication 225, the Farmer's Tax Guide. Also, ask your Extension agent about tax workshops for farmers and ranchers.