2015 farm income tax -- tale of two tails

pdf fileAgDM Newsletter
November 2015

This is a year when you will find farmers who were aggressive in marketing early and have pushed sales from 2014 into 2015 and then there are those who were hoping for better markets and have very little grain marketed ahead. One of the brighter spots in the livestock sector is the cow/calf producer, who should also have a good year, but probably not as good as 2014.

Farmers with good incomes will be looking for deductions. One of the most used deductions in past years has been the Section 179 Expense Election. In 2014, the amount available was $500,000, for 2015 it is $25,000. It is anticipated that the $500,000 deduction will be extended to 2015, but it is not guaranteed and in the past it has been very late in the tax year before it has been passed. It appears that both the House and Senate agree that the Section 179 deduction should be $500,000, but some of the discussion is for how long: should it be another one year extension or be made permanent? Trying to plan for your farming business and not knowing what the tax laws will be makes tax planning frustrating.

Farmers should be aware that purchasing machinery strictly to reduce the income tax burden is not always the best plan, especially when looking ahead at a depressed farm economy. If money is borrowed to purchase the machinery, then payments have to be made and this will reduce working capital. Working capital is disappearing at an alarming rate and this is the capital that allows a farm business to stay in operation.

Farm operations that are not having a good year may be looking at a net operating loss (NOL) on their tax returns. A net operating loss not only looks bad, but it robs you of tax free income. In 2015, the government allows a couple filing a ‘married filing jointly’ return a standard deduction of $12,600. They are also allowed a personal exemption of $4,000 for each dependent. In this situation, a family of four could earn $28,600 of total income and not pay any Federal income tax, although they could possibly owe a small amount of self-employment tax and state income tax. This $28,600 of income is essentially tax-free income and if it is not there you lose all or a portion of your itemized and personal exemptions, they can’t be carried over and used the next year. It may be more advantageous to move some income from 2016 into 2015 or defer paying some expenses until 2016 to enable the use of the allowable government deductions. Selling grain at a lower price, but having it tax free may be a more prudent decision. Many times the net operating loss can’t be avoided; the loss is just too large to be offset by manipulating income and expenses. And in some operations, the losses could be large in 2015.

When a loss occurs, farmers have the option of carrying the net operating loss forward to offset the income in a future year or carrying it back two or five years. This is an election that is made when filing the tax return. Carrying back the net operating loss may be a good option for 2015. Many farmers have had good profits the last two to five years and they paid considerable taxes during those years. Carrying back the net operating loss allows a farmer to recalculate their income taxes for those years and have some of those taxes refunded, if allowable.

For the 2015 tax year, income averaging may not be as helpful as it has been in past years. In this situation, farmers can take a portion of their income, average it for the three previous years, and recalculate the income tax for those years. In some situations it is possible to move to drop a tax bracket and lower your overall income taxes. This has been heavily used the past few years due to the higher incomes and will not have the advantage it once did.

If you are not sure of your farm income and need more flexibility, do not forget about using deferred payment contracts. Cash basis farmers, not accrual, can sell their grain now to lock in a price using a deferred payment contract to defer the income to 2016. It is important to note that this must be a signed, legitimate deferred payment contract, not just asking your grain buyer to hold your check. If you get to the end of the year and see that you need more income in 2015, you can pull a deferred payment contract back into 2015 and declare it as taxable income in 2015, even though you won’t receive the cash until 2016. It must be a full contract, you can’t pull back a partial contract, so for best results have multiple smaller contracts in place to give you more flexibility.

Tax laws are complicated and there is usually an "and, if, or but", always confer with your tax advisor and accountant for your tax planning needs.

 

Charles Brown, farm management specialist, 641-673-5841, crbrown@iastate.edu