A Few Year-End Tax Planning Tips for Farmers

Overview

As 2014 draws to a close, several weeks remain during which farmers and other taxpayers can still take action that will impact their 2014 tax returns. Although some producers may find their incomes lower in 2014 than in recent years, they may still seek ways to reduce income for the year or to defer it to future, potentially lower-income years.  Several possible strategies are worth reviewing.

Section 179 Deduction and Bonus Depreciation

A number of important tax provisions expired at the end of 2013. Among them, was the enhanced I.R.C. §179 deduction, which allowed farmers to currently deduct up to $500,000 of the tax basis  of certain business property or equipment during the year in which the property was placed into service. For 2014, the amount of the §179 deduction decreased to $25,000. Although Congress has not yet acted to increase this amount, it is anticipated that legislation will pass to increase the amount of the §179 deduction (probably to $500,000) retroactively to the beginning of 2014.  Nothing is certain, however, until such legislation is enacted.  It should be noted that the enhanced amount was available for fiscal-year filers until the end of their 2013 tax year, which was sometime in 2014.  For calendar-year taxpayers, the enhanced amount is not available at all for 2014 without congressional action. 

Also expired for tax years beginning after 2013 (without Congressional reinstatement) is 50 percent bonus depreciation. Under this provision, producers could claim an additional first-year tax deduction equal to 50 percent of the value of qualifying property. The bonus depreciation deduction, which was available only for new property, applied to farm buildings, in addition to equipment. It is not clear whether Congress will revive bonus depreciation.

We will keep you informed as to the status of legislative action. This information is particularly important if a large purchase has been made or is on the horizon. Remember that deductions are only allowed for property that is placed in service during the year in which the deduction is taken.

Charitable Gifts

A win-win strategy for reducing tax liability is to increase charitable giving.

Grain Gifts. Because of potentially significant tax savings, cash-basis farmers should consider gifting grain directly rather than selling the grain and then gifting the proceeds to charity. To qualify for the savings, certain technical steps must be followed. Otherwise, the IRS will deem the transfer to be a sale by the farmer, with a subsequent gift to the charity. To survive scrutiny, the commodity must be unsold inventory in the hands of the farmer. Title to the commodity must be transferred to the charity before the grain is sold. For example, the corn would be delivered to the elevator with a storage receipt made out to the charity. The charity receives a letter from the farmer stating the corn belongs to the charity and that the charity may sell the corn as it sees fit. The grain elevator should only issue a check to the charity once the charity has given a specific instruction to sell.

A gift of grain is different from a post-sale donation to the church because the income from the grain is never received by the farmer. Thus, the tax savings flows from removing the income before recognition, rather than from taking a charitable deduction after recognizing the income.  This can greatly benefit those taxpayers who do not itemize deductions. Furthermore, materially participating farmers benefit from gifting grain because lower income means less self-employment tax.

If you are considering a year-end grain gift, please consult with a tax professional to review any potential savings and to ensure that the proper steps are followed.

Other Charitable Gifts. For those taxpayers who itemize, charitable deductions can result in great tax savings. Donors should ensure, however, that they receive a “contemporaneous written acknowledgement” from the charity before claiming the deduction for any single contribution of $250 or more. The acknowledgement must state that no goods or services were provided by the organization in exchange for the contribution. Without such an acknowledgement, the IRS will disallow the deduction if the taxpayer is audited. It is a taxpayer’s responsibility to obtain the acknowledgment before the tax return is filed. A cancelled check or other evidence of payment is not sufficient.

Prepaying Expenses

Farmers might also consider prepaying 2015 expenses (in an amount up to 50% of all deductible farm expenses) in 2014, thereby making the expenses deductible against 2014 income. To qualify for the prepayment deduction—which applies to inputs such as feed, seed, fertilizer, and similar farm supplies—the farmer must make an actual purchase rather than just a deposit. The product purchased must be used or consumed in the next 12 months. The farmer must also have a business purpose (such as fixing a maximum price or ensuring supply) for the prepayment other than merely tax avoidance. Finally, deducting the prepayment must not result in a material distortion of the farmer’s income.

Conclusion

Although this article only highlights a few potential tax strategies, a number of other year-end tools are available. Farmers should spend some post-harvest time reviewing their books and making some year-end decisions. For those who may have lower 2014 income and an expectation that 2015 income will be higher, it might be beneficial, for example, to slow depreciation expenses and delay an asset purchase. Although time gets tight, a year-end visit with a tax professional may be a wise investment.

 

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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