Income Tax Changes for Agricultural Producers Highlighted

As tax preparation time gets underway, agricultural producers need to be aware of a number of key tax regulations including a significant change in some depreciation rules and income averaging, says an economist with the NDSU Extension Service.

"Staying up-to-date on these changes will help producers prepare their returns accurately," says Ron Haugen.

The change in depreciation rules is for property acquired in a "like-kind-exchange" (one property traded for another property). It is effective for property placed in service on or after Jan. 3, 2000. "The change now requires taxpayers to make two depreciation calculations for the same property," Haugen says.

Previously the adjusted basis of the old property (the trade-in) plus the cash paid to-boot was the basis for depreciation in the new property. Now, the cash paid to-boot is depreciated separately and the old property is depreciated according to the original depreciation schedule. The old property appears on the depreciation schedule even if it is no longer owned. Thus, two depreciation calculations are needed. "Note that the total amount of depreciation taken over the life of the asset is not changed with this new method, only the way it is calculated," he says.

Changes to income averaging rules will also affect farmers, Haugen notes. Current rules have been in effect since 1997 and allow farmers to level out higher income years with lower income years. Previously negative taxable incomes were not allowed in the calculations. Now negative values may be included.

"Review your tax returns for 1998 and 1999 to see if a negative taxable income existed for any of those base years," Haugen says. "An amended return may result in a refund. But also note that the use of income averaging may trigger the alternative minimum tax. If the alternative minimum tax is triggered it may result in a higher tax and negate the income averaging benefit." Legislation is pending in Congress to eliminate that problem.

Other key items to remember:

• A $500 tax credit for each qualifying child under age 17.
• The personal exemption amount has been increased to $2,800.
• The 179 expense for 2000 is $20,000. It is scheduled to increase to $24,000 for 2001 and 2002 and $25,000 for 2003.
• The milage rate for 2000 is 32.5 cents per mile.
• The self-employed health insurance deduction is at 60 percent. It is scheduled to remain at 60 percent for 2001 and increase to 70 percent in 2002.

Farmers have until March 1 to file their returns without penalty. If they make an estimated tax payment by Jan. 15, they have until April 16 to file. If you have questions about these changes, contact your tax preparer or call the Internal Revenue Service at (800) 829-1040.

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Source: Ron Haugen, (701) 231-8103
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu