February 13, 2003

Specialist Reviews Income Tax Changes for Agricultural Producers

As tax preparation time gets under way, agricultural producers need to be aware of a number of changes in tax regulations.

"Staying up-to-date on these changes will help producers prepare their returns accurately," says North Dakota State University Extension farm management specialist Ron Haugen. Farmers have until March 1 to file their returns without penalty. If they made an estimated tax payment by Jan. 15, they have until April 15 to file.

Items to note for 2002 income tax preparation:

• The personal exemption amount has increased to $3,000.
• The standard deduction has increased to $7,500 for married filing jointly and $4,700 for singles.
• The 179 expense for 2002 is $24,000. It is scheduled to remain at $24,000 for 2003.
• The mileage rate for 2002 is 36.5 cents per mile, scheduled to go to 36 cents per mile in 2003.
• W-2's can be filed online for businesses with fewer than 10 employees. For more information, call the Social Security Administration at (888) 772-2970 or visit its Web site at: www.ssa.gov/employer. 
• The social security wage base is $84,900, scheduled to be $87,000 in 2003.
• The self-employed health insurance deduction is at 70 percent. It is scheduled to go to100 percent in 2003.
• The child tax credit is $600 for each qualifying child under age 17.
• The annual gift exclusion is now $11,000.
• Annual IRA contributions are at $3,000 for 2002 through 2004.
• Producers are allowed to change the way they treat Commodity Credit Corporation loans. If you previously elected to treat CCC loans as income (taxable when you take the loan), you can file Form 3115 to change and treat them as loans. You must keep accurate records and track bushels through the final grain sale if you change methods.
• Producers who have forced livestock sales because of drought (or other weather-related conditions) and want to later replace these animals may postpone gain on the portion of sales that are above normal sales. The replacement animals must be the same type of livestock and must be replaced within two years. An attachment to the tax return is required in the year of the sales and the year of replacement.
• A 30 percent special depreciation allowance is allowed on property acquired after Sept. 10, 2001, and before Sept. 11, 2004. The property must be new property with a recovery period of 20 years or less. An election must be made to not take this special depreciation allowance.
• There is a new credit for qualified retirement savings contributions.

Haugen notes that the IRS is planning to do more payroll and information return audits in the future. Producers are encouraged to file their information returns on time and accurately. The IRS is encouraging electronic filing and electronic tax payments (EFTPS). Electronic filing and payment has been made easier, fewer errors result and it is more cost efficient for the IRS. For more information, check out the IRS Web site at www.irs.gov.

"Remember that depreciation rules for property acquired in a like-kind-exchange (one property traded for another property) are in effect," Haugen says. Taxpayers must make two depreciation calculations. The cash paid to boot is depreciated as one line-item, and the old property (the property traded in) is depreciated according to the original depreciation schedule. The old property appears on the depreciation schedule even if it is no longer owned.

Income averaging rules for farmers have been in effect since tax year 1998. According to Haugen, income averaging allows farmers to level out higher income years with lower income years. "Remember that negative taxable income values may be included in the calculation. Tax returns should be reviewed for 1999, 2000 and 2001 to see if a negative taxable income existed for any of the base years. You have until April 15, 2003, to file an amended return for 1999. An amended return may produce a refund," he says.

Haugen notes that the use of income averaging my 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.

Crop insurance proceeds for 2002 received in 2002 may be deferred to 2003 if you qualify, Haugen says. You must use cash accounting and show that you would have, under normal business practices, included the sale from damaged crops in any future tax year.

The North Dakota tax rates are no longer tied to the federal rates. The ND-1 form is used to file state income taxes figuring tax on North Dakota income, using the North Dakota rates.

Farmers who elect to use income averaging (Schedule J) for federal purposes, should also use the new ND-1FA income averaging form for North Dakota.

Any questions should be addressed to your tax professional, the Internal Revenue Service at (800) 829-1040 or the North Dakota State Tax Department at (800) 638-2901. Also, you may order Publication 553, Highlights of 2002 Tax Changes, by calling (800) 829-3676.

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