|
December
14, 2006
Year-end Income
Tax Planning Advised for Agricultural Producers
By Ron Haugen,
Farm Management Specialist
NDSU Extension Service
Agricultural producers
should do tax planning before the end of the year. It is best to start
with year-to-date income and expenses and estimate them for the remainder
of the year. Do not forget income that was deferred to 2006 from a previous
year. Also, depreciation needs to be estimated. It is best to try to spread
out income and expenses so you don’t have abnormally high or low
income or expenses in any one year. Caution should be used in deferring
too much income because it may push you into a higher tax bracket in a
future year.
Here is what producers
can do before the end of the year to limit tax liability:
- Prepay farm expenses.
Feed, fertilizer, seed and similar expenses can be prepaid. Typically,
discounts are received by paying for these expenses in the fall. You
can deduct prepaid expenses that do not exceed 50 percent of your other
deductible farm expenses.
- Defer income to
2007. Crop and livestock sales can be deferred until the next year by
using a deferred payment contract. Most grain elevators or sales barns
will defer sales until the next tax year. Producers should be aware
that they are at risk if the business becomes insolvent before the check
is received and cashed.
- Purchase machinery
or equipment. Machinery or equipment purchases can be made before the
end of the year to get a depreciation or 179 expense deduction in 2006.
- Pay taxes or interest.
Paying taxes or interest can be done before the end of the year to increase
2006 expenses.
Items to note in preparing
2006 income tax returns:
- Income averaging
can by used by farmers to spread tax liability to lower income tax brackets
in the three previous years. This is done on schedule J.
- Crop insurance
proceeds can be deferred to the next tax year if you are a cash-basis
taxpayer and can show that normally more than 50 percent of your crop
sales crops are made the year after they are grown.
- Livestock deferral
can be done for those who had a forced sale of livestock because of
a weather-related disaster. Two methods can be used. In the first method,
income can be deferred to the next year for all types of livestock.
For the second method, purchased replacement livestock can be used within
four years from the end of the tax year in which the animals were sold.
This method is only for livestock held for draft, breeding or dairy
purposes. Only the gain of sale of those animals above and beyond what
was normally sold would qualify for postponement.
- The 179 expense
election generally allows producers to deduct up to $108,000 of machinery
or equipment purchases in the year of the purchase.
- The domestic production
deduction credit (new in 2005) is a credit against tax liability. Generally,
agricultural producers who grow and produce grain and livestock, and
have hired labor, qualify for this deduction. For 2006, the deduction
is 3 percent of the lesser of net farm income (from Schedule F) or adjusted
gross income. This is limited to 50 percent of the wages paid by the
producer. This deduction is not claimed on Schedule F. It is not used
in computing self-employment income. It is clamed on Form 1040 by using
Form 8903.
- Switch grain loan
elections. Grain (Commodity Credit Corporation) loan rules allow producers
to make an annual election on whether to treat CCC loans as loans or
income. Previously it was a one-time election that could not be changed
without permission from the Internal Revenue Service. It may be advantageous
in reducing tax liability to switch methods.
Any questions about
these topics should be addressed to your tax professional or the IRS at
(800) 829-1040 or www.irs.gov.
###
Source: Ron
Haugen, (701) 231 8103, Ronald.Haugen@ndsu.edu
Editor: Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
|
BeefTalk
Prairie
Fare
Plains
Folk
Hortiscope
Market Advisor:
Crop
Livestock
|
