12/9/2021 Year-End Tax Planning #448

Ron Haugen, NDSU Extension farm management specialist, joins Sound Ag Advice to discuss some ways ag producers can management their tax liability.

What is Sound Ag Advice?

“Sound Ag Advice” presented by the NDSU Extension Service features NDSU Extension specialists and staff talking about current crop and livestock issues. “Sound Ag Advice” is free and can be used in any way you see fit.

Speaker 1: Kelli Anderson, NDSU Agriculture Communication Specialist
Speaker 2: Ron Haugen, NDSU Extension Farm Management Specialist

Kelli: This is Sound Ag Advice, a weekly feature presented by NDSU Extension. I'm Kelli Anderson, and I'm joined this week by Ron Haugen, NDSU Extension Farm Management Specialist. Today we're going to be talking about why agriculture producers should do year-end tax planning. So Ron, why is it so vital for producers to do this, and what are some items they should be thinking about as we close out the year?

Ron: It's always important to do a year-end tax planning, so you don't have a real surprise when you actually do your income taxes. And you want to try keep your income and expenses as level as possible, so you don't have one year of really high income or one year of really low income. And so it's always best to do some planning before the end of the year, when you can actually do some changes, there is a lot of leeway that producers have as far as planning to be aware of.

There's depreciation methods. Now, there's a 200% declining balance depreciation for 3, 5, 7 and 10-year property, and producers have to use 150% declining balance for other property like 15 and 20 year property. Most new agriculture machinery and equipment except grain bins, the recovery period is five years, so more of an accelerated depreciation there. And of course, we all know about the 179 expense where you can write things off, and that's indexed for inflation. So right now, it's set at $1,050,000 for new or used machinery purchased in the tax year. So you had still have some time to purchase the equipment. If you purchase up to $2.62 million then it gets phased out. And remember now on the 179 expense, that the equipment must be used in 50% or greater for the for the business. There's also the additional first year bonus depreciation. It's available for a new property where you actually just take 100% of the adjusted basis after any 179 expense.

Kelli: Now Ron, I know that the drought this year has affected a lot of producers. Is there anything producers can do tax planning wise to mitigate their losses due to drought?

Ron: Well, because of the drought, probably incomes aren't as good as they should be. So probably, they might not have a tax consequence. But there was a lot of government payments that were issued, so then so then you need to weigh the different types of income there. But I should mention that crop insurance proceeds, because there's maybe a lot of people that collected crop insurance proceeds because of a bad crop or low yield because of the drought, you can defer those proceeds to the next tax year. But you need to show on your tax return that you normally sell your crops, in the next tax year.
And also, producers that have had to sell their livestock, they're in a tough situation. They didn't have have any hay, they couldn't buy any hay, their pastures drying up, they may have had been forced to sell their livestock. There's a couple of different provisions with the IRS that you can defer the sale of these of the livestock. And there's a couple of different code sections to be concerned about. You basically replaced the animals at a later date, or there's another provision where you can defer the income for one year and those are for animals that you sold in excess of your normal sales. Always talk to your tax advisor in doing something like that.

Kelli: Ron, are there any other final items to note for this year?

Ron: Well, as always, with tax planning, you can almost always prepay it, expenses like feed and fertilizer and seed can be paid this year. With the high cost of fertilizer and chemicals, prepaying is something that's really a financial decision you want to make if you think the price is going to go higher or you think it's going to go down. And so if you want to prepay some now, that's a financial decision to make and a tax decision. And if you do have a high income for this year, you can defer that to the next year. The crops and livestock sales can be deferred by using a deferred payment contract. Purchasing machinery equipment, as I mentioned, can be done by the end of the year using the 179 expense. And I always encourage producers to, especially if they're young, maybe contribute to a retirement plan and it's a way to reduce your taxes some and also start saving for retirement.

Kelli: And where can producers go if they'd like more information on tax planning?

Ron: Well, the IRS is available at their 800 number, but it's pretty difficult. The IRS is really understaffed and overwhelmed. You probably have to wait on the telephone quite a long time. But the IRS website is very good. They have some areas there where you can look at frequently asked questions. And I always encourage people to look at the farmers tax guide. That's publication 225. It's actually a publication that's put together jointly with the IRS and Extension educators around the country, and is a very good publication for producers to look at.

Kelli: Thank you so much for this information today, Ron. This has been Sound Ag Advice, a weekly feature presented by NDSU Extension.