In thinking about the year’s end, it’s important (and time to start!) planning for taxes. Farmers have several weeks remaining where you they still take action that will impact their 2015 tax returns. Although some producers may find their incomes lower in 2015 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.
Set Date to Determine Income & Expenses
The most important step in year-end tax planning is to establish a date to determine income and expenses for the year. Larry Gearhardt, OSU Extension Asst. Professor, Taxation, suggests that around December 1 of this year, the farmer should determine, as close as possible, what his/her income and expenses are for the year. This leaves ample time for the farmer to take action to reduce income taxes, if possible. As soon as the ball drops on New Years Eve, the farmer has lost his opportunity to take action to reduce his taxes in 2015.
The most basic year-end tax planning is timing income and expenses, if possible, so that the income and expenses occur in the year that is most beneficial to the farmer. If 2015 is a high income year, the farmer should delay the receipt of revenue until 2016 and pay for 2016 expenses this year. This becomes especially important under the current circumstances where it appears as if 2016 income will be lower than previous years.
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. Make sure that the commodity remains 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.
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.
Farmers might also consider prepaying 2016 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.
Section 179 Deduction and Bonus Depreciation
An important tax provision that has not been enhanced (per Congress’s discussions) for 2015 is the Section 179 limit remains at $25,000, where it was previously $500,000 in 2013 (before decreasing in ’14). This provision allows farmers to deduct $25,000 of the tax basis of certain business property or equipment during the year in which was property was placed into service. This information is particularly important if a large purchase has been made or is on the horizon.
With all of your tax decision, please consult with your tax professional to review any potential savings and to ensure that the proper steps are followed.
Information from here and here.