Ag Producers Should Do Year-end Income Tax Planning

NDSU Agriculture Communication

Agricultural producers should do tax planning before the end of the year.

"It is that time of the year again to think about year-end tax planning," says Ron Haugen, North Dakota State University (NDSU) Extension farm management specialist. "Generally, all or most of the government payments that farmers and ranchers received during the year must be reported as income in the year it is received," says Haugen.

"When tax planning, it is best to start with year-to-date income and expenses and estimate them for the remainder of the year," says Haugen. "Estimate depreciation and include any income that was deferred to 2021 from a previous year. It is best to try to spread out income and expenses so producers don't have abnormally high or low income or expenses in any one year."

Here are several items to note for tax planning:

* Farmers and ranchers are allowed to use 200% declining balance depreciation for three-, five-, seven- and 10-year property. A 150% declining balance is required for 15- and 20-year property.

* For most new agricultural machinery and equipment (except grain bins), the recovery period is five years.

* The section 179 expense has increased. It generally allows producers to deduct up to $1,050,000 on new or used machinery or equipment purchased in the tax year. There is a dollar-for-dollar phase-out for purchases in excess of $2,620,000. Equipment must be above 50% business use to use Section 179.

* The additional 100% first-year bonus depreciation is in effect. It is available for used as well as new property. It is equal to 100% of the adjusted basis after any section 179 expensing.

* Net operating loss (NOL) carryback rules are in effect. Producers can carry back losses to offset income.

* Like-kind exchanges are not allowed for personal property but are allowed for real property.

* Income averaging can be used by producers to spread the tax liability to lower income tax brackets in the three previous years. This is done on schedule J.

* Producers who elect to use income averaging for federal purposes also may use Form ND-1 FA (income averaging) for North Dakota income tax calculations.

Other tax planning items to note:

* Crop insurance proceeds can be deferred to the next tax year if a producer is a cash-basis taxpayer and can show that normally income from damaged crops would be included in a tax year following the year of the damage. Producers affected by drought may want to consider this option.

* A livestock income deferral is available for those who had a forced sale of livestock because of a weather-related disaster. This is a very important consideration for producers that had to sell livestock because of this year's drought.

* Prepay farm expenses. Feed, fertilizer, seed and similar expenses can be prepaid. Typically, discounts are received by paying for these expenses in the fall. Producers can deduct prepaid expenses that do not exceed 50% of their other deductible farm expenses.

* Defer income to 2022. Crop and livestock sales can be deferred until the next year by using a deferred payment contract. Most grain elevators or livestock sale 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 2021.

* Contribute to a retirement plan such as a simplified employee pension plan, savings incentive match plan for employees or individual retirement account.

Information on agricultural topics can be found in the Farmers Tax Guide, Publication 225. It can be obtained at any IRS office, ordered by calling 800-829-3676 or found online at https://www.irs.gov.

Additional questions on this topic should be addressed to your tax professional or the IRS at 800-829-1040 or https://www.irs.gov. North Dakota income tax questions can be addressed to the North Dakota Tax Department at 877-328-7088 or https://www.nd.gov/tax.