Extension and Ag Research News


Year-end Income Tax Planning Advised for Agricultural Producers

By Ron Haugen, Farm Economist

NDSU Extension Service

With higher commodity prices for crops and livestock, the agricultural economy of North Dakota is looking positive at this time. Crop yields also have been good through most of the state. These positive factors may mean that producers will have higher incomes than normal. With higher incomes, income tax planning is even more important.

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 or the year. Do not forget any income that was deferred to 2007 from a previous year. Also, depreciation needs to be estimated. It is best to try to spread out income and expenses so a producer doesn’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 2008. 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 2007.
  • Pay taxes or interest. Paying taxes or interest can be done before the end of the year to increase 2007 expenses.

Items to note in preparing 2007 income tax returns:

  • Income averaging can by used by producers to spread tax liability to lower income tax brackets in the three previous years. This is done on schedule J. North Dakota farmers who elect to use income averaging for federal purposes also may use Form ND 1FA income averaging for North Dakota income tax calculations.
  • 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 are made the year after the crops 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 sold prematurely. In the second method, income from livestock held for draft, breeding or dairy purposes is not taxed if like-kind animals are repurchased within four years (or more depending on weather conditions or disaster declarations) from the end of the tax year in which the animals were sold. Only the gain on the 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 $125,000 of machinery or equipment purchases in the year of the purchase. There is a dollar-for-dollar phaseout for purchases of more than $500,000.
  • The domestic production deduction credit is a credit against tax liability. Generally, producers who grow and produce grain and livestock and have hired labor qualify for this deduction. For 2007, the deduction has increased from 3 percent to 6 percent. The calculation is 6 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 loan rules allow producers to make an annual election on whether to treat Commodity Credit Corp. 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.
  • New for 2007 is the North Dakota property tax relief income tax credit. The credit is 10 percent of the combined amount of residential and agricultural property taxes paid. This credit is used to offset North Dakota income tax liability. The maximum credit is $500 for singles and $1,000 for married couples filing jointly. There also is a new credit for commercial property taxes paid. If you have questions about the property tax relief income tax credit, call the North Dakota Tax Department at (800) 328-2760.

Information on agricultural topics can be found in the “Farmers Tax Guide,” publication 225. It can be obtained at any IRS office or ordered by calling (800) 829-3676. Any questions about these topics should be addressed to your tax professional or the IRS at (800) 829-1040 or http://www.irs.gov. Answers to North Dakota income tax questions can be addressed by calling the North Dakota Tax Department at (800) 638 2901 or on the Web at http://www.nd.gov/tax/.

NDSU Agriculture Communication

Source:Ron Haugen, (701) 231 8103, ronald.haugen@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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