Farmers should plan for their taxes from January to December, not just at the end of the year. If no planning has taken place by now, the first step is to gather information about the income and expenses of the operation. Income and expense totals, a current depreciation schedule, along with the identification of certain capital gain items, and current tax tables in the form of a spreadsheet are all that is needed to get a simple tax estimate. Year-long tax planning enables a farmer to take advantage of the many new tax law changes that have been enacted. A few of these changes involve the handling of the new 2002 Farm Bill Direct Payments. Direct payments are received, half at sign-up and the other half in the fall when the crop is harvested. Payment income is taxable in the year received. Depending on the time the farmer signed up, payments could have been received in two different years or in a single year. This is clearly a tax planning option. Although not too many crops will qualify for the 2002 Farm Bill Counter-Cyclical Payments this year, payments are taxable in the year received. These payments are based on market price and national averages. They are made in three payments over a 12-month period. Two of the payments are advanced and earned based on the final national market average price, and the final payment is made at the end of the marketing period. Farmers have the option of foregoing their advanced payments, if earned, until the end of the 12-month period. These payments could be received in the same year or in two different years depending on the tax strategy of the farmer. Another tax planning tool is the 2002 change in handling CCC crop loans. Farmers can now change their election of methods for tax reporting CCC loans. To switch from the income method to the loan method requires completion and filing IRS Form 3115. Farmers can also switch from the loan method to the income method by filing an I.R.C. 77 election with their tax return. These changes can be made yearly but require all covered commodity crops in any given year to be treated the same. Several other changes that have broad tax planning implications are the changes in tax law relating to depreciation. These changes affect Section 179 Depreciation as well as First-Year “Bonus” Depreciation provisions. Section 179 expensing deduction for first-year depreciation increased to $100,000 beginning Jan. 1, 2003. This was an increase from the $24,000 that applied to 2002 taxes. This means that farmers can expense up to $100,000 of equipment purchases in the first year. First- year “bonus” depreciation of 30 percent also includes a provision for 50 percent on property purchased after May 5, 2003. The State of Minnesota and many other states do not allow the claiming of the total “bonus” depreciation in the year taken on the federal tax return. Because of needed extra depreciation records, it is advisable to consult with your tax preparer to see if you need to take advantage of this provision. As you can see, tax planning is a year-long exercise. For more information on tax planning and estimates contact Northland Community and Technical College for a Farm Business Management Program near you by calling (800) 959-6282.
