Best advice: Take time now to look at the books before tax time arrives

SALEM, Ohio — Although harvest may still be on the minds of some farmers, many may want to shift their focus to tax time instead.

Dave Miller, an enrolled agent with the Wright Law Co. in Columbus, said many farmers have experienced a good income this year and may want to consider their options before the end of 2011.

The tax expert recommends farmers start now to track down the year’s income and the expenses for the year, then project what tax bracket they will be in at year’s end.

Bonus depreciation

Dr. Phil Harris, tax specialist with the University of Wisconsin-Madison, said farmers need to beware of bonus depreciation rules for 2011 so they can be prepared — but his No. 1 piece of advice is for producers to talk to their tax preparer before the end of the year.

Under the bonus depreciation for 2011, farmers can write off 100 percent of a purchase, such as a new building, new tractor or a new motor in a tractor. The depreciation rate for 2012 will only be 50 percent.

Miller emphasized it has to be new equipment, not used equipment, to receive the deduction. It can be a new motor in a used tractor or any type of overhaul on a piece of equipment.

Another example that falls under the depreciation rule is a new roof on a barn or machinery shed. However, if a farmer is considering the construction of a new pole building on their property to take advantage of a deduction, the building must be fully constructed and usable by Dec. 31. That is less than four weeks to go this year.

And, no, you can’t just have the materials purchased and sitting on your property — it has to be standing and usable.

Section 79

Another area of tax law farmers should ask their preparer about is the Section 79 provision. It allows a rapid write-off for equipment, livestock and single purpose agriculture purchases. This could also include grain bins and grain dryers.

The 2011 limit is $500,000. However, the total deduction can not exceed the total taxable amount a producer has accumulated in 2011.

“There are a lot of opportunities to claim deductions, but farmers have to consider the future and figure out if it’s the best of a deduction,” said Harris.

For example, if a farmer has purchased a $100,000 tractor, they have to decide if it’s best to take the whole 100 percent deduction under the bonus depreciation, or all or part of it under the section 79 and then take a portion of the depreciation the following year.

Level off income

Harris advises all producers to try and level their income from year to year, so that they can stay in the same tax bracket, which makes planning and purchases easier.

“The idea is that if you can level it, then a producer doesn’t get pushed into the higher tax bracket some years, which means more taxes that need paid,” said Harris.

Delayed payment

Producers may also want to consider collecting some income for 2011 through a delayed payment program. Many grain farmers participate in programs like these where farmers delay payment for their grain until the beginning of 2012 in an attempt to reduce their tax burden. However, producers should check to see they are involved in a qualified delayed payment contract.

Prepaid expenditures

Another deduction to consider is prepaid expenditures. These purchases can include fertilizer, seed and chemicals for next year’s crops. Again, Miller advises producers check with their tax adviser before making the prepay purchases.

Cash rent

One thing that can’t be prepaid is cash rent to land owners. For example, a producer can pay for the following year’s rent, but that can’t be tax deductible.

Both Harris and Miller emphasized farmers need to check with their tax preparer before assuming they will qualify for any tax deductions and acting on them.