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Farm income tax strategies for 2020

By Steve Johnson - Columnist | Nov 24, 2020

The large increase in government payments, crop insurance claims and higher market prices has created more taxable income for 2020 than many farmers anticipated. This means some unexpected income tax consequences that might need to be addressed soon.

– Prepay expenses

This only works for cash basis taxpayers, not accrual. Some examples that you may prepay are seed, fertilizer, chemicals, feed, up to 12 months land rent that is coming due and any accrued business interest. You must have a business reason for doing so, such as to lock in a price or to insure supply. Tax avoidance is not a good business reason.

– Defer income

Using deferred payment contracts for grain sales gives you a lot of flexibility. If you like the price today, you can lock the price in, but take the payment in 2021. The added flexibility is that if you are a cash basis taxpayer and find that you needed the income in 2020, you can pull the contract back into 2020 from 2021 and report the income in 2020, even though you will not receive the cash until 2021. There is a catch, you must pull back a full contract, you cannot pull back a portion of a contract. To have added flexibility you should have multiple smaller contracts and not just one large one. This allows you to have a better chance at managing your income to a level that you want. The added bonus is that this decision can be made after the end of the year.

Crop insurance also may be deferred if the payment received is due to crop damage and not price such as occurred in 2020. This assumes you would have normally sold the majority of the crop the following year and requires a deferral form be filed.

– Depreciation

There are several options for determining how much depreciation you want to take on new asset purchases. If you want to use accelerated methods, you have available Section 179 and bonus depreciation. For 2020, the maximum Section 179 is $1,040,000. Farm machinery, grain bins, solar grids, breeding livestock, confinement buildings and field tile all qualify for Section 179. They must be used more than 50% in the business of farming and it is an asset-by-asset decision. Section 179 cannot create a net operating loss. If you take more than allowed, the remainder will carry over to the following year. The good news is that unlike in previous years, Iowa now couples with the federal rules.

Bonus depreciation is another accelerated method of depreciation. Unlike Section 179 where you choose how many dollars you expense, with bonus depreciation it is all or none. You expense either the full purchase price or none of it. It can be used on new or used assets and can be used on 20-year property, such as machine sheds. Bonus depreciation is a class-by-class decision. Bonus depreciation can create a net operating loss, unlike Section 179. Iowa did not couple with the federal rules on bonus depreciation, so you may reduce federal income, but not Iowa income.

– Consult with your tax advisor

Other tools, such as retirement plans, charitable giving and college saving plans can also help manage income tax liabilities. Everyone’s tax decisions are different, so it’s advisable to contact your tax preprayer to determine what is best for your tax situation.

Steve Johnson is an Iowa State University Extension and Outreach farm management specialist. He can be reached at sdjohns@iastate.edu.

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