Income Taxes – Year-End Planning Checklist for Ag Producers

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

    “With the difficult and late harvest, producers haven’t had much time to think about year-end tax planning, but it’s getting to be that time of year,” says Ron Haugen, North Dakota State University Extension farm economist. “With potential financial problems due to the difficult year, it is more important than ever to do 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 2019 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,” Haugen adds.

    There are several items to note for tax planning:

    • Agricultural producers are allowed to use 200% declining balance depreciation for 3, 5, 7 and 10-year property. 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 5 years.
    • Like-kind exchanges are not allowed for personal property, but are allowed for real property.
    • The section 179 expense has increased. It generally allows producers to deduct up to $1,020,000 on new or used machinery or equipment purchased in the tax year. There is a dollar-for-dollar phase-out for purchases above $2,550,000.
    • 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.

    Other tax planning items to note:

    • Crop insurance proceeds and government crop disaster payments 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.
    • A livestock income deferral is available for those who had a forced sale of livestock because of a weather-related disaster.
    • A two-year net operating loss (NOL) carryback is available for agricultural producers.
    • 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.
    • 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 percent of their other deductible farm expenses.
    • Defer income to 2020. 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 2019.
    • Contribute to a retirement plan such as a simplified employee pension plan, savings incentive match plan for employees or individual retirement account.

    Items to note for North Dakota:

    • Recent North Dakota law changes require that anyone filing 10 or more W-2s needs to file them electronically rather than by paper. Also, anyone filing 10 or more 1099 MISCs needs to file them electronically. Information on filing electronically can be found at www.nd.gov/tax/W2.
    • Producers who elect to use income averaging for federal purposes also may use Form ND 1FA (income averaging) for North Dakota income tax calculations.

    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.

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




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