TAGS: Marketing, Overseas
December 18, 2014
The title of this month’s column might seem counterintuitive to most producers. But there are many times when farmers would like to increase their income.
Most of these situations involve trying to soak up a standard deduction and personal exemptions that might go to waste. Also, most farmers want to at least pay taxes in the 15% bracket to avoid paying higher rates in the future, even though farm income averaging can help mitigate this situation. Other farmers want to show taxable income for banking purposes.
Here are some common options available to increase farmers’ taxable income after year-end.
Option No. 1: Use deferred payment contracts. One of the best ways to increase income is to sell grain using a deferred payment contract. At delivery, you enter into a written contract that calls for payment after your year-end. Because this is considered an installment sale for income-tax purposes, you can elect to accelerate that income into the current year.
This election is on a contract-by-contract basis. You can’t pick and choose the number of bushels to bring into income. It is either all or none. If you elect to accelerate this income, you need to make sure not to double report it in the following year.
For example, Farmer Sue uses a deferred payment contract to sell three separate installments of 5,000 bu. of corn for $20,000 each. When preparing her tax return, she determines she needs to increase her income by $40,000. She elects to take two contracts into income in 2017 instead of in 2018. Sue makes a notation in her books that this income is nontaxable in 2018.
Option No. 2: Elect to capitalize your fertilizer costs. The Internal Revenue Code allows farmers to deduct fertilizer costs even if the benefit extends beyond a year. Yet a farmer might have the option of capitalizing these fertilizer costs on a year-by-year basis. This allows a farmer who applied fall fertilizer for the next year’s corn crop to capitalize those costs on the current year tax return and then deduct them on next year’s tax return.
Option No. 3: Elect to capitalize repair costs. You may elect to capitalize all repairs incurred during the year and then depreciate the repairs or elect to take Section 179 to reduce farm income.
For example, Farmer James incurs…