Purdue News

October 23, 1998 Tax planning critical for farmers facing low prices WEST LAFAYETTE, Ind. -- Not to be upstaged by the hazards of low prices for corn and soybeans, Uncle Sam is providing his own harsh realities for the 1998 tax year. "Low commodity prices do not necessarily mean low taxable incomes for farmers in 1998," said Purdue University Cooperative Extension agricultural economist George Patrick. He advised farmers to get tax advice before 1999 arrives. "For farmers using the cash accounting method, it is when an input is paid for -- not when it's used -- that determines when its cost is deductible for tax purposes," he said. "Expenses prepaid in 1997 cannot be deducted in 1998." Patrick also reminded farmers that receipts are reported as income only for the year in which they are received. "Many farmers didn't sell 1997 grain until after Jan. 1, 1998. Also, some farmers may have sold commodities in 1997, but deferred payment into 1998. In both cases, the sales would be 1998 income," he said. "If farmers use the option to take half of their 1999 production flexibility payments in 1998, these payments will be reported on the 1998 form 1099-G they receive, together with the 1998 production flexibility payments received early in 1998." To plan effectively, Patrick said, farmers should review 1998 receipts and expenses soon. Farmers who take government-provided loan deficiency payments (LDP) on their 1998 corn and soybean production may want to consider deferring those payments until 1999, he said. "If grain is harvested and sold when delivered to the elevator, the CCC-709 form is filed with the Farm Service Agency (FSA) before harvest," he explained. "Although the LDP rate is based on delivery dates, payment is not made until FSA receives acceptable evidence of production. Therefore, a producer could delay submitting the necessary paperwork to FSA and defer the LDP into 1999." For producers who store their grain on the farm or commercially, the LDP is set -- generally near the end of harvest -- using the FSA form CCC-666, Patrick said. The FSA is supposed to process the deficiency payment within 30 days, so these LDPs are likely to be 1998 income. "Many farmers are familiar with techniques to reduce taxable income in a high-income year," Patrick said. "Delaying sales, using deferred payment contracts, prepaying expenses, purchasing machinery and equipment, and using Section 179 expensing election are some common techniques. "In a low-income year, many of these techniques can be reversed to improve the tax situation. "There is no federal income tax on the first $12,500 of 1998 income for married couples. This increases to $17,900 for families of four and, depending on their situation, families may qualify for the new child tax credit and earned income tax credit. "As a result, if a year-to-date review indicates that net income is less than this tax-free amount, attempts should be made to increase income for tax purposes." Delaying purchases, or delaying payments on items bought in 1998, until after Jan. 1, 1999, will reduce 1998 expenses. For assets acquired in 1998, Patrick advised using slow depreciation methods, which is possible only for items not yet on a depreciation schedule. "Selling commodities or livestock and taking payment before the end of the year would increase 1998 receipts. Farmers who take Commodity Credit Corporation (CCC) loans on their production in 1998 may elect to report the loans as income this year," Patrick said. "However, once that is done, all future CCC loans must be reported as income when received rather than being treated as loans." If farmers have losses on their income and expense forms (Schedule F) for 1998, the losses can be offset by income from other sources, such as the sale of breeding stock, machinery, and equipment reported on Form 4797, off-farm employment. If after all income sources are included the adjusted gross income still is negative, a net operating loss (NOL) may exist, Patrick said. A 1998 net loss can be applied against income in 1996 and 1997 (and back to '95 for farms in federally declared disaster areas), or the farmer may elect to forgo the carryback and carry the net loss forward up to 20 years into the future. "The amount of the tax savings as well as the time value of money needs to be considered in determining the best strategy for using the NOL," Patrick said. "Some planning opportunities are also possible with income and expense items related to the NOL. Assistance of a tax professional may be helpful in decisions whether to carry the NOL backward or forward. "Farmers with a negative or very low Schedule F income in 1998 may want to use the optional farm method to report their earnings for self-employment taxes and obtain or maintain their disability coverage and other Social Security benefits." Patrick will conduct Agricultural Tax Workshops from 8:30 a.m. to 12:30 p.m. Nov. 18 in Fort Wayne; Dec. 2 in Indianapolis; and Dec. 8 in Jasper. The fee is $110, or $70 for persons who are registered for one of 11 Income Tax Schools for tax practitioners that will conducted around the state. To register, contact the Purdue Division of Conferences, (765) 494-7219 or 800-359-2968 ext. 92-L. Source: George Patrick, (765) 494-4241; e-mail, patrick@agecon.purdue.edu Writer: Amy H. Raley, (765) 494-6682, e-mail: ahr@aes.purdue.edu Purdue News Service: (765) 494-2096; e-mail, purduenews@purdue.edu To the Purdue News and Photos Page