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May 2000
Economists advise farmers
to plan now for 2000 tax year
WEST LAFAYETTE, Ind. – Now is the time for farmers to begin thinking about how they'll file their 2000 tax returns, say two Purdue University agricultural economics professors.
Farmers should get an early start taking stock of their farming operations and document any changes that could affect their tax liability in the year ahead, say professors George Patrick and Gerald Harrison.
Before completing a business transaction, farmers should consider the tax consequences, Patrick says. That's especially important when it comes time to sell the farm. Farmers can spare themselves much grief – and a hefty capital gains tax bill – if they trade their property for other farmland or investment real estate rather than accept cash. Such trades between owners of "like kind" assets are nontaxable.
"Some of the saddest calls I've received come from farmers who say, 'I sold my farm. Now how long do I have to reinvest the money?' Quite a few farmers end up making a mistake by letting the money come into their hands," Patrick says.
Conversely, some farmers may benefit from tax laws that favor selling, not trading, old farm machinery. A farmer purchasing a new tractor, for instance, can claim depreciation and lower both his taxable income and self-employment earnings, Patrick says. "The gain on the sale of the old tractor may be ordinary income, but it is not income for self-employment tax purposes. So selling a fully depreciated old asset may reduce the tax bill over time," he says.
The tax code allows farmers a generous estate tax break, Harrison says. Under current law, a farmer can take advantage of an exemption amount, special use valuation of farmland and family-owned business interest deduction, and avoid inheritance taxes on an estate worth up to $2.07 million. If assets are divided between husband and wife, the tax-exempt amount jumps to $4.14 million.
Harrison says farmers also can invest their money in Roth IRAs, a relatively new individual retirement account with income tax-free earnings. Farmers who filed their 1999 returns on or before March 1 may still invest in a '99 Roth IRA under the allowable limit up to April 17.
"Traditionally, farmers didn't have these kinds of retirement plans – they invested in land," Harrison says.
Farmers shouldn't be tripped up by Social Security myths. "Some farmers think that when they retire they have to get on cash-rent to satisfy Social Security. That's not true and never was true," Harrison says. "I can retire and go on a 'nonmaterially participating' share lease and file the farm business and income expenses on Form 4835."
Internal Revenue Service Form 4835, titled "Farm Rental Income and Expenses," covers the reporting of income a farmer receives from crops or livestock raised by others on his land through a share lease. Income derived as a "nonmaterial participant" is not subject to self-employment tax. For a detailed explanation of nonmaterial participation, refer to the IRS's Farmer's Tax Guide. Copies are available at the Purdue Cooperative Extension Service office in your county.
Patrick and Harrison offer these other tax tips:
• Take a deduction for purchased animals that die, are lost or stolen during the year. "It depends on how much you paid for the animal and when you bought it," Patrick says. "Usually, it's the purchase price minus depreciation that equals the adjustment."
• Set up charge accounts at the hardware store, elevator and other merchants you do business with. "You have to have a record of expenditures," Patrick says. "Every dollar you don't deduct will cost you, both in income and self-employment taxes."
• Conservation Reserve Program (CRP) payments are again taxable for active farmers and materially participating landlords, following a recent appellate court decision. "If you've stopped paying CRP tax because of a 1998 tax court case that held the opposite, you may be hearing from your accountant or from the IRS," Harrison says. "Cash renting and nonmaterially participating landlords are not required to pay self-employment tax on CRP," Harrison says.
Most of all, don't take shortcuts, and seek professional help before making major decisions affecting tax liability.
"Some farmers may go to such lengths to avoid paying tax that they do some things that don't make sense financially," Patrick says.
For further information, contact Patrick or Harrison at 1-888-398-4636 or check the Purdue Department of Agricultural Economics Web site.
Sources: George Patrick (765) 494-4241; patrick@agecon.purdue.edu
Gerald Harrison (765) 494-4216; harrison@agecon.purdue.edu
Writer: Steve Leer, (765) 494-8415; sleer@aes.purdue.edu
Purdue News Service: (765) 494-2096; purduenews@purdue.edu
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