Editor's Note: Brown is the Iowa State University Extension farm management specialist in southeast Iowa, located at Oskaloosa.
Income positions of farmers vary widely this year. Grain farmers who marketed aggressively early and pushed sales from 2014 into 2015 have solid incomes. Those who were hoping for better markets and sold little grain may have net operating losses. One bright spot in the livestock sector is the cow/calf producer, who should have a good year, but probably not as well as 2014.
Those farmers with good incomes will be looking for deductions. The Section 179 Expense Election has been one of the most used deductions in past years. In 2014 the amount available was $500,000; for 2015 it is $25,000. It's anticipated that the $500,000 will again be extended to 2015, but it is not guaranteed and in the past it has been very late in the tax year before it has been passed by Congress.
Both the U.S. House and Senate appear to agree that Sec. 179 should be $500,000 but some of the discussion is for how long? Should it be another one year extension or should it be made permanent? Trying to plan for your farming business and not knowing what the tax laws will be makes tax planning frustrating.
End of year tax moves you may want to consider
Farmers should be aware that buying machinery strictly to reduce income taxes is not always the best plan, especially when looking ahead at a depressed farm economy. If money is borrowed to purchase the machinery, then payments have to be made and this will reduce working capital. Working capital is disappearing at an alarming rate and this is the capital that allows a farm business to stay in operation.
Farm operations that are not having a good year may be looking at a net operating loss (NOL) on their tax returns. NOLs not only look bad, but they rob you of tax-free income. In 2015 the government allows a couple who are filing a "married filing jointly" return, $12,600 as their standard deduction. They are also allowed a personal exemption of $4,000 for each dependent.
A family of four could earn $28,600 of income and not pay any Federal income tax. They might owe a small amount of self-employment tax and state income tax. This $28,600 of income is essentially tax-free income and if it is not there you lose all of those government deductions; they can't be carried over and used next year. It may be more advantageous to move some income from 2016 into 2015, or defer paying some expenses until 2016 to use the government deductions. Selling at a lower price, but having it tax free may be a more prudent decision.
Many times the NOL can't be avoided; the losses are just too big to be offset by managing the timing of income and expenses. Farmers with large losses in 2015 have the option of carrying the NOL forward to offset the income in a future year or carrying it back two or five years. This is an election they make when filing the tax return. Carrying back the NOL may be a good option for 2015. Many farmers have had good profits the last two to five years and have paid considerable taxes in those years. Carrying back the NOL allows them to recalculate the income taxes for those years and have some of those taxes refunded.
Should you use income averaging?
Income averaging may not be as helpful for 2015 as in past years. Farmers can take a portion of their income and average it back to the three previous years and recalculate the income tax for those years. If you can drop a tax bracket it lowers your overall income taxes. This has been heavily used the past few years due to the higher incomes and will not have the advantage it once did.
If you are not sure of where you are at with your farm income and need more flexibility, consider using deferred payment contracts. Cash basis farmers, not accrual, can sell grain now to lock in a price and use a deferred payment contract to defer the income to 2016. This must be a signed, legitimate deferred payment contract. You can't just tell the grain buyer to hold your check. If you get to the end of the year and see that you need more income in 2015, you can pull a deferred payment contract back into 2015 and declare it as taxable income in 2015, even though you won't receive the cash until 2016. It must be a full contract, you can't pull back a partial contract, so you should have multiple smaller contracts to give you more flexibility.
Tax laws are complicated and there is usually an "and, if or but," always confer with your tax adviser and accountant for your tax planning needs.
Brown is the Iowa State University Extension farm management specialist in southeast Iowa, located at Oskaloosa. Contact him at [email protected]