By Kent Vickre
With the proposed tax legislation being debated in Congress, many producers are uncertain regarding their 2017 year-end tax planning.
Since all of these changes are proposed, currently there are no solid answers we can plan for. However, the majority of the tax changes won’t be implemented until 2018, so let’s review several common examples a cash basis farmers can use to adjust income for their 2017 tax return.
Prepay operating inputs. Be sure to specify a quantity and price. Remember, prepaid expenses are limited to 50% of deductible expenses.
Defer crop insurance proceeds. You may elect to defer all or part of your income to the following year if you meet specific conditions. Also, only crop insurance proceeds paid because of crop damage or the inability to plant crops are eligible for the deferral under Internal Revenue Code 451(d). To clarify, insurance policies that have both a yield and price component such as Revenue Protection (RP) will require a separate calculation. To calculate the deferral amount, you must calculate a percent of physical loss compared to the total loss.
Pay your children a reasonable wage for farm work. You don’t have to pay Social Security tax on your children under age 18. You must file the appropriate payroll tax forms.
Pay any accrued interest. It’s a potential tax saver some farmers overlook.
Consider income averaging. Depending on the prior year’s taxable income, income averaging may decrease your tax liability.
Double up on church or charity contributions. If you itemize, consider donating more or paying state income tax in December instead of waiting until the following year.
Review CCC loan tax treatment. If you have “sealed grain” carrying over at year-end, simply electing to change the tax treatment may increase or decrease your taxable income. You may need to file additional forms with your return.
Review deferred payment contracts. Since the installment sale election is on a contract-by-contract basis, consider multiple smaller contracts for maximum flexibility.
Capital assets. Consider purchasing needed capital assets, such as equipment, buildings or breeding livestock. The federal depreciation rules are described below. However, each state decides if they’ll couple or decouple from these. Check on the depreciation rules for your state.
• Bonus depreciation for purchased capital assets for 2017 is 50% of the cost.
• The Federal Section 179 deduction — the “quick write-off” depreciation for purchased capital assets — is $510,000. The 179 election is limited to qualified capital purchases for items such as equipment, grain bins or breeding livestock with a dollar-for-dollar phaseout starting at $2.03 million.
Fund your retirement account — IRA, SEP, Keogh. Because some plans need to be set up by Dec. 31, be sure to check into this now.
Remember each of these items have different rules regarding income phase-out or limits; be sure to discuss these with your tax consultant. For example, only new equipment is eligible for bonus depreciation, but both new and used are allowed for the Section 179 deduction.
Looking ahead to 2018, here are several proposals producers will want to watch because they could affect 2017 planning:
• Proposals to increase bonus depreciation to 100% for assets purchased after Sept. 27, 2017.
• Proposals to increase standard deduction. This would make it less likely taxpayers would itemize. Because of this change, producers may consider increasing charitable contributions and paying personal household property tax in 2017 to take advantage of itemizing.
In closing, these are several of the most common tax strategies and possible 2018 tax change considerations that could affect a producer. However, because of tax law changes, be sure to review your tax estimate with your tax consultant. An hour with your tax consultant before New Year’s Eve can save thousands of dollars compared to any tax election you can make on your final tax return.
Vickre is state coordinator of the Iowa Farm Business Association. Contact him at [email protected] or 515-233-5802.