Tax Planning in Agricultural Industry

The agriculture industry has always had recurring income trends.  Cattle producers are looking at astonishing prices for their livestock in 2014, which leads many to be concerned about the tax bill that will inexorably follow during this period of prosperity.  Adding on to the high prices, many producers have received disaster payments from the Federal Government for losses from 2012 and 2013 in 2014.  This combination raises concern about cash basis taxpayers. 

When reducing income, there are several things to look at for agricultural producers.  The first is to purchase equipment and the second is to prepay expenses for the next year.  With alternating years, prepaying in the good years is a great way to even things out with the next bad year.  While this is a good strategy, it cannot be the only strategy in terms of long-term profitability. 

Buying capital purchases to reduce taxable income is a great strategy in terms of enhanced accelerated depreciation.  However, the favorable laws have been allowed to expire as of January 1, 2014 and without Congressional action, the law stands that there is a limit on Section 179 of $25,000 and no bonus depreciation.  Without the enhanced accelerated depreciation rates, the immediate benefit of purchasing capital assets are greatly reduced. 

One of the unique tax benefits used in agriculture is the ability to use Income Averaging.  This strategy is a must for all livestock producers this year as it allows cash basis taxpayers to carry income back to the three prior years and recalculate the tax in those years.  Other strategies include paying wages in periods of high income in order to reduce overall farm income for standard deductions. 

See Tina Barrett, Managing Your Taxes In A High Income World, Farms.com, Oct. 6, 2014.