FARGO, N.D. -- Agricultural producers should do tax planning before the end of the year. It is best to start with year-to-date income and expenses and estimate them for the remainder or the year. Do not forget any income that was deferred to 2008 from a previous year.
Items to note in preparing 2008 income tax returns in regards to tax planning:
- New this year is a change in the 179 expense election. The 179 expense election has increased to $250,000 for 2008. Generally, it allows producers to deduct up to $250,000 worth of machinery or equipment purchased in 2008. There is a dollar-for-dollar phaseout for purchases above $800,000. The maximum 179 expense deduction is scheduled to revert back to $133,000 for 2009.
- New this year is an additional first-year bonus depreciation available only for 2008. It is equal to 50 percent of adjusted basis after 179 expensing. It only applies to new property purchased in 2008 that has a recovery period of 20 years or less.
- Income averaging can by used by producers to spread tax liability to lower-income tax brackets in the three previous years. This is done on schedule J.
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- Crop insurance proceeds can be deferred to the next tax year if you are a cash-basis taxpayer and can show that normally more than 50 percent of the crop is sold in the year after it is produced. Producers with Revenue Assurance or Crop Revenue Coverage may receive an indemnity because of price declines and yield loss. Indemnities from price declines are not deferrable.
- A livestock deferral can be done for those who had a forced sale of livestock because of a weather-related disaster. Two methods can be used. In the first method, income can be deferred to the next year for all types of livestock sold prematurely. For the second method, income from livestock held for draft, breeding or dairy purposes is not taxed if like-kind animals are repurchased within four years (or more depending on weather conditions or disaster declarations) from the end of the tax year in which the animals were sold. Only the gain on the sale of those animals beyond what was normally sold would qualify for postponement.
- Switch grain loan elections. Grain (Commodity Credit Corp.) loan rules allow producers to make an annual election on whether to treat CCC loans as loans or income.
Limiting liability
Here is what producers can do before the end of the year to limit tax liability:
- Pay taxes or interest. Paying taxes or interest can be done before the end of the year to increase 2008 expenses.
- Defer income to 2009. Crop and livestock sales can be deferred until the next year by using a deferred payment contract. Most grain elevators or sales barns will defer sales until the next tax year. Producers should be aware that they are at risk if the business becomes insolvent before the check is received and cashed.
- Purchase machinery or equipment. Machinery or equipment purchases can be made before the end of the year to get a depreciation or 179 expense deduction in 2008.
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Information on agricultural topics can be found in the Farmers Tax Guide publication 225. which can be obtained at an IRS office or by calling (800) 829-3676. Any questions about these topics should be addressed to your tax professional or the IRS at (800) 829-1040 or www.irs.gov . North Dakota income tax questions can be answered by calling the North Dakota Tax Department at (800) 638-2901 or www.nd.gov/tax .
Editor's Note: Haugen is a farm economist at the North Dakota State University Extension Service in Fargo.
