Tax Planning

College of Minnesota Tax Planning for Farmers Fall 2021

23 August 2021

Most government payments to farmers and small businesses must be included as income on your annual federal or state tax return. The ongoing COVID-19 pandemic, natural disasters in the summer of 2021, including hail and drought, and other government funding initiatives will see some farms and small businesses receiving significant government income payments this year. Because most cash-based farmers are tax filers, farmers can use various tax planning strategies to maximize their after-tax income.

Successful fall tax planning requires farmers to keep up-to-date farm records to determine which strategies to implement.

Government Payments and Agricultural Revenues

Crop insurance payments, crop and livestock disaster payments, Commodity Credit Corporation (CCC) payments, state or county grants or payments funded by CARES Act, Coronavirus Food Assistance Program (CFAP 1 & 2), and Producer Pandemic Aid (PAP) are some of the general government programs that require gross income inclusion on annual tax returns.

Forms 1099-G and CCC-1099-G are mailed to producers at the end of the year and report the government payments received. Regular crop insurance revenues are collected on a 1099-MISC.

There are a few exceptions when it comes to including government programs in income.

  • Retroactive state and federal laws exclude select COVID-19-related government funds from gross income, including waived Paycheck Protection Program (PPP) loans and advances from the Economic Injury Disaster Loan (EIDL).
  • Expenses purchased with PPP and EIDL prepayment are deductible.
  • Unemployment benefit less than $ 10,200 was excluded from taxable income in 2020 for single or married individuals filing jointly with taxpayers with modified gross adjusted income of $ 150,000 or less.
  • Unemployment is currently taxable in 2021.

Tax planning strategies to maximize post-tax income

Section 179 Depreciation

Section 179 depreciation allows you to record qualifying property as an expense during the year in which it is in use, rather than depreciating the property as capitalized assets over a number of years.

Bonus depreciation

Bonus depreciation (also known as Extra First Year or Special Depreciation) is the second method of accelerated depreciation.

Minnesota Law – Section 179 and Bonus Amortization

During the 2021 legislature in Minnesota, the state of Minnesota fully adopted the amended provision of Section 179 in the federal tax law. This means Minnesota is in full compliance with federal law for 2021 and beyond. The state-level changes to Section 179 are also retroactive to 2017 and may require you to change the previous year’s tax returns with the state of Minnesota.

The bonus write-off is not accounted for on Minnesota tax returns (it is still subject to the 80% surcharge) and the bonus write-off amount must be spread over a five-year period.

Deferred contract sales

A farmer can sell grain and livestock one year, sign a deferred payment or installment agreement, and defer payment and recognition of those revenues until the following year. However, late payment increases the likelihood that the buyer will not pay for the goods due to financial difficulties.

Because the sale was not accounted for as income, a cash farmer will not have a deductible loss if the buyer defaults on the deferred payments.

Average income

Income averaging remains in effect only for farmers. Farmers can choose an amount of their current agricultural income to split evenly over the last three years.

  • The amount from the last three years is added to the taxable income of the previous year.
  • Savings result if the income of the previous year was taxed at a lower tax rate than the current year.
  • This choice applies to all income attributable to an agricultural holding.
  • Farm income includes income, deductions, gains and losses attributable to an individual’s farm. This contains:
    1. Schedule F. Net Income
    2. An owner’s share of the net income of an S company, partnership or limited company.
    3. Wages that an S corporation shareholder receives from the S corporation.
    4. Income from the sale of assets used on the farm and reported on Form 4797 and / or Appendix D (Form 1040), but not income from the sale of land or timber.

Farmers are allowed to use a negative farm income for the calculations in the base year. However, this loss carried over from the base year to other calculation years must be removed from the calculation of the base year in order to avoid a double taxation advantage.

If you liquidate your farm, the profit or loss is only attributable to your farm in terms of income if the property is sold within a reasonable period of time. One year is considered appropriate.

Catastrophe and Crop Insurance Benefits

All income from crop insurance must be reported as income on your tax return. As a rule, you include this income in the year in which it was received.

Crop insurance also includes payments for crop disasters received by the federal government due to destruction or damage to crops or the inability to grow crops due to drought, flood, or other natural disasters.

Plant and livestock insurance payments include the Non-insured Crop Disaster Assistance Program (NAP) and livestock disaster payments under the ELAP (Emergency Assistance for Livestock, Honeybees and Farm-Raised Fish Program), LIP (Livestock Indemnity Program), and LFP (Livestock Forage Program.). ).

Income from one of these compensation programs is reported on Form 1099-G and is taxable by the farmer.

You can defer the income from the crop insurance to the year following the year of loss if you meet all of the following requirements:

  • You use the cash register method of accounting.
  • You will receive the proceeds from the crop insurance in the same year in which the crop is damaged.
  • You can prove that, in normal business practice, you would have taken into account the income from the damaged harvests in each tax year following the year in which the damage occurred.

There are uncertainties regarding the deferral of crop insurance. Does the taxpayer have to show that all income from a culture has been deferred or only part of it? Does the choice apply to all payments or only to the crops that would have been sold the following year?

IRS Code Section 451 is the primary authority regarding crop insurance. However, Section 451 is silent on the issues listed in the previous paragraph. See the drawer below for more information.

Average income

Catastrophe and Crop Insurance Benefits

Prepaid expenses

When you use the cash method of accounting for your income and expenses, your deduction for prepaid agricultural expenses is limited to 50 percent of other deductible agricultural expenses for the year in the year in which you pay them (all allowances listed in Appendix F less prepaid agricultural expenses ). Costs). This limit does not apply if you meet all of the exceptions described below.

Many cash taxpayers use year-end prepaid expenses to offset income and expenses. This practice also enables the agricultural producers to guarantee the delivery and fixed price prices for the inputs for the following year.

According to the IRS’s 2020 Farmers Tax Guide, prepayments must meet the following conditions:

  • Must be for an actual purchase and not a deposit.
  • The prepayment has a business purpose and is not just a tax avoidance.
  • The prepayment does not lead to any significant income distortion.

There are a couple of exceptions. The prepaid business expense limit does not apply if you are a farmer and any of the following applies:

  1. Your prepaid business expenses are greater than 50 percent of your other deductible business expenses due to a change in business operations due to exceptional circumstances.
  2. Your total prepaid business expenses for the past three tax years is less than 50 percent of your total other deductible business expenses for those three years.

The maximum prepayment amount is calculated each year based on the final figures in Appendix F.

Fall manure and lime are treated differently if applied before the new year. If you buy fertilizer and lime at the end of 2021 and apply it before January 1, 2022, the fertilizer and lime expenditure are not considered to be an advance payment for tax purposes and are therefore not subject to the 50 percent rule.

Prepayment Example: In 2021, Bert purchased plant chemicals ($ 40,000), feed ($ 10,000), and seeds ($ 50,000) for use on his farm the following year. His total prepaid farm spend for 2021 is $ 100,000.

His other deductible farm expenses totaled $ 180,000 for 2021 (Schedule F total expenses minus prepaid expenses, including depreciation).

Therefore, Bert’s deduction for prepaid farm inputs for 2021 cannot exceed $ 90,000 (50 percent of $ 180,000). The excess prepaid operating expenses of $ 10,000 ($ 100,000 minus $ 90,000) are deductible in 2022 if he uses or depletes the supplies.

This article is educational and does not provide legal, financial, or tax advice.

Prepaid expenses

This press release was produced by the University of Minnesota Extension. The views expressed here are your own.

Related Articles