In Wallaces Farmer magazine, the Timely Tips panel answers questions from readers every month. Members of the timely advice panel include Alejandro Plastina and Wendong Zhang, economists for extensions at Iowa State University; Leslie Miller, Marion County Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.
Much of the state income went to farmers in 2020 and could cause some tax problems. The issue of income tax liability related to crop insurance compensation payments, state payments, and property or casualty claims is paramount for many Iowa producers. What are the top questions I should ask my tax advisor before the end of 2020? What are the options to manage income taxes efficiently?
Stout: You are asking about ways you can reduce your tax liability for 2020. If you have a lot of crop insurance payments, you can defer income until next year as long as you are a cash taxpayer. I believe that payments from the Coronavirus Food Assistance Program, the Market Facilitation Program, and the Agricultural Risk Cover and Price Loss Programs are taxed in the year received.
If you have property damage such as machinery or buildings, the casualty insurance profit can be significant if your base is low as the items have been partially or fully depreciated in the past. If you are replacing the items, you can use Section 179 or a faster depreciation method that would make up for this. If you find yourself in a federally declared disaster area, there are special rules that mean you don’t have to replace the property with a similar property and still use it for tax purposes.
For example, you could replace a destroyed building with a tractor. Check with your tax advisor for details before you are sure. You can also defer any crop sales payments that you received after the first of the year. You can also pay for 2021 crop entries such as seeds, fertilizers, and chemicals in 2020 for lower taxable income. Meet with your tax advisor as soon as possible to make plans.
Plastina: Consult your tax advisor before the end of the year. There is no single strategy for income tax management. The alternatives that need to be considered depend on whether you are a cash or accrual taxpayer. Prepayment costs and the deferral of income from grain sales and compensation for crop insurance are possible alternatives for bar-based taxpayers but not for accrual taxpayers.
Section 179 and bonus write-offs, contributions to retirement and college savings plans, and giving grain (bushels, not cash) to charities are options both types of taxpayers should consider. A tax advisor should explain the applicability of each alternative and its consequences for federal, state and self-employment taxes.
For example, section 179 can only be used to issue new assets and reduce federal and state taxable income, while bonus depreciation can be used to issue new or used assets, but only federal Iowa taxable income. An article by Charles Brown, farm management specialist at ISU Extension, discusses the alternatives in more detail. Read Income Tax Problems In 2020?
Müller: Increased prices combined with government payments have created the potential for higher incomes for many farmers. It would be a shame to lose too much of that income because of higher income taxes. I agree with the idea of minimizing your tax liability, but can also remember problems I saw as borrowers try to minimize their tax burdens.
Using Section 179 depreciation appears to potentially save you from income taxes. However, if you borrow the money to buy this device, you will be paying back the principal amount of the loan using dollars after taxes – which could add to the cost of this item is 15% to 20% higher when you are done with it. Therefore, it seems to me the best way to minimize the tax burden is to insist on deferring income and increasing the amount of prepaid expenses.
If you prepay the harvest cost now, you may be able to negotiate a reduced price that offsets the cost of borrowing funds for these inputs. Don’t forget to pay interest, property taxes, or cash rents before the end of the year, due next spring.
Will land rents fall in 2021?
Corn and soybean price increases this fall improved the picture for actual 2020 crop budgets. My landlord wants to increase the rent. I paid $ 250 an acre in 2020 and planted half corn and half soybeans on his 300 acre farm. Looking to 2021, using the current budget projections, even after the most recent price increases, the net return is still well below the expected average cash rent. If I’m going to stick with this 300 acre area, I have to consider how much I’m willing to lose based on the 2021 budgets. What should I do?
Stout: I don’t know where you are, but in much of Iowa with reduced income, the rent of $ 250 per acre was also high for 2020. If you look at prices for October 2021, soybeans are over $ 1 lower and corn over 40 cents per bushel lower than cash prices as of this writing in mid-November. Remember, you have almost a year to price the grain and more if you have stock. So there is time to improve prices for 2021 and also take advantage of the market.
Another aspect to consider when giving up the 300 acres is that it will add to your fixed costs, e.g. B. Machines over fewer acres. So you need to factor this into your budget. There are only a handful of counties in Iowa where the average cash rent has exceeded $ 250 an acre. So unless this land is exceptional, you have a good argument not to raise the rent. Above all, have a friendly negotiation with your landlord to represent your case.
Zhang: In general, the money rent keeps track of property values pretty closely. Our studies show that the gross rent is on average around 3% of the property’s value. Recent rallies in the commodity market have further stabilized the land market, and several recent polls such as the Chicago Fed Ag Credit Survey from October found that Iowa land values were up 2%. Applying the same percentage, you can pay an additional $ 5 per morning for your cash rent.
Do a scenario analysis and see how this $ 5 cash rent increase can affect your cash flow and bottom line, and what other changes you can make such as: B. Refinancing or additional grain sales. Also, check out how your production costs can change if you don’t rent the 300 acres. Another option is to negotiate a flexible cash lease with your landowner that allows you to take advantage of the risks and benefits of changes such as: B. rallies in the late season. Read ISU Extension Ag Decision Maker file C2-22, Examples of Flexible Cash Leases, by William Edwards.
Müller: In Iowa, landlords should notify renters and renters should notify landlords by September 1 if a rental change is desired. Fortunately, from the perspective of a tenant (and his banker), grain prices had only just begun to recover at this point. I think later grain price increases coupled with government payments could make it difficult for any tenant to negotiate lower rents for 2021.
This does not mean that your rents are correct for the income generated or the quality of the property you are renting. Try negotiating with your landlord to see if a flexible lease can help both of you. I suspect that if you were to use pricing examples from that year in conjunction with a more normal crop yield, it would show the landlord is getting a reasonable rent. However, these prices and normal returns are not guaranteed for next year, so flexible leasing could potentially save you money if actual prices or returns for 2021 are lower than the example you showed your landlord.