When tax planning goes awry
Sometimes the best plans go awry. So it is with income tax planning.Most of the time, taxable income is optimized during an appointment held shortly before year-end.
However, sometimes when taxes are finalized, the plan could be inadequate.
The cause of the problem might be due to receipt of unexpected income at the end of the year or because of a surprise expense. Sometimes the problem is caused by a bookkeeping error and sometimes by a miscalculation by the tax professional.
• Deferring crop insurance proceeds is one way to reduce excessive income.
• Report deferred commodities, amortizing fertilizer expenses when income is low.
• Section 179, 50% or 100% expensing can adjust income.
Whatever the cause, there are some remedies that can be used to save the day.
Deferral of crop insurance
Where crop insurance was received in the tax year, often income can be decreased by deferring this income until the following year. Alternatively, if income is too low and a greater income is desirable, crop insurance proceeds that were planned to be deferred can be reported in the year of receipt.
There are some important rules to follow so check with your accountant or tax professional.
Many times, farmers defer commodity sales until the following year so that income can be reduced.
When it is discovered that income is too low, one strategy to increase income is to report some or all of the deferred commodity sales.
Deferred sales are treated by the income tax code as installment sales. With all installment sale contracts, the income can be recognized in the year of sale, even though payments will be received in a later year. A taxpayer can simply report deferred sales as income.
The most important thing to remember if this strategy is used is to make sure these sales are marked in the books the following year to avoid reporting the income twice.
Adjusting Section 179
Taxpayers are allowed to expense up to $500,000 of qualifying capital purchases in 2010 and 2011. If income is too high, often more Section 179 can be elected. Alternatively, Section 179 can be reduced if income is too low.
Section 179 can be elected on many types of farm capital purchases, including breeding stock, machinery, single-use livestock facilities, and wells and drainage tile. These items can be new or used.
In 2010, taxpayers can elect to expense 50% of any qualifying purchase, and for assets placed in service after Sept. 8, 2010, 100% of a qualifying purchase.
If income is too low, and the above mentioned strategies are unavailable or insufficient, a farmer can elect to amortize fertilizer expense over several years.
The length of the amortization depends on the length of time that the fertilizer will be available, but often a three- or four-year period is used, although nitrogen fertilizers are generally not deferrable.
Finally, for those who qualify, traditional IRAs or SEP IRAs can both be funded for the preceding year as late as the due date of the tax return.
For example, if a taxpayer wished to fund an IRA for 2010, he has until April 15 of 2011 to deposit the funds in the IRA.As always, consult with an experienced tax adviser before proceeding.
Anderson is a farm financial management consultant in Redwood Falls. E-mail him at [email protected].
This article published in the February, 2011 edition of THE FARMER.