Taxlink by Andy Biebl

Editor's Note: Andy Biebl is a CPA and principal with the firm of CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., and a national authority on ag taxation. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future tax columns, e-mail AskAndy@dtn.com. To attend Andy's DTN University "Over 55: Make Retirement Less Taxing" workshop in Chicago Dec. 7, go to http://goo.gl/… or www.dtnagsummit.com.

Here we are two months from the end of the year, ready to tackle those critical year-end tax projections, and we still don't know the depreciation rules for 2014. Soon Congress will finally address the so-called "extenders." The two big questions are the Section 179 deduction (do we extend at the $500,000 level or revert to an old $25,000 amount?) and do we renew or drop 50% bonus depreciation on new assets?

To illustrate the dilemma, let's assume a farmer purchased $700,000 of new machinery in 2014. If both provisions are renewed, the 2014 depreciation on those assets could be nearly $611,000. If neither provision is renewed, the deduction is $75,000. Given this disparity, how should you plan your taxable income?

INSTALLMENT SALE SOLUTION

Cash method farmers only recognize income on deferred payment sales when the proceeds are collected. The installment sale rules of Section 453 of the tax code apply to a cash method farmer's sale of inventory. When grain is delivered in November and sold under a contract that calls for payment the following January, technically a farmer has elected to use the installment method in the tax law.

The opportunity is in the ability to make an "election out" for any particular contract and instead report the income earlier in the year of the sale. This election is made as part of the tax return preparation, and is done by simply reporting the sale early rather than when the payment was collected. This election is made on a contract-by-contract basis. Because this decision can be made by your tax return preparer out in 2015, this gives great flexibility to adjusting your 2014 income upward. But to allow the tax preparer to hit the right income target with some precision, the farmer should set up multiple installment sale grain contracts in varying amounts. Conversely, if there's a single large contract, it will be more difficult to fine-tune the income at tax preparation time.

Several years ago, it took Congress until New Year's Eve to resolve their annual retroactive extender legislation. If this uncertainty continues, tax accountants will need to run two tax projections on depreciation, and then be sure the producer has a sufficient mix of deferred grain contracts to allow elections out to backfill for the depreciation result. Remember, Congress could do any combination of rules for these first-year depreciation deductions, so it's not an all-or-nothing result that might occur. Multiple deferred sales contracts mean more paperwork at the grain elevator. However, that's a small negative to manage unknown tax rules that could retroactively change your income by $500,000 or more.

One final idea for those with no grain deliveries in fall and no deferred contracts: Put the crop under CCC loan and elect the income method in the tax return later if we get expanded depreciation numbers. But that is an all or nothing tax election.

(MZT/AG)

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