Since annual profits/losses in agriculture generally follow a roller-coaster path, farmers and ranchers in the past were reassured a tax-loss year would help offset taxes from a future profitable year. That has changed. The new tax law severely limits the benefits from net operating loss carryforwards. “This is a new way of thinking for farmers and ranchers,” advises Rod Mauszycki, principal with CliftonLarsonAllen, in Minneapolis, Minnesota, and Taxlink columnist for DTN/The Progressive Farmer.
Fortunately, farmers and ranchers have several strategies they can use to adjust their income between the current tax year and the next tax year.
One of the easiest ways to keep flexibility in your tax planning is to sell grain in small increments under what is known as deferred payment contracts. Then, at tax preparation time, your tax accountant can determine which sale should be considered in the current tax year, and which sale should be designated for the following tax year. “Agriculture is the only industry that allows these ‘deferred payment contracts’,” Mauszycki explains.
HOW IT WORKS. Let’s say you price your grain with a deferred payment contract, and you’ll receive payment on Jan. 2, 2019. IRS allows the option to pull that money into the current tax year, even though you don’t receive payment until the next tax year, Mauszycki points out.
You can designate which year to recognize the sale when you prepare your tax return, such as in February, and it can be made on a contract-by-contract basis. Rather than a couple of large grain sales of $100,000 each with payment due Jan. 2, if you sold your grain in $10,000 to $50,000 increments, at tax time, you can decide which particular sales are designated for 2018, and which would be recognized in 2019. “The key is you don’t want a loss for the tax year,” Mauszycki advises. “With several smaller sales, if we need additional income this year, we’ll pull some of those sales into the current year.”
He gives this example on why flexibility is important: Joe Farmer typically sells the current-year crop in the following year and prepays inputs to get better pricing and to offset taxable income. Joe sells his crop using several deferred payment contracts. He gets an unexpected deal on seed and fertilizer in December. The purchase would pull his income negative and push him out of certain credits (earned income, child credits), not to mention increase potential issues because of new tax laws (see “Tips on Depreciation,” below). However, by designating a few of the deferred payment contracts into 2018 when he does his taxes, Joe can create positive income even though he didn’t receive the cash until January 2019.
As with any tax advice, especially with the complicated new tax law this year, seek expert agricultural tax counsel.
Tips on Depreciation:
Another area for flexibility at tax preparation time is deciding how to depreciate the purchases you made this year. The new tax bill makes it easier to deduct 100% of your depreciable assets in the year of purchase. But, that may not be the best tax strategy if it would reduce your income to a loss. Your tax preparer may advise depreciating the cost over the life of the asset. You may also decide to capitalize machinery repair costs.
Of course, you can also hold back on prepaid expenses if it looks like you will have a loss this year. But, that decision has to be made before Jan. 1, and you may lose out on early order discounts.
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