Beginning Farmers and Taxes

OMAHA (DTN) -- While young and beginning farmers already have a lot thrown at them every day with their crops, livestock, weather, machinery and the markets, they also need to pay close attention to federal taxes.

Groaning about it doesn't make it go away.

USDA recently hosted an educational webinar to provide new farmers with a few pro tips about taxes. A key pro tip: Even though tax season doesn't start for farmers until early next year, planning should begin now.

1. DON'T DO YOUR OWN TAXES

It's not quite as bad as trying to be your own attorney, but it can be close.

"Farm tax returns are fairly complicated," said Rob Holcomb, Extension educator at the University of Minnesota. "One of the scariest calls I get during the year is somebody will call me, and they ask a ton of questions about stuff and then I finally extract out of the conversation, 'I'm doing my own return.' There are so many rules and everything, I really think a lot of folks do themselves a disservice if they aren't seeking out a professional on this."

2. HOW TO PICK A TAX PROFESSIONAL

This is the offseason for tax professionals. Like free agency in sports, now is the time for new farmers to start recruiting their tax pro for next year. That's way better than waiting until late February to try finding a qualified professional for a farm tax return, said Tammy Cushing, an Extension assistant professor at the University of Florida.

Some upfront conversations are needed to find a tax professional that fits your operation. When doing so, keep in mind it's also important to avoid sharing any personal information such as Social Security numbers until you choose to become a client.

Do they know about the farm? Farmers should consider a tax professional who is versed with the lingo, costs and income that come from your type of farm. If a tax pro isn't familiar with those terms, "Then there's a likelihood that they aren't going to know how to treat the revenue and the expenses that you bring into them."

If a tax professional has never done estimated taxes for a farmer on Jan. 15 or never filed a Schedule J, then you may want a different tax pro. It's also important for those tax pros to know and understand the ins and outs of USDA programs.

There are also significant differences regarding the size of farms that a tax professional has worked with that should be vetted. Ask preparers how livestock sales or timber sales are treated during a disaster in their area.

There are also a lot of "gray areas" in tax law, so in partnering with a tax pro, it's important to understand how they handle equipment and building depreciation and expensing issues and whether that fits with your own mindset on how "aggressive" they might be, Cushing said. Following up on that, it's also important to know what role the tax professional would play in an audit. There may be limits with a tax pro, or its company, on how audits are handled.

Probe into a preparer's history. It's better to learn ahead of time that a tax pro has a history of complaints than after the fact. Check into disciplinary actions such as the state board of accountants, and also check with the Better Business Bureau on complaints. The status of an enrolled agent can be found by emailing the IRS. See more at https://www.irs.gov/….

Also, learn ahead of time how much a tax professional will charge to avoid surprises once a preparer has completed a return. Billing is often done by the hour or the tax form.

Never sign a blank tax return ahead of time. Cushing also suggested avoiding tax professionals who base fees on the size of a refund or tell everyone they get the biggest refunds in town. "You should probably investigate that a little when you are having these upfront conversations," she said.

When all is said and done, make sure you get a full copy of the tax return, signed by yourself and the tax professional. You are often going to have to present that tax return for loans or business transactions.

3. PLAN AHEAD BY GOING BACK

After picking a tax professional, be ready to show them prior-year tax returns as well as your receipts.

The earlier you talk to a tax professional about expenses and receipts, the better off you will be in planning for taxes in the last quarter of the year. If you go into the office in February and simply drop off receipts, nothing can be done but file that return.

4. UNDERSTAND WHO IS A FARMER UNDER IRS RULES

USDA may call anyone with $1,000 in farm sales a "farmer," but the IRS is a little stricter on a few rules.

To avoid sending in quarterly estimated tax payments, two-thirds of a person's gross income needs to come from the farm, Holcomb noted. If that's the case, then the producer gains some flexibility when it comes to estimated taxes and filing a complete return.

If a farmer does not make estimated payments, then the tradeoff is the farmer's tax return is due March 1. If a farmer goes ahead and makes a Jan. 15 estimated payment, then that extends the tax return deadline to April 15.

"There is some flexibility that comes into play with that, but this is a huge thing where producers don't have to make estimated tax payments, they just have to file the return by March 1," Holcomb said.

Producers who do not fall under that "two-thirds" rule also should pay more attention this year to ensure they avoid underpayment of those estimated payments, noted Bob Rhea, CEO at Farm Business Farm Management based in Urbana, Illinois, and an instructor at the University of Illinois Tax School. With higher interest rates, the IRS will expect to have higher interest rates on their penalty charges at the end of 2022 as well.

Also, keep in mind that farm machinery sales are not deemed as farm income for this definition of an estimated tax payment.

5. FARMING OR PROCESSING?

Schedule F, the form for farmers, involves selling the raw commodity. For a lot of smaller niche operations, there's also some processing of those products and likely changes the income to a Schedule C business income.

This comes up a lot now with the expansion of vineyards and wineries, Holcomb said. Just selling grapes from a vine is agricultural production and considered farm income. Processing those grapes into wine becomes non-farm income.

A FEW OTHER INCOME CONSIDERATIONS

You may want to ask your tax professional how versed they are on a few of the following issues as well:

-- Income Averaging

Having a really good income year? Farmers and fishermen have the option to average income under Schedule J. Income averaging allows income from 2022 to push back some taxable income into the past three years. Farmers can look back at the three prior years and see how much income they could push back into 2019-21 under a lower bracket. This will help farmers who find their Schedule F this year has spiked income.

-- Installment Sales

A farmer also can deliver grain in October but collect the check the following January to report income in the following year, which is known as an installment sale.

On the flip side, a farmer also has the option to elect out of an installment method to move the income out of early 2023 back into 2022 if that is beneficial.

-- Government Payments

Farm program payments, crop insurance indemnities and payments for Conservation Reserve Program (CRP) all involve different rules. There is case law on who must pay self-employment taxes on CRP payments.

"That's one of those you probably have to sit down with a tax professional to get nailed down," Holcomb said.

-- Fertilizer Deductions

Likely never a more important topic than in 2022. Expensing fertilizer is an election farmers make every year on a return, and most farmers use that option, though producers do have the option to amortize over multiple years as well.

"Most farmers I've ever come across, we expense the fertilizer on the tax return," Holcomb said.

For a deeper dive into issues on farm taxes, check out DTN's Ask the Taxman column: https://www.dtnpf.com/….

To watch the full webinar, go to https://www.youtube.com/….

USDA will post the slides for the webinar at www.farmers.gov.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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