This calendar year is predicted to deliver the worst economics in grain farming in 20 years. Low grain prices and high input costs could actually lead to an operating loss, unless yields come in exceptionally high. However, this looming dark cloud may have a silver lining in the form of tax benefits.
AVOID ZERO TAXABLE INCOME
Reporting zero taxable income and taking a one-year vacation from paying federal income tax may seem like a satisfactory outcome in a difficult year. But this result overlooks the fact that some farm expenses, as well as personal exemptions and itemized deductions, are producing little or no tax savings, and child and education credits may be lost.
A joint return can handle about $18,000 of taxable income (which is at least $38,000 of earnings before personal exemptions and the standard deduction) at a modest 10% income tax rate, and from there up to about $75,000 is only a 15% bracket (the thresholds are half for single filers). If there is a substantial tax deferral in the form of carryover grain or prepaid expenses, 2015 might be the year to ease off on the prepaids or accelerate grain sales. For those approaching retirement, 2015 may present an opportunity to lessen the looming tax pain that awaits a few years down the road when carryover grain is sold and there are no more farm input expenses.
TAX LOSS OPPORTUNITY
Special net operating loss rules apply if the farm business schedule actually runs in the red and there's overall negative taxable income. If the loss arises from a farming business, a special five-year carryback applies. For example, if an ag producer has a Schedule F loss of $100,000 in 2015 and also an overall $100,000 negative taxable income, the loss carries back initially to the 2010 tax year. The loss works from the top down, offsetting the highest bracket income first. If the loss totally eliminates the 2010 taxable income, the excess would then move forward through 2011 and subsequent years.
Farmers, however, have special flexibility. An election can be made to decline the five-year carryback and instead use a two-year loss carryback rule. In this case, a 2015 tax loss would be applied first to the 2013 tax year, with any excess again working forward.
In general, 2010 and 2013 were high bracket tax years for many grain producers. If 2015 does shape up to be a negative, strong consideration should be given to recovering some of those high-bracket tax dollars from a prior year. When it's time for the year-end tax planning projection, take a hard look at the amount of taxable income at the upper brackets in 2010 and 2013. A targeted tax loss could produce a significant recovery. Your tax preparer has the software to do the "what-if" on various levels of losses. This is a necessity, given the complexity of phase-outs and interplays built into our tax system. The optimum tax loss takes more analysis than a quick glance at a rate chart.
EDITOR'S NOTE: Andy Biebl is a nationally recognized CPA and tax principal who specializes in agriculture with CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minnesota. He writes tax columns for DTN and its sister publication, The Progressive Farmer magazine. To submit questions for future columns, email AskAndy@dtn.com. Subscribers can always find Biebl's columns in Town Hall, on the Farm Business page or online using the Search feature under News.
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