tax provisions to benefit farmers
By Dorinda Anderson
Prairie Grains is the official
|If youve never worked with a professional
to plan your farm tax strategies, this might be the time
The 1999 Omnibus Appropriations Bill containing about $6 billion in aid to farmers and another $1 billion in tax relief brought about in part thanks to wheat grower lobbying efforts will have financial ramifications for farmers to consider, this tax year and beyond.
Factor in the emergency assistance with loan deficiency payments and advanced Agricultural Market Transition Act payments, and farmers income may increase more than they realize in 1998. You may want to prepay some expenses to offset some of that additional income, says Don Magnusson, tax specialist with Farm Credit Services, Grand Forks, ND.
Following is a closer look at key tax provisions approved in the 1999 Omnibus Spending Bill.
Provisions under the health insurance portion of the tax relief bill will accelerate the rate of deduction. Self-employed individuals are normally allowed to deduct a portion of their health insurance costs regardless of whether they itemize their deductions.
For 1999, the deductible portion was scheduled to be 45% of otherwise allowable costs. However, the FY99 Omnibus Spending Bill accelerates deductibility to 60% from 1999 through 2001, 70% in 2002, and 100% in 2003 and later years, says Norm Hayes, CPA with Hayes and Hayes CPAs, Roseau, MN.
To get this to cover the employee or spouse, Hayes says the health insurance can be listed as a business expense on Schedule F, and then it covers the employee and not the farmer. If the spouse (your wife, for example) is considered an employee and is paid a wage, she would qualify as an employee and have health insurance, under which her dependents are covered, including her husband.
If youre a single farmer, or your wife works in town and doesnt help on the farm, then the farmer can take a deduction on the front page of the tax return, which was 40% last year and will be 60% in 1999, says Hayes. If you provide other employees with health insurance, then it is 100% deductible.
Congress passed a change in 1997 to allow farmers to average income in 1998, 1999 and 2000, but this new bill will make the averaging permanent, says Hayes. However, renewal legislation is required in five years.
Farm income averaging allows farmers to elect to take a certain portion of their current year farm income and have it taxed at the rates applicable on their three prior tax returns, Magnusson explains. The elected income must be applied evenly over the three prior years.
Income averaging may not work for those who report taxes under the cash method of accounting alternative minimum tax, or AMT. If your AMT is higher than your total tax using income averaging, you have to pay the AMT. For example, if your taxable income is $50,000 for the last three years under income averaging and this year it is $250,000, AMT will come into play and you will pay the higher tax.
Other items that dont qualify with income averaging include non-farm income such as cash rent, wages and interest, as well as any capital gains such as the sale of land and sale of stock, says Magnusson.
Farm income that does qualify for income averaging includes net farm income and gain from the sale of machinery and breeding livestock, Magnusson says.
Income averaging will work best when there are unused lower tax brackets available in the three prior years, meaning you will be able to pay tax at a lower rate than you would currently or in the future, he says.
When $60,000 of the 1998s taxable income is carried back to 1995, 1996 and 1997, the total federal income tax for those four years, using income averaging, is $15,000. The total federal income tax without income averaging for those four years is $22,500, a difference and a savings of $7,500. However, the example shows that the alternate minimum tax is $17,550 for the four years. Since the alternate minimum tax is higher than the $15,000 from the income averaging, the higher amount has to be paid to the IRS, according to tax law.
Net operating loss carryback
Beginning this year, the bill provides a five-year carryback period instead of the previous two, for net operating loss (NOL) from a farming business. Farmers can now recalculate taxes from a previous good year and possibly receive a tax refund.
For example, if a farmer incurred a huge loss, like $100,000, under NOL he could carry some of that back five years and actually get a refund.
Example: Under the new five-year plan, if a farmer incurred a loss of $80,000 in 1998 he could carry that loss back as far as 1993 and spread it over some good years. Such as $60,000 in 1993 and $20,000 in 1994, which would create a tax savings of $14,600.
Farm Net Operating Loss Carryback Prevision
Under the new five-year carryback plan, an $80,000 loss in 1998 can be carried back as far as 1993 to create tax savings for that year. In the example, that carryback created a tax savings of $14,600. Using the old two-year carryback plan, in this example, only $10,000 could be carried back, creating a tax savings of only $1,500. The difference in federal income tax savings between the two plans is $13,100.
Early AMTA payments
Under this tax bill housekeeping measure, technically called "no constructive receipt," farmers will pay taxes on Ag Marketing Transition Act (AMTA) payments in the year he or she receives them. Since a bill passed by Congress last August allows producers to take their 1999 transition payment early, there may be tax consequences for 1998 or 1999, depending on when the payment is taken. Thus, consider discussing with your tax advisor whether to take the 1999 AMTA payment before the end of the year or wait until 1999.