As the 2019 tax season quickly approaches, the main focus of most tax preparers and practitioners is meeting with clients to properly plan for the end of the year. With changes to the tax laws that were implemented in recent years, especially for farmers, tax planning is more important now than it has ever been. A well-constructed and properly executed tax plan can make a difference between a devastating tax liability and a comfortable financial position for yourself and/or your operation.
Keep reading for 5 things farmers should consider when you meet with your tax preparer this year.
In years prior to 2018, bonus depreciation short-lived capital assets such as farm equipment were allowed a 50% bonus depreciation deduction for the year the asset was purchased. With the implementation of the Tax Cuts and Jobs Act (TCJA) the short-lived assets can now be depreciated at 100% in the first year. In other words, the full cost of the asset can be written off when it is purchased. Proper planning of electing in or out of bonus depreciation can ensure that you are taking advantage of this new deduction.
Like-Kind exchange laws have been in place since the early 1900’s. However, the TCJA has eliminated the use of the practice for capital assets (excluding real property such as land). From a taxpayer perspective, this changes how we have recognized trade-in of farm equipment from prior years. Post TCJA, if you trade in a tractor to purchase a new one, you must recognize any gain or loss on the sale of that equipment. When planning to purchase equipment, it is imperative to speak with your tax professional to determine the gain you will be recognizing if you trade in a capital asset. These transactions may have unexpected consequences on your return.
Crop Insurance Deferment
Throughout most of the United States we experienced record rainfall throughout planting season. Many farmers have been working with their insurance brokers to file prevented planting claims. IRS code sections allow for farmers to defer crop insurance payments due to “the inability to plant crops.” If the crops that would have been planted this spring would have been sold in 2020, crop insurance deferment could be an election you wish to take advantage of on your 2019 income tax return. Allowing time for appropriate planning with your tax preparer can facilitate a discussion on if crop insurance deferment is best for your operation.
Prepaying for crop inputs is something that many seasoned tax preparers and practitioners are well versed in. If you use the cash method of accounting to report your income and expenses, there could be a limitation on the amount of prepaid inputs you can deduct on your tax return. In order to deduct the full amount of prepaid inputs, the prepaid expenses claimed on your business return cannot be greater than 50% of your other deductible expenses. If you find yourself subject to the limitation, speak with your tax professional about recognizing the cost of the prepaid input in the following year.
Overall Business Health
During tax planning it is easy to focus solely on the income tax return to determine the health and viability of your operation. When a business takes a position of prepaying expenses over the course of several years and relying solely on an operating note, the overall viability of the operation could decrease. It is imperative to make decisions for your business as a whole instead of relying on the tax benefits or consequences as the sole determining factor. A tax professional who is well versed in your farming operation could potentially set you up for a successful year and lifetime of sound financial decisions within your organization.
The tax professionals at AgriSolutions are experienced in the area of agriculture taxation laws and regulations. The majority of our client base rely on our expertise for planning their income tax returns in advance of the December 31st year-end date. With the knowledge of our preparers and practitioners, you can make the best choices for your operation from both a taxation and business perspective. Planning season for the 2019 tax season is beginning now, so call today for an appointment with one of our tax professionals.
Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your return. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax Department at firstname.lastname@example.org.