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Year end tax planningBy Richard C. Snell Barton County Extension Agent, agriculture Kansas They say death and taxes are the only sure things in life. Really, death is the only one because income tax is optional. If you don't make a profit, you don't pay income tax. Thus taxes will be today's subject. Year-end tax planning should be on the mind of all farmers. If we didn't pay taxes, I'd be out of business and you'd have less services. Today, I want to focus on income tax because you still have a few days to work at reducing your 2007 load. The basic tax management strategy of farms should be to avoid wide fluctuations in taxable income. The good fall crops have put some of you in the situation of needing to either defer income into 2008 or do some year end purchasing so you can write off some expenses for 2007. Now common logic tells me you don't just blow money on things you don't need. However, if you've got things you are planning to buy anyway, get it by December 3l if you need to offset a big income. Besides, many variable inputs such as seed, fuel, herbicide, and fertilizer can offer good discounts this time of year if you check with your supplier. Many times, fertilizer prices are cheaper in the fall as opposed to the spring and this year will probably be no exception. As high as these prices are right now, that may be hard to swallow, but hey, we are in uncharted waters with high prices on everything. Thus nobody knows where they are headed. Also, we have the yield books for soybeans, corn, and sorghum already available so that you can make your selections now and get your seed purchased. Fuel and herbicides are two other huge expenses on the farm. Remember that you can pre-pay up to 50 percent of your total expenses for the year. Farmers can elect to treat up to $125,000 of business property purchased during 2007 as an expense rather than a depreciable capital expenditure. This can be done on one large item or on several small items that can be entirely written off the first year. Some of you may even be in the market for a new drill or planter or piece of tillage equipment. Others of you may be able to take advantage of some good financing packages and purchase a new tractor or combine. A new or used grain truck might be another option. In spite of the poor wheat crop, the historically high wheat price coupled with good fall crops have given some farmers record income levels. As I mentioned many producers may want to defer some of this year's income into 2008. I realize that most farmers sold their wheat back when it was $5 instead of $8, but that is still a good price. In our area, a lot of farmers received crop loss payments from crop insurance which may "bunch" income for 2007. Who knows what next year will bring with the anticipated new farm bill, the uncertain weather and the bidding war for acres among crops? Another tool that can be used to spread income out would be to pay wages to your children who have done work for you. If you decide to defer the income from grain that has been delivered to a local elevator, be sure to check the contract with your tax advisor. You must not have access to the income before 2008 or the Internal Revenue Service can say it was "constructively received" in 2007. A lot of whether or not you can defer income on grain contracts has to do with your history. The first year you do a certain practice that you haven't done, you are under scrutiny. After the first year, you normally are fine because it is considered a typical practice for you. If interest is involved, that complicates things. You can use an installment sale to defer income from crop or livestock sales, but under certain conditions, you may be vulnerable to the Alternative Minimum Tax. This is another area to check with a tax expert that has been to tax school this year and is up on current farm tax rules. Another option is to wait until next year to sell your grain. Many market analysts say that most stored grain is not at particular price risk if you carry it into next year, even at these prices. If you are trying to defer the receipts from livestock delivered this year, you will have a more difficult time, since there are many laws that require prompt payment for livestock. Before you try it, make sure your tax advisor agrees with the procedure. The bottom line is to be careful when deferring income and to only make purchases that will really be needed and will enhance your farm operation. In some cases you may be better off just paying off some current debt so you can get a little ahead on the principle. I can't emphasize enough the importance of good records. Good records will not only help you at an IRS audit but will help you be a better farm manager. You should also have a good tax advisor. For more information on what you can do and have to do on farm income taxes, stop by our office and pick up a free copy of the "Farmers Tax Guide." We already have them this year. Some years, they didn't show up until after tax season. This is a 110 page booklet printed by the IRS with important reminders and changes for both 2007 and 2008. It will be helpful not only in filing this year's return but in planning for the coming year. Another good resource is "Income Tax Management For Farmers in 2007." It is a report written by George Patrick, Purdue University Economist. It can be found on the Internet or I can print you a copy for $2. 1/7/08 Date: 12/31/07
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