Agricultural producers should do tax planning before the end of the year.
"In tax planning, it is best to start with year-to-date income and expenses, and estimate them for the remainder of the year," says Ron Haugen, North Dakota State University Extension farm economist. "Estimate depreciation and include any income that was deferred to 2018 from a previous year.”
Haugen adds, “It is best to try to spread out income and expenses so producers don't have abnormally high or low income or expenses in any one year.”
There are several items to note for tax planning regarding the new tax law changes:
- Tax rates have decreased for 2018.
- Agricultural producers are now allowed to use 200 percent declining balance depreciation for 3, 5, 7 and 10-year property. 150 percent declining balance is still required for 15 and 20-year property.
- For most new agricultural machinery and equipment (except grain bins), the recovery period has been reduced from 7 to 5 years.
- Like-kind exchanges are now not allowed for personal property, but still are allowed for real property.
- The section 179 expense has increased. It generally allows producers to deduct up to $1,000,000 on new or used machinery or equipment purchased in the tax year. There is a dollar-for-dollar phase-out for purchases above $2,500,000.
- The additional 100 percent first-year bonus depreciation is in effect. It is now available for used, as well as new property. It is equal to 100 percent of the adjusted basis after any section 179 expensing.
Other tax planning items to note:
- Income averaging can be used by producers to spread the tax liability to lower income tax brackets in the three previous years. This is done on schedule J. North Dakota farmers who elect to use income averaging for federal purposes also may use Form ND 1FA (income averaging) for North Dakota income tax calculations.
- Crop insurance proceeds and government crop disaster payments can be deferred to the next tax year if a producer is a cash-basis taxpayer and can show that normally income from damaged crops would be included in a tax year following the year of the damage.
- A livestock income deferral is available for those who had a forced sale of livestock because of a weather-related disaster.
- Prepay farm expenses. Feed, fertilizer, seed and similar expenses can be prepaid. Typically, discounts are received by paying for these expenses in the fall. Producers can deduct prepaid expenses that do not exceed 50 percent of their other deductible farm expenses.
- Defer income to 2019. Crop and livestock sales can be deferred until the next year by using a deferred payment contract. Most grain elevators or livestock sale barns will defer sales until the next tax year. Producers should be aware that they are at risk if the business becomes insolvent before the check is received and cashed.
- Purchase machinery or equipment. Machinery or equipment purchases can be made before the end of the year to get a depreciation or 179 expense deduction in 2018.
- Contribute to a retirement plan such as a simplified employee pension plan, savings incentive match plan for employees or individual retirement account.
Information on agricultural topics can be found in the Farmers Tax Guide, Publication 225. It can be obtained at any IRS office or ordered by calling 800-829-3676. Any questions about these topics should be addressed to your tax professional or the IRS at 800-829-1040 or http://www.irs.gov. North Dakota income tax questions can be addressed to the North Dakota Tax Department at 877-328-7088 or http://www.nd.gov/tax/.