Dairy Channel: Don’t wait until January to look at your farm’s income tax situation

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It is officially the last minute for those of you who work best under a little deadline pressure.

The topic is income taxes. There is a potentially lethal combination of low commodity prices, poor crops, mounting open accounts and government crop and/or livestock program payments that can create an unpleasant surprise for the unprepared farmer.

Critical year. During 2002, producers experienced a wide variety of weather conditions and the problems associated with too much rain and then not enough rain.

Prices for livestock and livestock products have been some of the lowest seen in recent years. This is especially true for dairymen, but other livestock producers have not had a banner price year either.

For these reasons, it is critical for some tax calculations and planning to take place in the next week.

Income could rise. If your income is down substantially this past year because of price declines, your net income will probably decline also. You need to be careful, however, because it could potentially increase.

Let’s say your income was down, but expenses were the same as 2001 or maybe even a little higher. You made all your scheduled debt payments for machinery, real estate, etc. You also made withdrawals for family living, but did reduce those expenses as much as possible because there wasn’t as much money to go around as in prior years.

So what’s left? How did you do paying your normal operating expenses during the year?

Because you might not have had enough money to pay all your bills you may owe more money to the supply firms you buy from. It is also possible you owe money to other people for land rent, custom work, hay, etc.

No one wants to be in this situation, but with everything that happened in 2002 it is entirely possible.

Unpaid bills not deductible. How does this situation affect your taxes?

Farm expenses are deductible when they are actually paid. So the bills that you owe as of Dec. 31, 2002, will not be deductible for 2002.

A worst-case scenario is that although you have made all your loan payments, your total deductible operating expenses may be less. Even though income is down, your net income for 2002 is increased along with increased income and self-employment tax liabilities.

Get busy. What to do? First, estimate your income and expenses for 2002 and compare those numbers to the same numbers for 2001. Income will probably be down, but are the total nondepreciation expenses down more than income? If so, is there some money available to pay on those open accounts before Dec. 31 to reduce your net income?

An obvious solution is to borrow money on an operating line of credit. If a credit line is not available, are there some other sources of money you might be able to borrow until after Jan. 1?

Is there some additional income you can generate to be used to pay bills?

Easy money never is. A word of caution: It can be very tempting to take advantage of no- or low-interest rate credit card or cash advance offers that seem to arrive in the mailbox by the dozen. Realize that not only will the interest rates rapidly increase to 10 percent to 20 percent, but cash advances also charge 1 percent to 3 percent of the advance as a fee.

Minimum payment requirements on an open balance may seem manageable, but will result in years of payments at high interest rates.

While such an offer may help in a pinch, it must be ruthlessly managed if the farm is not to be caught in a never-ending cycle of minimum payments. Not meeting minimum payment requirements will adversely affect the farm’s credit rating.

Section 179 expensing. If there were some new capital purchases made during the year, be sure to look at using Section 179 expensing or accelerated depreciation and the 30 percent additional depreciation for those qualifying assets to reduce net income.

This is a difficult situation for a farm to be in, but with careful planning the farm can borrow money to pay down those open accounts before the end of the tax year.

Without this action, the farm will have to borrow money anyway to pay the tax liabilities and will still owe the full amount on open accounts.

Clock is running. To do anything about your potential tax liability, you need to look at your financial records as soon as possible to determine where you are. After Dec. 31, it is too late.

All you can do is eat a few stale Christmas cookies, report income and expenses and write the check to the IRS.

(Dave Miller is the east district farm management specialist with OSU Extension; Dianne Shoemaker is the northeast Ohio district dairy specialist with OSU Extension. Send comments or questions in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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