Happy holidays to all of our northeast Ohio and northwest Pennsylvania dairy farmers. It is hard to believe that 2011 is coming to a close already.
As the howling winds of winter approach, it is a good time for farmers to grab a cup of coffee and start to gather their income and expenses records to determine their cost of production and profitability from 2011. It is also the time to take a peek at their potential income tax liability for the year.
This column addresses some of the questions which I have been receiving over the past few weeks.
Q. Are there any changes to the Schedule F for 2011?
A. Part I of Schedule F (Form 1040) has been revised for 2011, and the line numbers for reporting farm income are not the same as in prior years.
The payments reported on lines 1a and 2a for specified sales of resale or raised products are those received through a merchant card or a third-party network. These generally will be reported to the farmer on Form 1099-K, Merchant Card and Third Party Network Payments.
Merchant cards include, but are not limited to, Visa and Master-Card. Third-party networks include, but are not limited to, Paypal and Google Check-out.
The IRS instructions for Schedule F (Form 1040) state that merchant card and third-party network transactions are to be reported on line 1a or 2a even if a Form 1099-K is not received. Other sales of commodities which were reported in past years on 1a and 2a are now reported on lines 1b and 2b.
* * *
Q. With potential for strong incomes from crop production this year, what are some strategies farmers can use to reduce their potential tax burden?
A. Farmers can use a variety of methods to reduce their liability. This may include using bonus depreciation. The additional first-year depreciation rules allow farmers to deduct on their 2011 income tax returns 100 percent of the cost of qualifying new equipment purchased.
Similarly, I.R.C. 179 expensing allows farmers to elect to deduct part or all of the cost of qualifying farm assets in the year they are placed in service. The deduction is limited to $500,000 for 2011. New and used equipment is eligible for this deduction.
Additional strategies include purchasing 2012 inputs in advance or utilizing farm income averaging to borrow unused tax brackets from the three prior years. Farmers can also postpone sales of raised commodities or use deferred-payment contracts to delay receipts into 2012.
* * *
Q. Farm input costs are projected to be higher next year, should farmers consider purchasing some of those inputs this year to save money and offset tax levels?
Every farm’s tax obligations are unique; however the pre-purchasing of inputs is one way to reduce your tax liability for the current year. Remember that your deduction may be limited to 50 percent of your other deductible farm expenses for the year.
Any prepayment of livestock feed must also meet specific business purpose criteria and must not cause a material distortion of income.
* * *
Q. What other changes are known or projected for next year, and how might farmers prepare for or react to those?
Farmers purchasing depreciable items should take notice now of the reductions which may occur in 2012. The reduction of the I.R.C. 179 expensing will drop from $500,000 in 2011 to $125,000 in 2012 and then $25,000 per year thereafter.
In addition, the bonus depreciation is scheduled to drop to 50 percent of the purchase price of eligible assets in 2012. So if the purchase of capital assets is in your farm’s business plan, now is the time to consider such a purchase. A word of caution, don’t buy “new paint” or “new steel” without first doing a comprehensive cost analysis.
* * *
Q. What are some good sources of tax advice and information for farmers with questions?
A great location to find agricultural tax advice is through the new agricultural tax web site at www.RuralTax.org. This website provides with a source for agriculturally related income and self-employment tax information that is current and easy to understand.
Producers should also watch for tax articles on OSU Extension’s Ohio ag manager website at http://ohioagmanager.osu.edu. Producers who prepare their own taxes should plan on attending OSU Extension’s Agricultural Tax Issues Update which will be held in Jefferson, Ohio Dec. 12.
More information about this update can be found at: http://incometaxschools.osu.edu/. And last but not least, the Farmer’s Tax Guide is an excellent resource and it can be found at www.irs.gov/pub/irs-pdf/p225.pdf.
In closing, on behalf of OSU Extension, I would like to wish you a very happy holiday season. Have a good and safe December.