Dairy Excel: Tax planning will be a mixed bag for Ohio’s dairy farm businesses this year

Halloween items are on clearance and Christmas decorations have been sneaking onto retail shelves at least as long as all the Halloween garbage has been out there.

In the dairy business world that indicates two things: 1) the retail world is really messed up, and 2) it is past time to do some income tax planning.

Mixed bag

It will be a mixed bag for Ohio’s dairy farm businesses this year.

In a few weeks, we will have the final Ohio farm business summary for 2010, thanks to the National Farm Benchmarking Center Grant with the Center for Farm Financial Management. In the 2010 numbers, we will see net farm income per cow ranging from +$1,000 to -$1,000 per cow. I don’t expect 2011 to be much different, except that fewer farms will fall in the higher, positive end, but there will be a few.

It is critical to get books fully caught up and to project income and expenses through the end of the year — whether your gut tells you the results will look good or not so good.

Start planning

If net farm income looks good, now is the time to do some income tax planning. If net farm income is poor or negative, tax planning is also needed along with planning for change.

To assist with tax planning, the 2011 IRS Farmer’s Tax Guide Publication is available online this year as a downloadable pdf file. You will find it at: www.irs.gov/pub/irs-pdf/p225.pdf. Hard copies will also be available at no charge at your local OSU Extension office starting in early December.

Income options

When net farm income is high, two methods are frequently used to minimize income tax liabilities, pre-paying expenses and Section 179 Expense Deduction.

Section 179 expensing allows purchases of eligible property to be expensed against income. This is where the Farmer’s Tax Guide and tax practitioners come in.

We can generally say that purchases of machinery, equipment, grain bins, and buildings used in the production of milk on your farm would qualify, but who you purchased them from (family, non-family members?), whether you traded equipment in on a purchase, and other factors we may not even think about may all impact their eligibility for a 179 deduction.

For 2011 tax planning purposes, the Section 179 Expense Deduction limit is $500,000. That amount will be reduced if the value of property placed in service during 2011 tax year was greater than $2 million.

Prepaying expenses for the next year is another method of managing taxes on positive net farm income. While this is a valid tax management strategy, it must be done properly to comply with IRS rules. This is also addressed in the Farmer’s Tax Guide.

Don’t be fooled

Over the years, our farm received several offers from companies that would allow their customers to prepay expenses. However, the prepayment was not attributed to a specific amount of a specific item, rather the “prepayment” was held on account and interest was paid on the balance until it was used up.

This type of arrangement is unlikely to be accepted by the IRS as a qualified prepaid expense in the event of an audit.

About those lease payments

Another item that will be appearing on the tax returns of many eastern Ohio farms will be gas and oil lease “bonus” payments if those landowners signed gas and oil leases.

While these will not appear on the Schedule F, they certainly will have income tax implications and should be part of the tax planning discussion.

Highs and lows

2011 has been a strange year for Ohio’s dairy farmers. Strange weather, horrible feed prices, great grain prices if you were selling. Unexpectedly high milk prices kept the year from being a total blood bath. Some farms with grain to sell will have a good year; others purchasing a lot of feed will have a fairly poor year.

Whichever category you will fall in, it is tax planning time.

About the Author

(Dianne Shoemaker is an OSU Extension dairy specialist located at the extension center in Wooster, Ohio.) More Stories by Dianne Shoemaker

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