Answering common income tax questions from farmers across Ohio

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Hello Northeast Ohio! During the past six weeks, Ohio State University Extension has been offering a series of two-day tax workshops across Ohio for income tax preparers. I have been part of the team teaching at these workshops as well as at other extension events across the state.

As we have been teaching, we have been asked a variety of farm-related tax questions, so today I would like to share a few of these with you.

From a farmer in Marion County: I plan on buying a new tractor before the end of the year. How much accelerated Section 179 depreciation can I use?

Farm machinery purchases are expensed on a depreciation schedule, typically over 5 or 7 years. However, farmers can elect to speed up the depreciation through two accelerated methods — section 179 and bonus depreciation. For 2023, the maximum amount you can elect to deduct for most section 179 property is $1.16 million. This limit is reduced by the amount by which the cost of the property exceeds $2.89 million. Remember this deduction is limited to the taxable income from your business and the equipment must be on-site and fully ready for use before it can be depreciated. In addition to section 179 depreciation, remember to ask your accountant about the use of bonus depreciation which may allow for an 80% deduction. It should be noted that bonus depreciation is being phased out and will be lowered to 60% in 2024.

From a farmer in Wayne County: We are updating our farm estate plan. What are the new gift and estate tax limitations?

The Internal Revenue Service recently released their annual inflation adjustments to the annual gift tax exclusion as well as lifetime exclusion for federal estate and gift tax. For annual giving in 2024, individuals can make gifts up to $18,000 per gift recipient or up to $36,000 per recipient for married couples without using any of their lifetime estate and gift tax exclusion.

For individuals who pass away in 2024, the federal estate tax exclusion will be $13.61 million per person decreased by lifetime taxable gifts. A reminder that the historically high federal estate tax exclusion is scheduled to sunset at the end of 2025. This means the $13.61 million exclusion per person will be reduced to approximately $7 million. It would be wise for all of us to review our estate plans in 2024 given this reduction. Remember OSU Extension holds workshops to help you develop your farm succession and estate plans. More details can be found at go.osu.edu/farmsuccession.

From a farmer in Holmes County: We had a really good income year from selling our hay and beef this year. What are some strategies that I can explore to reduce my taxes?

First, paying taxes because of increased revenue is not a bad thing. This being said, there are a few strategies other than buying equipment through accelerated depreciation that producers can use. These include storing more crops and marketing them during the next tax year. Also, deferring the receipt of payments owed to you can push income forward. But remember, income is constructively received and taxable when money is credited to your account or made available to you without restriction.

Producers also routinely pre-pay expenses for the next production year by purchasing fertilizer, seed and feed. These expenses are typically limited to 50% of all other deductible farm expenses. It is also important to note that these payments must be for specific purchases not merely a deposit on your account to be used later.

Higher-income years are also a good time for a business to explore the available options for providing retirement funds for both partners and employees. There are some great options available so make sure to schedule time to visit with your financial professional before the end of the year.

From a farmer in Guernsey County: How can I learn more about farm taxes?

First, Publication 225, The 2022 Farmers Tax Guide, is the premier source of information on farm taxes and it can accessed at irs.gov/pub/irs-pdf/p225.pdf I would also recommend that you check out the Rural Tax Education website at ruraltax.org/, which has excellent farm tax resources that are both current and easy to understand.

OSU Extension will also be hosting a landowner and farm tax update on the Farm Office Live webinar on Dec. 15 from 10 a.m. to noon. This webinar is free and registration can be made at farmoffice.osu.edu/farmofficelive. Some of the topics that will be discussed include farm depreciation, employee versus independent contractor, corporate transparency act, 1099-K changes, charitable remainder trusts, estate and gift taxes, sunsetting provisions of the Tax Cuts and Jobs Act and Current Agricultural Use Valuation and commercial activity tax updates.

In Closing

I hope each of you has a wonderful holiday season and I would like to share a quote from Albert Einstein who stated, “The hardest thing to understand in the world is the income tax.” Have a good and safe day!

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