Answers to income tax prep questions from Ohio farmers

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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. 

Question

From a farmer in Wayne County: Our farm income is going to be higher this year in comparison to the past few years. I have heard that farmers are permitted to income average to help lower their taxes. Is this true? 

Yes, income averaging is a great way to level out the peaks and valleys of farm income to avoid higher tax brackets. This option can lower income tax liability in a year where farm income is higher compared to one or more of the three previous years. 

You can elect how much of this year’s farm income to average back to use up unused and lower tax brackets from the three previous years. The IRS reports this tax-saving method is underutilized by farm taxpayers. Check out the instructions for Schedule J and then ask your accountant to see if they reduce your tax obligation through income averaging. 

Question

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

The maximum amount you can elect to deduct for most section 179 property placed in service in 2022 is $1,080,000. This limit is reduced by the amount by which the cost of the property exceeds $2,700,000. 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 a 100% deduction. 

Question

From a farmer in Richland County: We had a really good income year from selling our corn, hay and soybean crops 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, besides and income averaging and 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. 

Question

From a farmer in Ashland County: I heard there may be a new tax incentive for new and beginning farmers in Ohio. Is this true? 

The answer is yes. Ohio’s Beginning Farmer Bill, House Bill 95, became effective on July 18, establishing a new Ohio tax incentive for retiring farmers and/or landowners as an encouragement to sell or rent land, machinery and livestock to a certified beginner farmer. The new tax credit will be 3.99% of the sale price or of the gross rental income received during a calendar year for a cash or share rental agreement. 

This tax incentive will begin in 2023 so now is the time to learn more about this program. Peggy Hall from Ohio State’s Ag and Resource Law program wrote an excellent summary sheet on this new incentive and it can be accessed at farmoffice.osu.edu/our-library/tax-law This fact sheet also defines how a beginner farmer becomes certified and details on the requirement of completing a financial management program. 

Question

From a new farmer in Greene County: I am new to all this. Where can I learn more about farm taxes? 

Publication 225, The 2022 Farmers Tax Guide, is the premier source of information on farm taxes and it can be accessed at irs.gov/pub/irs-pdf/p225.pdf

I would also recommend that you also check out the Rural Tax Education website at ruraltax.org/ which has excellent farm tax resources that are both current and easy to understand. 

In closing, I hope each of you have a wonderful Christmas 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.” 

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David Marrison is an associate professor and Extension educator, Agriculture & Natural Resources, Ohio State University Extension. He can be reached at 740-622-2265 or marrison.2@osu.edu.

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