Now is the time for farm budgeting

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Barn and farmland

Halloween items are on clearance and Christmas decorations have been sneaking onto retail shelves.

I do not understand the amount of money people pay for some truly nasty “decorations.”

For the dairy business world, these signs indicate: 1) the retail world is really messed up, and 2) it is time to do income tax planning.

It will be a mixed bag for Ohio’s dairy farm businesses this year. We started the year feeling hopeful the worst of this down cycle was behind us.

If you locked in some prices at $17/cwt and up, you should be pleased since the Class III price has averaged only $16.12 through September.

While this was not the $17 we had hoped for, it is better than 2016’s $14.90/cwt (January-December).

Do it

Now is the time to get the farm financial 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, do it.

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.

Assistance

To assist with tax planning, the 2017 IRS Farmer’s Tax Guide, Publication 225 is already available online as a downloadable pdf file.

Find it at www.irs.gov/pub/irs-pdf/p225.pdf. Hard copies will be available at your local OSU Extension office starting in early December.

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

Section 179 expensing allows purchases of eligible property to be expensed against net 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 crops and milk on your farm would qualify, but whether you traded equipment in on a purchase, and other factors we may not even think about may all impact their full eligibility for a section 179 deduction.

For 2017 tax planning purposes, the Section 179 Expense Deduction limit is $510,000. That amount is reduced if the value of qualifying property placed in service during your 2017 tax year was greater than 2.03 million dollars.

Prepaying

Prepaying expenses for 2018 is another method of managing taxes on positive 2017 net farm income. While this is a valid tax management strategy, it must be done properly to comply with IRS rules.

As we near the end of the year, you may receive offers from companies that will allow their customers to prepay expenses. However, the proposed prepayment will not be attributed to a specific amount of a specific item, rather the “prepayment dollars” will be held on account and interest will be paid on the unused balance until it is 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. Check with your tax preparer beforehand!

Webinars

There are two good opportunities for farm tax updates. The 2017 Ag Issues Income Tax Webinar is an excellent, one-day workshop held in nine locations in Ohio Dec. 18.

You can also participate from the comfort of your own farm office if you have a good internet connection.

Go to http://farmoffice.osu.edu to register.

Finally, Jan. 29, many County Extension offices will offer a two-hour income tax update webinar specifically for Ohio’s farmers. Contact your local office for details.

Whether it is good news or bad news, give yourself time to consider and implement income tax management strategies.

Budget time now.

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