CALDWELL, Ohio – The year 2002 has been one of extremes – from too much rain during the spring to very little or no rain during the growing season; from normal prices for livestock and livestock products early in the year to very low prices later in the year.
Everything that has happened weather-wise and price-wise during 2002 has created a lot of stress on farm families. While working on farm records may not be the favorite job around the farm, using those farm records now to do some preliminary income tax planning can help ease some of the year-end stress.
Tax goal. The goal of income tax management is to avoid large year-to-year fluctuations in taxable income while making sure that there is at least sufficient income to offset personal exemptions and deductions.
The 2002 standard deduction for a married couple filing jointly is $7,850; single is $4,700 and the personal exemption is $3,000. A married couple with no children can have $13,850 of income before they will pay any income tax.
Self-employment taxes start at $400 net from self-employment so generally self-employment taxes will be paid before any income taxes are due.
Taxes in a drought year. With drought conditions comes the potential of additional income and expenses, e.g., crop insurance and crop disaster payments, additional livestock sales due to reduced feed and water supplies, and additional government payments for drought assistance.
If your county has been declared a disaster area because of the drought, any crop insurance proceeds and crop disaster payments received in 2002 can be deferred until the following year.
This deferral can be made if you can show that your normal marketing pattern is to sell your crops in the year following their production and harvest. If payments are made for more than one crop, the payments must be reported in the same manner for all crops.
Income from excess sales of any type of livestock can also be deferred to 2003 if the sales were caused by the 2002 drought.
If the excess livestock sold is held for draft, breeding, or dairy purposes, the gain on those animals can be treated as an involuntary conversion and postponed if similar animals are purchased animals within a two-year period.
The “excess” amount of income or gain that can be deferred or postponed is the amount over and above the amount that would have normally been reported.
Other government drought assistance payments are generally taxable in the year received.
Be sure to examine your tax situation carefully before you decide whether to defer or not defer additional payments or income you received because of the weather. The OSU Extension Farmers Tax Guide has an excellent discussion on making the elections necessary to defer income related to drought conditions.
Depreciation planning. The Job Creation and Worker Assistance Act of 2002, signed during March 2002, includes a provision for an optional 30 percent first year additional depreciation deduction for the taxable year in which qualified property is placed in service.
Qualifying property must meet all the following requirements:
1. must be MACRS property with a recovery life of 20 years or less;
2. property must be brand new (not used) and use must start after Sept. 10, 2001;
3. property must have been purchased after Sept. 10, 2001, and before Sept. 11, 2004; and
4. property must be placed in service before Jan. 1, 2005.
You have to elect out of the additional 30 percent depreciation on Form 4562, Depreciation and Amortization, if you do not want to claim it.
Depreciation ‘decoupled.’ Ohio personal income taxes have been calculated starting with the federal adjusted gross income from Form 1040. However the Ohio General Assembly passed legislation during 2002 that “decouples” depreciation for Ohio income taxes from the 30 percent additional depreciation allowed for federal tax purposes.
This will affect all Ohio taxpayers that use federal income as a basis for Ohio tax calculations.
To make the adjustment for Ohio income taxes, the amount of the 30 percent additional depreciation claimed is divided by 6 and that one-sixth amount is added to the regular federal deprecation claimed for years 1-6.
The result of this change is that you will get the full benefit of the 30 percent additional depreciation on your Ohio income taxes, but the amount will be claimed over six years rather than just in the first year.
Additional details on this adjustment for Ohio income taxes can be found at: www.state.oh.us/tax/Information_Releases/picft200201.html.
While this change does not require a separate depreciation schedule for Ohio, it will require some extra record keeping to track the depreciation amounts claimed over time.
Pencil it out. The decision to postpone reporting income related to drought conditions should not be automatic. Likewise, claiming the additional 30 percent depreciation is not an automatic decision.
Both tax provisions should be considered as part of an overall income tax management strategy for 2002 and 2003. Be sure to check with your tax adviser about your individual situation.
(The author is a farm management specialist with OSU Extension in eastern Ohio.)
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