Ag Decision Maker • Iowa State University Extension and Outreach

Contributed by Charles Brown, Extension Farm Management Field Specialist, crbrown@iastate.edu

Market Facilitation Payments (MFP), Coronavirus Food Assistance Program (CFAP 1 & CFAP 2), Paycheck Protection Program (PPP), Syngenta payments, ARC/PLC payments, crop insurance, etc. have pumped close to $40 billion into the US farm economy in 2020. If you are thinking of deferring any of these government payments, only crop insurance may offer the possibility of deferral. In February of 2020, the USDA was predicting a reduction in US farm income, but now is predicting growth in farm income, up to $115 billion.

This increase in government income could cause some unexpected tax consequences for some farmers this year. Even though crop and livestock prices were low for much of the year, they have now improved and coupled with government payments, farm income is looking better than expected.

If you happen to be in the group that is having a good year and may be better than expected, what can you do to manage your income and income taxes? Here are a few tips that you may use to manage your income.

Prepay expenses: This only works for cash basis taxpayers, not accrual. Some examples that you may prepay are seed, fertilizer, chemicals, feed, up to 12 months land rent that is coming due and any accrued business interest. You must have a business reason for doing so, such as to lock in a price or to insure supply. Tax avoidance is not a good business reason.

Defer income: Using deferred payment contracts for grain sales gives you a lot of flexibility. If you like the price today, you can lock the price in, but take the payment in 2021. The added flexibility is that if you are a cash basis taxpayer and find that you needed the income in 2020, you can pull the contract back into 2020 from 2021 and report the income in 2020, even though you will not receive the cash until 2021. There is a catch, you must pull back a full contract, you cannot pull back a portion of a contract. To have added flexibility you should have multiple smaller contracts and not just one large one. This allows you to have a better chance at managing your income to a level that you want. The added bonus is that this decision can be made after the end of the year.

Crop insurance also may be deferred if the payment received is due to crop damage and not price loss and you normally would have sold the majority of the crop the following year. Again, this does not work for accrual taxpayers.

Depreciation: There are several options for determining how much depreciation you want to take on new asset purchases. If you want to use accelerated methods you have available Section 179 and bonus depreciation. For 2020, the maximum Section 179 is $1,040,000. Farm machinery, grain bins, solar grids, breeding livestock, confinement buildings and field tile all qualify for Section 179. They have to be used more than 50% in the business of farming and it is an asset-by-asset decision. Section 179 cannot create a net operating loss. If you take more than allowed, the remainder will carry over to the following year. The good news is that unlike in previous years, Iowa now couples with the federal rules.

Bonus depreciation is another accelerated method of depreciation. Unlike Section 179 where you choose how many dollars you expense, with bonus depreciation, it is all or none. You expense either the full purchase price or none of it. It can be used on new or used assets and can be used on 20-year property, such as machine sheds. Bonus depreciation is a class-by-class decision. New machinery is a class life 5, so if you decide to use bonus depreciation on a new machinery purchase, all new machinery you purchased will have to use bonus depreciation. Bonus depreciation can create a net operating loss, unlike Section 179. Iowa did not couple with the federal rules on bonus depreciation, so you may reduce federal income, but not Iowa income.

Bonus depreciation also can be used by land owners receiving cash rent.

Retirement plans: Funding retirement plans will reduce federal income taxes, but not self-employment tax. Some retirement plans to consider may be traditional IRAs, 401Ks, Simplified Employee Pension Plan (SEP), Solo 401K, etc.

Charitable giving: The standard deduction for married filing jointly is $24,800 in 2020. You have to exceed this amount with your itemized deductions before it pays you to itemize. Gifting to charities is one of the itemized deductions, but many farmers do not exceed the standard deduction so their charitable giving does not create a tax deduction. Gifting grain to your favorite charity is a much better option. If you sold the grain and then gifted money to your charity, you would have to pay federal, state and self-employment taxes on the income. When you gift the grain directly to the charity, you do not get a charitable deduction, but also have no income to report and avoid the tax consequences. Ownership of the grain must be transferred to the charity before it is sold. Someone from the charity then makes the arrangement to sell the grain.

College savings plans: Contributing to 529 plans can save Iowa income taxes, but not federal taxes. A single person can contribute $3,439 per beneficiary in 2020. A husband and wife could contribute twice that amount. When the money is withdrawn and used for eligible education expenses, it is not taxed.

These are just some of the ways you can manage taxable income, but everyone’s situation is different. It is advisable to contact your personal tax preparer to determine what is best for your tax situation.

An agricultural economics and business website.

Contributed by Charles Brown, Extension Farm Management Field Specialist, crbrown@iastate.edu

The Tax Cuts and Jobs Act (TCJA) was signed into law December 22, 2017. Among many changes, it created new tax brackets for 2018 thru 2025. It also eliminated the deduction for personal exemptions and raised the standard deduction in 2019 to $12,200 for single fliers, $24,400 for married filing jointly and $18,350 for head of households. Keep in mind that most of the changes in TCJA end in 2025 and move back to pre-2018 tax law.

Section 179 Expense election was one of the changes that was made permanent. In 2019, this is now $1,020,000 and the phase-out starts at $2,550,000. On Iowa returns, the maximum amount is $100,000 and the phase-out starts at $400,000. In 2020, Iowa couples with the Federal amounts.

One of the other major changes in the TCJA was the repeal of like-kind exchange treatment for traded personal property. Under old law when a farmer traded machinery, the farmer depreciated the difference paid plus any remaining basis on the item traded in and no taxes were due. Under TCJA when a farmer trades machinery, the trade is considered a sale in the amount the dealer allowed for the trade-in, triggering ordinary taxable gain, and the farmer gets to depreciate the full purchase price of the machinery received. If the farmer does not want to pay tax on the gain of the trade-in, they are forced to use Section 179 or bonus depreciation to offset the taxable gain. Iowa did not couple with the Federal change in 2018, but maintained the old like-kind exchange rules. In 2019, for Iowa returns, farmers may use the old rule for like-kind exchanges or use the new Federal rule. In 2020, Iowa will couple with the Federal rule.

If farmers are forced to use Section 179 or bonus depreciation to offset gains from trading machinery, there can be other consequences. Excessive accelerated methods of depreciation reduce net Schedule F income, possibly taking it down to $0 or maybe even a negative situation. IRA and other retirement plan contributions are based on earned income (Schedule F). The deduction for self-employed health insurance is based on Schedule F net income. Contributions for self-employment tax are based on Schedule F net income. Reducing Schedule F income affects money available for retirement planning and other “above the line” deductions taken on the 1040. Also new in 2018 was the new “post card” 1040 Form that also had multiple schedules attached to it. After numerous complaints, there is another new 1040 Form for 2019. This one is a combination of the old 1040 and the 1040 from 2018. Maybe eventually they will get it right. I am not sure I can stand more simplification in our tax code.