Tucked away in the $787 billion stimulus package are two notable changes that will impact your tax planning.
“The stimulus legislation made more than 300 changes to the IRS code,” says Robert Holcomb, agricultural business management Extension educator at the University of Minnesota. Most important among them are that the 50% bonus depreciation provision and the increased section 179 deduction have been extended, he says.
The 50% bonus depreciation provision had expired at the end of 2008, but was extended for the 2009 tax year. The depreciation includes qualifying property acquired and placed in service in 2009.
Be forewarned that if you do not want to take the 50% bonus depreciation, you must specifically elect not to use it. “The 50% bonus depreciation is a requirement,” says Gary Hoff, Extension specialist, taxation, at the University of Illinois. “If producers don't want to use it, they must specify it in writing.” Your tax preparer will have more specifics on how to opt out of the deduction.
And not opting out could be a big deal. “The 50% bonus depreciation could become a huge deduction that a producer may not want,” Hoff says. “If you spent $500,000 on a new tractor and combine for 2009, you could end up with a $250,000 tax deduction that you don't want to take for 2009.” It's all part of the tax planning process. “If a producer writes all his assets off and doesn't have a deduction next year, he could expose himself to a large tax liability,” Hoff says.
The maximum section 179 deduction was scheduled to be lowered to $133,000 with a qualifying property limit of $530,000 for the 2009 tax year. The stimulus package changed the maximum section 179 deduction to $250,000 with a qualifying property limit of $800,000 for the 2009 tax year. Under current law, the section 179 deduction is scheduled to be reduced to $125,000 for tax year 2010 (with an inflation factor adjustment). But in 2011, the section 179 deduction is slated to drop back to $25,000 with no inflation factor adjustment.
“Washington could decide to extend the section 179 deduction once again,” Hoff says. “But much of that will depend on the state of the economy and the federal budget.”
Another major change, which comes courtesy of the Economic Stabilization Act of 2008, is on the purchase of certain farm machinery. For qualifying farm machinery placed in service in 2009, producers must depreciate that machinery over a five-year span instead of seven years. It has to be new machinery used in the farming business, and some things are not included: grain bins, cotton ginning assets and fence or land improvements.
GROWERS CAN ELECT out of the five-year life and use a 10-year recovery period for machinery that qualifies for the five-year recovery period. If you want slower depreciation than 150% declining balance over a five-year recovery period, you have two choices. You can elect straight-line depreciation over the five-year recovery period or straight-line depreciation over a 10-year recovery period. However, either of these choices applies to all property in the five-year recovery period that is placed in service during the year.
Tax experts continually stress the importance of accurate record-keeping when it comes to taxes. And this year — and the coming years —; could make that even more important. That's because the Internal Revenue Service (IRS) is hiring more revenue agents and revenue auditors, nearly 3,000 this year.
And the IRS is training these new agents regarding specific areas where growers could be in possible non-compliance.
“Producers need to ensure they are properly identifying hedging and speculating transactions,” Hoff says. “To be a hedge, that transaction must be identified before the end of the business day that it is a hedge,” he says.
Options for identifying the transaction as a hedge include setting up an account with the broker that is used only for hedging, marking the trading ticket or purchase order or keeping a record of hedging transactions.
THE BUSINESS RISK that is being hedged must be unambiguously identified in the farmer's records within 35 days of the hedge. There is concern that auditors are being told that even if a true hedge is placed, and the producer does not have records, it will be treated as a hedge if there is a gain, but as a speculative position if a loss is incurred.
“And in 2009 there are a lot of losses out there,” Hoff says. “It has always been an IRS requirement to keep these positions separate, but I would stress that keeping the right records will remain of utmost importance.”
Another concern for tax professionals and growers alike is the entire treatment of legitimate price protection market positions. At press time, the IRS was finalizing its guidelines that will be available on its Web site, www.IRS.gov. “The IRS requirements can be quite complex,” Hoff says. “The important thing is to have detailed records in the event you are audited.”
And with more IRS field personnel looking at tax returns, it's also quite possible that agriculture may be more closely scrutinized. “The most recent IRS statistics indicate that nearly 70% of farm tax returns showed a loss,” Hoff says. “And while there are legitimate reasons for that number, Washington will have increased pressure to look at those returns with a sharper eye.”
HANDLING LOWER-INCOME YEARS
Tax experts agree that income averaging can be very helpful in managing your tax strategy. Lower commodity prices may also translate into overall lower farm incomes, which means farm income averaging could be an election for future years, says Phil Harris, professor of agricultural and applied economics at the University of Wisconsin.
“Allowing the use of tax brackets from three prior years to decrease a current year's taxes is a powerful tool to help offset higher income years,” he says.
Also, growers are reminded that if operating expenses exceed operating income, net operating loss deductions can be carried backward or forward to other tax years. There are certain complex rules that apply, so it's best to consult with your tax advisor. “This is another tool for producers to better manage their tax liability,” Harris says.