(OnFocus) It has been a challenging financial year for many farmers. Fortunately, there are tax benefits specifically for people in the farming industry, and the CPA’s at Hawkins Ash CPA’s are happy to help farmers maximize their tax return.
“Farmers are allowed a number of tax benefits under the current tax law,” said Matt Eckelberg, partner at Hawkins Ash CPAs.
A few of these include:
· Farm income averaging – A farmer may be able to average some or all of the current year’s farm income by spreading it out over the past three years. “This may lower your taxes if the farm income is high in the current year and low in one or more of the past three years,” explained Eckelberg.
· Fuel and road use – A farmer may be able to claim a tax credit or refund of excise taxes paid on fuel used on the farm for farming purposes.
· Sale of raised livestock – If raised livestock is sold by a farmer, the taxable gain on the sale of the livestock may be taxed at the lower capital gains rates if the livestock meets certain age thresholds.
· Net Operating Losses – Generally, net operating losses are no longer allowed to be carried back to an earlier tax year to offset prior income. Farmers are allowed to carry back to the past two years an operating loss from 2019.
One common topic that Eckelberg hears about is crop insurance.
“Crop insurance proceeds received as the result of crop damage is included in income. Generally the insurance proceeds are included in income in the year you receive them,” he explained. “A farmer should treat the crop insurance proceeds the same as crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops because of drought, flood, or any other natural disaster.”
“If the farmer uses the cash method of accounting and receives crop insurance proceeds in the same tax year in which the crops are damaged, she/he can choose to postpone reporting the proceeds as income until the following tax year,” he added. “The farmer can make this choice if it can be shown that the proceeds have been included in income from the damaged crops in any tax year following the year the damage occurred.”
When it comes to deductions, farmers can deduct ordinary and necessary expenses they paid for their business.
“An ordinary expense is a common and accepted cost for that type of business. A necessary expense means a cost that is appropriate for that business,” explained Eckelberg. “Fixed assets purchased by the farmer are given specific depreciation lives by the IRS. These lives apply specifically for assets used in agriculture.”
For example, a single purpose agricultural structure is depreciated over 10 years and general purpose farm buildings have a 20-year depreciation life. Building structure for businesses are depreciated over a 39-year life.
Prepaid farm supplies are allowed as a deduction in the current year even if the supplies are not received until the next. Items such as feed, fertilizer, seed and other similar supplies if paid for during the year would be deductible.
Eckelberg added that farmers also qualify for a Wisconsin income tax credit.
“The Wisconsin Manufacturing and Agriculture Credit provides for an income tax credit of 7.5% of eligible production activities income,” he said. “Any unused credit is carried forward to future tax years. The credit is available to individual, estate, trust and corporations. Partnerships, LLCs tax as partnerships and tax options (S) corporations will calculate the credit and pass it through to the partners, members or shareholders.”
Hawkins Ash CPAs LLP has many years of experience in preparing farm income tax returns, assisting with bookkeeping and preparation of payroll and information (Form 1099) returns.
“We offer tax planning for the current year and can assist with long range planning, the transition of the farm to the next generation, and selling the farm for retirement,” said Eckelberg. “We have multiple offices that we can draw on each other’s experience to help ensure we are providing our clients the best income tax outcomes.”
According to the IRS, farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables.