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UK economists offer tax tips for farmers

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Be aware of ag-related tax breaks

By David Harrison

For farmers who have yet to file their 2009 tax returns, UK Extension economists have the following suggestions as you prepare your returns and meet with your tax advisor.

Remember to report sales of breeding and market livestock separately. Animals used to produce milk, calves, pigs and market livestock are cull sales not subject to self-employment taxes.

Depreciation is one of the confusing parts of federal taxes, but note these three things concerning depreciation:

1) Additional first-year depreciation or “bonus” depreciation – Congress extended the 50 percent write-off of qualified 2009 depreciable asset purchases. It applies only to original use (new) items including machinery and equipment; fences; land improvements; single-purpose agriculture structures; and general purpose shops and barns.

2) Section 179 Expense Election – Congress extended the $250,000 maximum election on qualified property placed in service 2009. It is phased out for total purchases above $800,000 and is limited to earned income (including W-2 wages and other self-employed income).

3) Five-year recovery – Congress requires five-year recovery on new machinery and equipment placed in service in 2009. Used equipment still uses seven-year recovery.      

Farmers may deduct prepaid expenses for feed and supplies to be used the next year. The deduction is generally limited to 50 percent of this year’s total expense. It must be for actual feed or supplies, not merely a deposit on future purchases.  There must be a business purpose for the purchase. Farm insurance must be deducted in the year it applies.

Remove insurance, utilities, fuel and other personal expenses from farm expenses. The IRS assumes the first telephone landline is a personal expense. You may deduct itemized long-distance charges. Be sure to include farm subscriptions, utilities and office supplies.

Farmers may elect income tax averaging. It allows application of lower tax brackets from previous years to this year’s taxable income. The election may be used in the current year even if it does not reduce this year’s tax liability. Do this to create an opportunity for reducing taxes in some later year. Ask your tax preparer if farm income tax averaging will work for you.

IRS Publication 225, the Farmers Tax Guide, is available at the County Extension office or www.irs.gov. The publication contains a great deal of information and is written for farmers by the IRS with input from Extension farm tax specialists.

Concerning Forms W-2 and 1099: Social Security number and current address are required for employees, contractors, and landlords. Get the information before you make the payment. Form I-9 is required within the first week of employment. Report new hires to Kentucky New Hire Reporting within 20 days.

Farmers are required to file Form 1099-MISC to report payments of $600 or more for rent and services. The form requires address and SSN of recipient. There is a $100 failure-to-file penalty for each form not filed.  

Another possible thing for tax consideration this year is timber casualty loss due to last year’s ice storm. Obviously, many rules, qualifications, restrictions apply including determining basis, the actual loss, the allowable deduction. A timber casualty loss should first be reported on IRS form 4684. Other forms also may be required to be filed, depending on the circumstances.

Whether or not to actually deduct a casualty loss depends on an individual’s tax circumstances, and the nature and extent of the casualty loss. The cost of filing for a casualty deduction, such as the cost of hiring a professional forester or obtaining appraisals, along with the expected tax savings are important to consider.