At the Southwest Missouri Spring Forage Conference on Jan. 26, Elmer Curbow, a farm tax specialist and a Stone County farmer, offered some of his experience and information on taxation and the farm.
There are three types of farmers: those who farm for pleasure/recreation, those who are hobby farmers, and those who are true farmers. Curbow warned, “The IRS is looking harder at the hobby farmers, nowadays. They want to make sure that making a profit with the farm was your original intent.”
He added that many people who purchase a few cows, a few horses or a few of any livestock, and want to write it all off and deduct their expenses, should be careful, and beware an IRS audit.
Also, note that taxable income is all filed together. Your income from a full-time job is taxable income, and the farm income is included in your return on a schedule F.
Farm income is defined as anything you raise or produce for the purpose of selling, Curbow explained. “If you buy feeders to background then sell, that counts. But, you don’t want to put anything on the Schedule F unless you have to,” he said.
Enter the Form 4797: This is an ordinary income bracket or long-term capital gain form. This includes things that involve the sale of the business or farm property. “Livestock over two years old count as long term capital gain when selling livestock on form 4797," he explained.
Selling Livestock for Form 4797
Curbow offered an enticing suggestion for including more livestock on the 4797 form instead of it being reported as income on a schedule F.
“Farmers raise their own heifers to improve their herd. By keeping heifers out of their best cows, the herd can improve. If a farmer will identify half of his heifers as breeding replacements, then in the event that any of those heifers in the top half have to be culled and sold, their profit will go on the 4797 form. The advantage to this is saving yourself the 15 percent social security tax.”
No Taxes on Long-Term Capital Gain
Another area Curbow noted could benefit some farmers is that in 2008, 2009 and 2010 there is no tax on the long-term capital gain if you are in the 15 percent tax bracket or lower. If you are above that 15 percent bracket, in 2008 if your taxable income is below $65,100 you have zero tax on long-term capital gain.
It is a good time to cull cowherds or sell old equipment, Curbow said, and it won't cost you any tax. "This could be a good opportunity to upgrade your herd or equipment and not have to pay any taxes on it," he added.
Tax and Timber
Another area a lot of farmers have to grin and bear is a tax on the sale of timber. Curbow said one way to manage timber is to work with the local FSA office on a woodland exclusion project. “Then the timber is no longer part of the farm, and it goes on Schedule D as a long-term capital gain,” he said.
In this way, you can deduct expenses of cleaning up after the ice storm, etc. and then deduct or carry forward those amounts until you sell the timber.
Selling Equipment
Curbow said it is usually a better idea to sell equipment and buy equipment, as opposed to trading in. Selling equipment you’ve had over a year will be reported as long-term capital gain on the 4797 form- saving a minimum of the 15 percent social security tax.
Employee Benefits
“Health coverage is extremely expensive nowadays,” Curbow said. “If you don’t have health coverage, put your wife on the farm’s payroll and give her employee benefits.” He explained that this type of method will allow deductions on the schedule F. “You can also pay your kids less than $5,350 in a year, you will file a W-2, but they won’t have to file a tax form, and then you can claim them as dependents, deduct what you paid them, and put that money in a college fund. I wish I’d have done that before I had to pay for college for four kids,” Curbow laughed.
Fertilizer Taxation
If you put potash or phosphorus fertilizer on in the fall you can spread that expense out over two years. Lime is the same way, it can be spread out over three years. It is good to have this kind of flexibility. You may need the expense all in one year, or you may need it over several years.
Do you live off the farm?
Put an office in your home. Then, Curbow explained, before you go to the farm, stop by the office and deduct your mileage. “If you don’t have an office in the home, it is considered a commute to the farm.”
Talk to your tax advisor before implementing these suggestions to ensure they are right for your situation.
In all situations, Curbow said he can’t overemphasize keeping records up to date.
“Keep a spreadsheet, in a computer or on paper. Sit down and put your receipts and expenses in. You need to know where you are at at the end of the year to do appropriate tax planning,” he stressed.
