Rural Tax Education

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  Prepaid Farm Expenses

  Jeffrey E. Tranel

  Farmers and ranchers often pay for feed, supplies, fertilizer, and other inputs in one year and use those items in the following year. They may do so to pay lower prices, guarantee availability, for planning purposes, and/or other reasons.

  The Internal Revenue Code allows qualified farmers and ranchers (farm-related taxpayers) to deduct the costs of such purchases in the year that the purchases are made rather than the year in which such items are used. Generally, the deduction for pre-paid farm supplies is limited to 50% of other deductible farm expenses (all schedule F deductions except supplies) for the year.

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  Alternative Minimum Tax

  Philip E. Harris

  Congress imposes the alternative minimum tax (AMT) on taxpayers to prevent them from combining several tax exclusions, deductions and credits to pay very little or no federal income tax even though they have significant income. When it was first enacted in 1969, the AMT affected only a few, very high-income taxpayers. Since it was first imposed, changes to the regular tax rules cause many more taxpayers to pay the AMT. This fact sheet gives a basic explanation of the AMT, some examples of situations that cause taxpayers to pay it, and some planning techniques to minimize the impact of the AMT.

  The terminology of the AMT tax can be confusing, because the tax that Congress calls the AMT is technically an add-on tax rather than an alternative to the regular income tax—the AMT is added on to the regular tax liability. The IRS follows the Congressional labeling and calls the amount of tax added on to the regular tax the “alternative minimum tax.” Therefore, taxpayers report their regular income tax on their income tax return and then add on the AMT to find their total income tax liability.

  While the AMT is technically an add-on tax, it has the effect of an alternative tax because taxpayers calculate their AMT by subtracting regular tax liability from a “tentative minimum tax.” If the tentative minimum tax is less than the regular tax, there is no AMT. If the tentative minimum tax is greater than the regular tax, the AMT is the difference between the tentative minimum tax and the regular tax. Because the AMT is added to the regular tax, the effect of these rules is that taxpayers pay the higher of the regular tax or the tentative minimum tax. Therefore, the tentative minimum tax is in effect an alternative tax that taxpayers must pay if it exceeds their regular tax obligation.

  This fact sheet focuses on the AMT imposed on individual taxpayers. Because only the owners of partnerships, S corporations, and limited liability companies (LLCs) that are taxed as disregarded entities, partnerships, or S corporations are taxed on the income of those entities (the entities do not pay tax on the income), the individual AMT is the only AMT imposed on the income of those entities. The AMT imposed on C corporations is discussed briefly at the end of the fact sheet.

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  Net Operating Losses

  Philip E. Harris

  Weather, disease and variable prices for inputs and commodities cause farmer’s income to fluctuate from one year to the next. Farmers can minimize their income tax liability by managing the timing of their income and deductions to keep their taxable income level. In some cases, the leveling technique is not enough to avoid a spike in taxable income or a dip that causes taxable income to go below zero. The tax effect of the spikes can be minimized with income averaging rules. The tax effect of the dips below zero can be managed with the net operating loss (NOL) rules discussed in this fact sheet.

  The concept of the NOL rules is quite simple. Taxpayers are allowed to carry business losses from the loss year to offset taxable income in other tax years. The loss can be carried back and/or forward.

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  Choices for Your Farm Operating Loss

  George F. Patrick

  Many young or beginning farmers may find that their projected farm expenses exceed anticipated farm receipts for the current tax year. These farm losses may be experienced during a start-up period. However other losses may be the result of unexpected events. For some producers, farm losses may generate cash inflows in the form of tax refunds. Tax law allows choices with respect to farm losses. Farm losses realized in one tax year may be carried back 2 years or 5 years1 to obtain refunds of taxes previously paid. If the loss is not carried back, or if the full loss is not used (absorbed) in the carryback years, the loss may be carried forward to offset income and tax liabilities in future years. Therefore, producers with farm losses should analyze their carryback and carryforward alternatives.

  A net operating loss (NOL) and a farm loss reported on Schedule F (Form 1040) are often not the same because of differences in income and expense items included. The NOL concept is simple, but computation of the NOL deduction and NOL carryback can be quite complex. This complexity arises because various tax benefits must be removed by modifying the deductions from the loss year and modifying the income in the carryback year or years. Similar modifications are made if the loss is carried forward. Because of these modifications, the tax benefits of the loss may be reduced significantly. This article addresses some possible loss situations and general strategies for farmers to avoid an NOL, if possible.

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  Form 1099 Information Returns

  Jerry S. Pierce Jr.

  The 1099 tax form is used to report various forms of income (other than wages, salaries, and tips) to the Internal Revenue Service (IRS) and to the recipient of the payment. Agriculture producers may both receive Form 1099 information returns and be required to issue them. The Form notifies the IRS and the recipient of the payment. The IRS will then look for the amounts from the Form 1099s to show up on the recipient’s Federal tax return. This article covers many 1099s that producers may encounter.

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  Farm, Farming and Who’s a Farmer for Tax Purposes

  Guido van der Hoeven

  Meeting the qualifications of farming and being a farmer under the Internal Revenue Code (IRC) allows for special benefits; however, not all agricultural producers meet these qualifications even if they are producing agricultural products, which is why it is vitally important for operators of farms and their tax professionals to understand the IRS tax definitions of farm, farming and farmer. One of the benefits of being classified as a farmer is the exclusion of certain receipts from income as in the case of conservation payments as allowed under IRC Section 175.

  Operators of farming businesses may associate the term farmer as an adjective when describing themselves. Used in the colloquial context most people will understand what being a farmer means as a description of the noble rural occupation. For income tax purposes, however, taxpayers and their advisers need to be certain of the facts and circumstances in the context of the tax issue at hand. In some instances, an individual can be classified as a farmer for one income tax purpose but not for another. Also, someone who is not classified as a farmer may still be engaging in farming activities and have farm income.

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  Like-Kind Exchange (Trade) of Business Assets

  Guido van der Hoeven

  During the course of operating a farm or ranching business, operators will dispose of property used in the business. Disposition can occur in a variety of ways. A sale and/or trade (like-kind exchange) of property are two common methods of disposition. The purpose of this discussion is to illustrate correct income tax reporting procedures when business properties are disposed of over the course of time through like-kind exchanges.

  This discussion will focus on the like-kind exchange of tangible personal property (i.e. equipment and vehicles) commonly known as trade-ins. The point of the discussion is to bring readers a better understanding of correct income tax reporting for trading business assets. The use of a like-kind exchange for real estate will be introduced briefly.

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  Sale of Business Property

  Guido van der Hoeven

  During the course of operating a farm or ranch business, producers will dispose of property (e.g., livestock, equipment, real estate, etc.) used in the business. This can occur in a variety of ways with two common methods being sales of assets and trading (like-kind exchange) of property. The purpose of this fact sheet is to discuss and illustrate correct income tax reporting when business assets are sold.

  This discussion also addresses, for income tax purposes, different types of business assets and their tax treatment upon selling them. One common example is the sale of cull breeding animals that were raised by the operator of the farm or ranch. Though these animals may be regarded as “farm products” by business operators, for income tax purposes these animals may receive capital gains treatment.