Badgerland Financial, a financial services and accounting firm that is a member of the Farm Credit System, has issued a memo to accountants and tax preparers regarding the recently-passed extension to tax credits. It reads:
For most farmers the most important aspect of the legislation is Code Section 179 expensing and Bonus depreciation. The following items have been extended for one year (through 2014):
- $500,000 Section 179 expensing limit on qualifying property, $2 million phase-out on purchases.
- 50% Bonus depreciation deduction on qualifying new property.
The temporary extension provides a needed 2014 tax deduction for many farmers. We expect Congress to take on a more comprehensive tax reform package in 2015.
See below for a few helpful reminders for other year-end tax planning strategies.
Deferred Payment Contracts
Under a deferred payment contract crops are sold this year but delay receipt of cash until next year. For tax purposes, these contracts fall under the rules of installment sales. When structured properly, they allow you to either delay income recognition until actual receipt of cash, or to elect out of this treatment and accelerate income into the year the contract was entered into.
For added flexibility, this election can be made on each contract independently. Badgerland Financial recommends the use of many deferred contracts of varying sizes to give maximum flexibility after year end. Specifics of these contracts should be discussed with your tax consultant to ensure personal needs are met.
Here is a reminder of the rules regarding these prepaid supplies.
- Under the cash method of accounting, a deduction for prepaid farm supplies in the year they are paid for is limited to 50% of other deductible farm expenses for the year, unless;
- The excess over 50% of other expenses is because of a change in business operations caused by unusual circumstances, or
- The total prepaid farm supplies expense for the preceding three tax years is less than 50% of total other deductible farm expenses for those three tax years.
- Prepaid livestock feed must also meet the following conditions (in addition to the above 50% test) to be deductible:
- The payment must be for the purchase of feed and not a deposit.
Consider the following factors:
- Specific quantity terms
- Seller’s treatment of the payment as a purchase
- No right to substitute other goods or products (can change ingredients)
- The prepayment has a business purpose and is not merely for tax avoidance.
- Example of business purpose include;
- Fixing maximum prices and securing an assured feed supply
- Securing preferential treatment in anticipation of a feed shortage
- Deducting the prepayment does not result in a material distortion of a farmer’s income. Consider the following factors;
- What are your customary business practices in conducting your livestock operations?
- The amount of the expense in relation to past purchases.
- The time of year the purchase was made.
- The expense in relation to your income for the year.
Source: Badgerland Financial memo at http://badgerlandfinancial.com/~/media/Files/Public%20Website/Misc%20PDFs/BF_Memo_Section179Passed