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DEEPYIELDTAX STRATEGIES

Year-End Tax Planning for Farmers and Ranchers: Questions to Work Through With Your CPA

Short answer: Year-end planning for a farm or ranch is a structured look at the tax year while it is still open: how income and expenses are landing under your accounting method, whether any IRS elections may apply to this year's crop and livestock sales, what has been placed in service, and how estimated tax works for farmers. IRS Publication 225, Farmer's Tax Guide, covers each of these. Which questions matter for your operation, and what to do about them, depends on your facts and is decided with your CPA.

Year-end is a checkpoint, not a cutoff for everything. Some items depend on what happens during the tax year; others are handled after it ends, when the return is prepared. Knowing which is which is part of the planning.

Which accounting method does your operation use?

Most of the year-end timing questions start here. Under the cash method, IRS Publication 225 says you generally deduct expenses in the tax year you pay them, and you generally report income when you actually or constructively receive it. Under an accrual method, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Publication 225 also notes that certain large farm businesses must use an accrual method for their farm activities.

Publication 225 adds a limit that matters at year-end: under the cash method, "you may not be able to deduct an expense paid in advance." Chapter 4 has special rules for prepaid farm supplies and prepaid livestock feed, including a deduction limit and exceptions. If you are considering prepaying anything, read those rules with your CPA first.

Crop insurance and disaster payments: is the postponement election available?

Publication 225, chapter 3, describes an election to postpone reporting eligible crop insurance proceeds until the year after the physical damage occurred. It is available only if all of its conditions are met, including that you use the cash method, you receive the proceeds in the same tax year the crops are damaged, and you can show that under your normal business practice you would have included more than half of the income from the damaged crops in a later year. Publication 225 also explains that for revenue insurance, only the part of the proceeds that results from yield loss can be deferred, and that weather insurance payments based on rainfall amounts rather than physical damage can't be deferred.

Did weather force extra livestock sales this year?

If you sold more livestock (including poultry) than you normally would because of drought, flood or another weather-related condition, Publication 225 says you may be able to postpone reporting the gain from the additional animals until the next year. The rule covers livestock held for sale and livestock held for draft, breeding, sport or dairy purposes, and you must meet all of its conditions, including that your principal trade or business is farming, you use the cash method, you can show the extra animals wouldn't have been sold under your usual business practice, and the sale happened solely because of a weather-related condition affecting the livestock's water, grazing or other requirements. Chapter 3 walks through them, and Table 3-2 compares this rule with the related involuntary conversion rule.

Is farm income averaging (Schedule J) worth running?

Schedule J lets an individual with income from a farming business elect to figure the current year's income tax by averaging all or part of that farm income over the previous three years (the base years), according to the Schedule J instructions. Publication 225 says income averaging can be used for any year in which you were engaged in a farming business as an individual, a partner in a partnership or a shareholder in an S corporation. Whether it changes anything depends on your income history, so ask your CPA to figure the tax both ways.

What was bought, built or placed in service this year?

Depreciation generally begins when property is placed in service (IRS Publication 946, "When Does Depreciation Begin and End?"). That makes year-end a good time to list what went into service during the year: equipment, fences, wells, drainage tile, grain bins and buildings, with dates and invoices. Section 179 and the special depreciation allowance may be available for qualifying property, subject to limits that depend on the property and the year; Publication 225, chapter 7, and Publication 946, chapters 2 and 3, explain the current rules. Whether either applies depends on your facts.

Land itself is never depreciable (Publication 225, chapter 7). If you bought land with improvements this year, the purchase price is allocated between the land and each improvement, generally by fair market value (Publication 225, chapter 6).

How does estimated tax work for farmers?

Publication 225 gives farmers a special rule. If at least two-thirds of your gross income for the current or prior tax year is from farming, and you file your return and pay all the tax due by the March date that Publication 225 gives for that year, you don't have to make estimated tax payments. Otherwise, the general estimated tax rules in Publication 505 apply. Your CPA can tell you which rule fits your year.

Is the operation a business or a hobby in the IRS's eyes?

Publication 225, chapter 4, covers not-for-profit farming: when a farm activity isn't engaged in for profit, deductions are limited, and the publication explains the presumption of profit and the factors involved. This is worth a conversation for newer operations and ranch properties. We don't assume a structure makes any expense deductible before reviewing the facts.

What to have in hand for a year-end review

  • Year-to-date income and expense records for the farm (Schedule F categories are a useful map).
  • Crop insurance, disaster and other program payment statements, with the dates of any crop damage.
  • Livestock sale records, with notes on any sales beyond your usual practice and why.
  • Invoices and placed-in-service dates for equipment, buildings and improvements bought this year, and purchase documents for any land.
  • Last year's return, with the depreciation schedules, and any estimated tax payments made this year.

Where DeepYield fits

DeepYield is a second set of eyes, not a replacement for your CPA. We go looking for what's missing. In a free two-year look-back, we do a review of your last two years of returns, done for you, including Schedule F, the depreciation schedules and how land and equipment purchases were recorded, and we share the questions we see with you and your CPA. We look for every legitimate deduction and credit your operation qualifies for, not just the obvious ones. Whether any of it applies to this year is something you and your CPA decide.

Request your free two-year look-back →

Frequently asked questions

What should farmers review at year-end?

Publication 225 topics that often come up include how income and expenses land under your accounting method, the rules for prepaid farm supplies and feed, whether the crop insurance or weather-related livestock sale postponement rules may apply, Schedule J income averaging, what was placed in service, and how estimated tax works for farmers. Which ones matter depends on your facts.

Can a farmer deduct prepaid feed or supplies?

Sometimes. IRS Publication 225 says a cash-method taxpayer may not be able to deduct an expense paid in advance, and chapter 4 has special rules for prepaid farm supplies and prepaid livestock feed, including a deduction limit and exceptions. Review those rules with your CPA before prepaying.

Can crop insurance proceeds be reported next year?

In some cases. Publication 225 describes an election to postpone reporting eligible crop insurance proceeds until the year after the damage, if conditions are met, including using the cash method and showing that you would normally have reported most of the income from the damaged crops in a later year.

What is farm income averaging?

Schedule J lets an individual with farm income elect to figure the current year's tax by averaging all or part of that income over the previous three base years. Whether it changes anything depends on your income history, so it is worth having your CPA figure the tax both ways.

Do farmers have to make estimated tax payments?

Not always. Publication 225 says that if at least two-thirds of your gross income for the current or prior year is from farming, and you file and pay all tax due by the March date it gives for that year, you don't have to pay estimated tax. Otherwise the general rules in Publication 505 apply.

Does year-end planning replace my CPA?

No. DeepYield is a second set of eyes, not a replacement for your CPA. Any question we raise is for you and your CPA to consider together.

Sources

Results depend on your specific facts. No outcome is guaranteed. This is general information, not tax advice; advice is provided only under a signed engagement.

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