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Tax Implications for Farmers to Consider
By Sam Custer
OSU Extension Darke County
Ohio and other Midwestern states were hit hard by the 2012 drought.
With reported yields as low as 7 bushels to the acre for corn, many
farmers will be relying on insurance and disaster payments to make ends
meet. Due to the severity of this year’s drought, many farmers will be
receiving a sizable insurance check which might put them in a unique
tax bind.
David Marrison, Associate Professor of The Ohio State University,
reports that generally, farmers who use the cash accounting method must
report income in the year in which they receive it. In 2012, this could
create a bunching of income for farmers who would normally sell a
portion or their entire crop in the year following harvest. If they
receive an insurance or disaster payment for their 2012 crop before the
end of the year, this could lead to sizable taxable income because they
already have reportable receipts from selling their 2011 crop in 2012.
So what can farmers do? Thankfully, the Internal Revenue Service
understands how farmers sell crops and allows for the postponement (for
one year) of reporting compensatory payments received for crop loss
under IRC section 451(d) and Treasury Regulation section 1.451-6.
Generally, this exception applies when crops cannot be planted or are
damaged or destroyed by a natural disaster such as a drought or flood.
To qualify for the exception, a farmer must use the cash method for
accounting and must show that it is his or her normal business practice
for crop income to be reported in the year following the year it was
grown (i.e. sold in the following year).
The election must cover all eligible crops from a single farming
business. If a farmer has more than one farming business, he or she
must make a separate election for each farming business. The exception
does not allow the taxpayer to postpone or accelerate reporting a crop
loss payment if the payment is received the year after the year of the
crop loss. So if the farmer receives his insurance payment in 2013 for
the 2012 affected crops, it cannot be deferred.
Chris Bruynis, Assistant Professor/Extension Educator, The Ohio State
University, shares the Section 179 tax provision which allows
businesses to deduct the full amount of the purchase price of equipment
(up to certain limits). It can be elected for either new or used
equipment purchased in fiscal calendar year of the business. In
2012, the deduction amount is $139,000 but is slated to be reduced to
$25,000 in 2013. Farmers can elect to use all or part of the deduction
amount. An example would be that a farmer purchases new equipment for
$100,000 and used equipment for $75,000 in 2012. She can deduct the
$75,000 on the used equipment and $39,000 on the new equipment for a
total of $139,000. The $61,000 remaining value of the new equipment
would then be eligible for bonus depreciation or be placed on the
regular depreciation schedule. Section 179 deductions are limited
to the amount of net operating income generated by the farm and cannot
be used to create a net operating loss.
Bonus depreciation has been a more recent tax law and also geared to
encourage investment in equipment and buildings. For 2012 the
bonus depreciation rate is 50% of the purchase price and can only be
applied to new items. Bonus depreciation is currently slated to
disappear in 2013. An example would be that a farmer purchased a new
multi-purpose building for equipment storage and the farm shop for
$120,000. He can use the bonus depreciation to deduct 50% or $60,000 of
the purchase price on his 2012 taxes. Bonus depreciation can be
used regardless of net operating income even if it results in a net
operating loss.
Typically, Section 179 rules should be applied first and then bonus
depreciation rules. The exception to this would be if the farm has no
net operating income resulting in the farm being ineligible to use
Section 179.
All decisions regarding tax implications should be discussed with your
accountant or tax preparer.
For more information visit the OSU Extension web site at
http://darke.osu.edu or contact Sam Custer at 937.548.5215.
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