Agriculture producers: It's time for tax planning
As Santa makes his list, checking it twice, producers should be diligently preparing documents of their own. North Dakota State University Extension Service farm economist Ron Haugen recommends agricultural producers have all their income tax pla...
As Santa makes his list, checking it twice, producers should be diligently preparing documents of their own.
North Dakota State University Extension Service farm economist Ron Haugen recommends agricultural producers have all their income tax planning completed by the end of the year.
"The basic rule is get your records up to date," Haugen said.
Haugen reminds farmers and ranchers to include in this year's calculations any income that was deferred to 2007 from earlier years.
With the generally higher commodity prices this year, Haugen said producers should be a little more diligent in their tax planning.
"Try to get as even as possible," Haugen said of balancing expenses and income. "From an economic point of view, I would not encourage producers to buy machinery just to save on taxes."
Haugen said, though, if producers need new machinery and have a higher income, they should purchase one before the end of the year. Another suggestion Haugen has is to prepay spring expenses, like fertilizer or feed.
"The 179 expense election has increased to $125,000," Haugen said. "The 179 election allows them to write off all or a large portion of machinery purchases in one year."
He said machinery purchases higher than $125,000 can still be deducted but only to the limit. He said there is a dollar-for-dollar phase-out for purchases of more than $500,000.
Normally, Haugen said most machinery has a tax depreciation schedule of seven years.
Haugen said another way to balance incomes and expenses is to defer income, like crop and livestock sales, until 2008 with a deferred payment contract.
New this year
Haugen said on the federal level there is no significant income tax changes for producers. A list of the changes, though, is available in the Internal Revenue Service Publication 225.
On the state level, Haugen said farmers and ranchers can receive a property tax relief credit.
"That's new for North Dakota," Haugen said.
The property tax relief credit lasts two years, though it may be lessened in the second year if the state expends its limit. The credit is 10 percent of the combined amount of residential and agricultural property taxes, which is used to offset income tax liability.
The maximum credit in the first year is $500 for single people and $1,000 for married couples who file jointly.
To receive the credit, which also applies to commercial property, people have to fill out a Schedule PT form. To qualify for the ag and residential credit, people have to be North Dakota residents. For commercial properties, it is only required that people file income taxes in the state.
Information about the tax is available at www.nd.gov/tax/property/taxrelief or by calling (800) 328-2760.
Haugen said the domestic production deduction credit, which is a credit against tax liability generally for producers who grow and produce grain and livestock and have hired help, increased from 3 percent to 6 percent. He said the calculation is 6 percent of the lesser of net farm income or adjusted gross income.
The credit is claimed on Form 1040 by using Form 8903.
Haugen said income averaging can be used by producers to spread tax liability on Schedule J. North Dakota farmers who choose this method would use North Dakota Form ND 1FA to average North Dakota income tax calculations.
There are two different accounting methods, cash and accrual. Haugen said a large percentage of producers are cash basis taxpayers because it allows more flexibility in adjusting their incomes and expenses.
Unless producers make an estimated tax payment on Jan. 15, they file ahead of the April 15 deadlines. Their taxes, then, are due on March 1.
Agricultural producers can find more information in the Farmers Tax Guide Publication 225.
It is available online at http://www.irs.gov/publications/p225/index.html , or ordered by calling (800) 829-3676. It is also available at any IRS office or the local county extension agency.