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Enhance risk management strategies through fall tax planning

Rob Holcomb Published on 26 November 2010
As calendar year 2010 quickly comes to a close, farm managers are meeting with their income tax professionals to assemble tax management plans to take advantage of new tax law changes.

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010.  This new law extends bonus depreciation, extends and doubles section 179 expensing, and also removes cell phones from listed property.

The new law extends, through December 31, 2010, 50 percent first-year bonus depreciation, which had expired at the end of 2009. The extension is retroactive to January 1, 2010. The new law also extends, through 2011, the additional year of bonus depreciation allowed for property with a recovery period of 10 years or longer, and for transportation property (tangible personal property used to transport people or property).

The new law also increases the maximum section 179 deduction to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.

One additional change that will impact farmers in this new legislation involves the removal of cell phones and similar personal communication devices from the current classification of listed property. This change effectively lifts the strict substantiation requirements of use and the additional limits placed on depreciation deductions.

Other pertinent tax law changes affecting farmers outside of the Small Business Jobs Act of 2010 includes the expiration of the mandatory five-year recovery period for new machinery. Previous legislation mandated that for new farm equipment placed in service during 2009, a five-year cost recovery period was required. This provision of the tax code expired at the end of 2009. Basically, this means that farm machinery, regardless of whether the farm machinery is new or used, goes back to seven-year property for tax purposes.

Farmers that are cash basis (for accounting) may still utilize prepaid expenses. Typical prepaid expenses include fertilizer, chemicals, and seed.  A farmer utilizing cash basis accounting is entitled to prepay up to 50 percent of the total schedule F expenses reported in any given year. The 50 percent maximum includes not only total cash expenditures but also depreciation, section 179 expense, and bonus depreciation.

It is also permissible for a cash basis farmer to defer crop insurance payments received during the current tax year that was attributable to crop loss or damage. Deferring crop insurance is allowable if the farmer would have normally sold the crop (the insurance payment was received for) in the following year. Please note that crop insurance payments based upon a revenue component are not deferrable.  Only crop insurance payments received in lieu of crop damage and or loss are deferrable under current guidelines.

Income tax planning issues can be complicated. Always consult with your tax professional to evaluate any potential plans for your individual farm operation.  FG

Internal Revenue Service web page.
National Income Tax Workbook 2010.  Land Grant University Tax Education Foundation, Inc.
CCH Tax Briefing: Small Business Jobs Act of 2010.