Last summer and fall, it looked as if the following IRS Code Sections would be very relevant in preparing 2012 farm taxes. However, many farmers experienced significant increases in expenditures (grain, hay and fuel) to the extent the delaying or deferring of income was not an issue. However, producers should have at least considered the options provided by the following:
Code Section 451 deals with situations where farmers sell more livestock because of drought and desires to postpone the gain until the following year. This is applicable only to livestock that can be documented to be sold in excess of normal (usually accelerating sale from next year to this year), you must be a cash basis farmer and you must have a federally declared disaster.
Code Section 1033 deals with situations where farmers sell more than normal breeding, draft or dairy livestock and wish to postpone gain and replace stock in the future. Producer have two years to replace in a non-declared federal disaster and up to four years in a federally declared disaster. Again, a statement is attached to the tax return giving the facts relating to the circumstances. The gain from the sale will reduce the basis of the replacement animals. The four year period may be extended up to one year after the drought ends.
If you do not intend to replace the sold animals, the gain must be recognized in year of sale. If you delay, but your intentions change, then an amended return needs to be filed to reflect the income in the year of the sale.
Sale of Business Assets
What are business assets – personal and real property used to produce income. In farming we are talking about machinery, equipment, breeding livestock, barns and special facilities – silos, liter sheds, lagoons, etc. Even fences are business assets that are depreciated. Of course farmland may be the asset with the most value (cannot depreciate).
Sale of business assets received special tax treatment.
1. No SE tax (social security and medicare).
2. Possible Capital Gains which may receive lower tax rates than ordinary income.
3. Potential recapture of depreciation can result in some unwanted surprises.
Land may produce largest of capital gains. Through 2012, federal rates were 0 percent for tax payers in the 0, 10 or 15 percent brackets and 15 percent for taxpayers in 25 percent and above.
Social Security & Retirement
Normal retirement age is currently 66 years old for people born between 1943-54 and gradually moves to 67 over the next 12 years for people born in 1960 and after. Schedule F bottom line is the basis for computation of self-employment tax. Sale of business assets (4797 gains or capital gains) do not figure into the calculation. Benefits are based on 35 years of earnings and too often people never study their earnings records and merely file at first eligibility.
Individuals Retirement Accounts (IRA’s) have been around since mid 70s and were established by the Employment Retirement Income Security Act (ERISA). Contributions limits have gone from $1,500 to $5,000 and even up to $6,000 for those age 50 and older.
The Taxpayer Relief Act of 1997 added the Roth IRA which is a fantastic retirement plan for low to middle income taxpayers who may continue to have farm income into their “golden years.”
Larry King owns and operates 21st Century Financial Services in Buffalo, Mo.