figuring out farm taxes

[cindy-e]

who is best to talk to about farm taxes, if I decide to sell stuff off the farm instead of just homesteading. Ag Extension? I tried to read the laws online... confusing, and changing. It might be helpful to talk to a person.

Thanks for the help!

Cindyc.

[oneokie]

A CPA or other tax preparer that is familiar with Schedule F and associated schedules.

[highlands]

IRS and state dept of taxes. Get the tax codes. Its available online. Sch. F. is the thing to start with as oneokie said. They have a number of publications geared towards helping farmers understand how to do their taxes. I like doing my own because I found CPA's made too many mistakes. If you understand the stuff and do it yourself you'll be able to do a better job than the CPA.

[Plowpoint]

There is a How To Informational Booklet for the Schedule F from the IRS and with it, you really can understand the majority of the laws and deductions. Surprisingly it is rather easy to read and they give real world examples that help to really clarify what they require.

I still refer to mine from time to time when new things crop up.

The beauty of farming is, I never have to be creative with my deductions. Most years I am like, "Oh my, the IRS will never believe why this is deductible..."

[Sawmill Jim]

On a small operation cash sales only is a big help

[ET1 SS]

Originally Posted by Sawmill Jim

On a small operation cash sales only is a big help

I know you are not suggesting doing anything illegal, like failure to report income.

[Sawmill Jim]

Originally Posted by ET1 SS

I know you are not suggesting doing anything illegal, like failure to report income.

Never I love supporting Gov waste If you like keeping books most every business will come out a loss thus you can file a joint return getting the biggest part of all taxes paid back . Plus never go on vacation go on a business trip to look at new breeding stock all a deduction

But cash is just easier to count

[ET1 SS]

Originally Posted by Sawmill Jim

... If you like keeping books most every business will come out a loss thus you can file a joint return getting the biggest part of all taxes paid back . Plus never go on vacation go on a business trip to look at new breeding stock all a deduction

But cash is just easier to count

I agree.

[Welshmom]

Most tax accountants found in small rural towns will be very familiar with farm taxes. Start by calling a few up and ask what they can do for you.

[rambler]

It's like playing checkers, the rules are fairly simple to grasp, but it takes a lot to plan out your stratigy, and you need to be thinking way ahead, not focused on the past.

That is where the good CPA will help you, he cab suggest to shuffle your incomes and expenses around to lower your tax bill. You'll lose 15% of what you make to Fed, and another 16% to SS, and your state will also likely take a cut, so it doesn'r leave with much for your hard work. This is why many farmers become asset rich over the decades, but cash poor.

Basically you will be reporting yout income from sales on one page, and summing up all your expenses on another page. Your expenses will be in 3 broad catagries:

Short term, stuff you use up the year you buy them - seed, fuel, fert, etc. Their full costs will be deducted the year you buy them.

Mid-term, tractor, equipment, etc. Thes you get to deduct 1/7 of their cost for each of the next 7 years mostly. Even if you keep them for 30 years, the tax effect will be over a 7 year period.

Long-term expenses. Building, fence, drainage, etc. These you get to deduct over a 20 year period, 1/20th each year.

Mid & long term expenses often have options to deduct more the first year. This changes depending on how Congress feels.

Simply total up the income you get in a year, total up the expenses you had in that year, and then sit down & see how they fit into the above areas.

The details are in planning to make your expenses fit your income, you don't want to lose $10,000 one year, and make $20,000 the next. You will pay less taxes if you can work out your deductions to get about $10,000 income each year....

--->Paul

[Sawmill Jim]

rambler Makes me sad i lost money every year

[oneokie]

Originally Posted by rambler

Mid-term, tractor, equipment, etc. Thes you get to deduct 1/7 of their cost for each of the next 7 years mostly. Even if you keep them for 30 years, the tax effect will be over a 7 year period.

Long-term expenses. Building, fence, drainage, etc. These you get to deduct over a 20 year period, 1/20th each year.--->Paul

This information causes me to ask this question: Why would one spend 2 or 3 dollars to save 1 dollar in taxes? Depreciation is a trap that many unwittingly fall into.

[Plowpoint]

Originally Posted by oneokie

This information causes me to ask this question: Why would one spend 2 or 3 dollars to save 1 dollar in taxes? Depreciation is a trap that many unwittingly fall into.

I watched this happen once to a local dairy farmer. He had a few good years because the price of milk was good and he was looking at paying 75K in taxes this one year. His accountant suggested he pay it, but the farmer...like all of us...did not want to pay the government and as such, went out and bought a tractor so it could be depreciated and a legitimate expense. And to his credit it is a legitimate expense...

But then the price of milk plummeted.

A year later he was stuck with a tractor he really did not need and was making payments on. Used and repossessed tractors flooded the market and so his new tractor could not quickly be converted into cash. Within two years he filed for bankruptcy and no longer farms now...completely attributable to his failure to pay his share of his income.

One thing I have always said was, like it or not, if you are going to be in business, you have to look at the government as a silent business partner. And just as farmers raise pigs, hogs are slaughtered and so it is with the IRS.

[Plowpoint]

One area that is hard to understand of the Schedule F form, is the Section 179 area, though it really behooves small farmers, and large farmers alike to understand it. Rapid depreciation is really a tool that can be used, and Congress likes to toy with that to accelerate or slow the economy. You can use that to your advantage. I am just a small farm, and yet I have used it almost every year...

[rambler]

Originally Posted by Plowpoint

He had a few good years because the price of milk was good and he was looking at paying 75K in taxes this one year.

went out and bought a tractor so it could be depreciated and a legitimate expense.

But then the price of milk plummeted.

A year later he was stuck with a tractor he really did not need and was making payments on.

That was the cycle in the 1970's, that led to the problems of the 1980's in ag.

We are having pretty good times in much of ag the past few years, we will crash again and find our trouble years soon enough.

His problem was, of course, that he did not buy a $60,000 tractor with the cash that would have gone to taxes, and put aside the $15,000 income minus a little bit of taxes. He bought something that was nicer and more than he needed _on credit_.

If you want to play the game, you need to understand money.

It's best to start out farming in poor ag ecconomic times. One learns how to handle money quickly. I feel sorry for anyone starting farming the last few years. They have no idea whatis coming their way when the rest of the USA ecconomy finally gets going and intrest rate pick up. It will be very, very messy for the new fellas in ag......

My farm is typically very wet. Need a lot of tile - drainage - here. I've sunk many thousadnds of dollars into tiling my small farm the past 4 years. This will make better crops for me, and return money to me the rest of my life. Even if ag crashesand corn returns to $2 a bushel, I will gain 1000 to 1500 bu extra corn every year, that is putting money in my pocket every year.

I really wanted a better tractor too, I really did.

But you have to know how to play the game, you have to pay cash if you want to depreciate yourself out of paying taxes, and you need to still make smart purchases that give you better returns, not just throw the money around.

--->Paul

[Sawmill Jim]

Originally Posted by Plowpoint

I watched this happen once to a local dairy farmer. He had a few good years because the price of milk was good and he was looking at paying 75K in taxes this one year. His accountant suggested he pay it, but the farmer...like all of us...did not want to pay the government and as such, went out and bought a tractor so it could be depreciated and a legitimate expense. And to his credit it is a legitimate expense...

But then the price of milk plummeted.

A year later he was stuck with a tractor he really did not need and was making payments on. Used and repossessed tractors flooded the market and so his new tractor could not quickly be converted into cash. Within two years he filed for bankruptcy and no longer farms now...completely attributable to his failure to pay his share of his income.

One thing I have always said was, like it or not, if you are going to be in business, you have to look at the government as a silent business partner. And just as farmers raise pigs, hogs are slaughtered and so it is with the IRS.

Nope his tractor became a business tax loss Lots here went broke here odds are he was broke a long time back some just wont stop and do a honest accounting .What would you have to make or clear to owe $75 k in taxes . I smell a rat

[ET1 SS]

Originally Posted by oneokie

This information causes me to ask this question: Why would one spend 2 or 3 dollars to save 1 dollar in taxes? Depreciation is a trap that many unwittingly fall into.

Depreciation is real.

Most assets break-down over time.

If an item would naturally rust apart over 30-years then you subtract 1/30 of it's cost each year.

Each year's repair and maintenance costs to keep that equipment running is accounted as boosts to it's 'cost-basis'.

So each year, each piece of equipment depreciates and each year each piece of equipment also has a boost in cost-basis.

These are real world expenses, and they are tax write-offs.

It is not a trap.



'Spending $2 to save $1' is a strawman. [edited] There may be some who do this, but not all who use depreciation do that.

If you need a tractor, then buy a tractor. But like anything it will need repair work. You will need to spend your money on it's maintenance anyway even without the tax implications. Depreciation is a method whereby those expenses can come off your AGI.


I do not spend one penny 'extra' on anything simply to be able to depreciate on my taxes. I do use depreciation, and it does save me tax money.

[cindy-e]

Well, since the discussion went that way, I can tell you that dh works for a dairy and things are NOT good in dairy right now. Around here, dairy farmers are in serious trouble.

Thanks for the info on schedule F and other taxes. Time to do more research.

thanks again,
Cindyc.

[Melissa]

It can be very simple or very complicated. If you are simply raising some fruits and vegetables to sell at the local farmer's market, just keep track of your sales, deduct your expenses (seeds,fertilizer, water, fuel for tiller if you use one, mileage to get to the market, stall costs, etc...) and come up with your profit or loss. If you buy equipment (a hoe, new shovel, canopy to set up under, tiller etc...) you can use the 179 deduction rather than normal depreciation to take the costs off right away. If you are planning to go big, the basics still apply, just bigger income and larger expenses. Mostly you will use a Schedule F, a Schedule SE if you make a profit, and a Form 4562 if you depreciate anything.

[Wayne02]

If you are just starting out I would suggest you study the materials yourself And talk with a CPA. Preferably one who has clients doing the small farming gig. Study the material and make a list of your questions, no question is too basic. Then make an appointment with the cpa and talk through all your questions. In some cases the cpa may not charge for these initial meetings, but either way you may be able to write-off the cost of the meetings. It's really helpful to talk through these issues with somebody, and it's important that you are comfortable in your own mind on how you are going to proceed. There have been a number of these farming tax threads here on HT and over the years I've found the input to be very accurate and helpful.

Finding a cpa you can trust can sometimes be a challenge. Work your contacts within the community for references. It's really important that you find one who has clients who are in fact small farmers. I've owned some sort of business most of my life and while the basics of financial business management may be the same for all businesses, when I started farming it become readily apparent it was a different animal from a traditional business in some respects.

Finally, you will find all kinds of scary pieces of information on IRS audits and such on the internet and likely within the community as well. Over time, and working with my cpa I've found that much of this kind of thing was blown out of proportion or flat-out rural legend, whose story had been embellished via every person who re-told it. Perhaps the most important thing that our cpa helped us to understand is that IRS expects to see, 'intent to make a profit'. Not so much how many years you lost money or made money, but demonstrating intent to make a profit. Disciplined record keeping is key in this regard.

Just one very small and simple example off the top of my head. You may want to improve the quality or output of your product(s) via increasing your knowledge about said products/processes. Of course there is no better teacher than the school of hard knocks, but you may want to do some book learning as well, and all manner of books (everything from college text books to general help books) are available. Amazon of course has all kinds of books as well. This is a very simple example of a cost input to your business that might be considered an action which demonstrates intent to make a profit.