Ag Notes: Tax planning important in good economic year

November 03, 2004|JERRY LITTLE

With 2004 being a year of good livestock prices and bumper grain production, farmers need to be planning now to address income tax issues they will be facing.

Cash receipts for agricultural products are expected to increased five percent this year due to continued strength in commodity prices and higher volumes. Demand for beef continue to be strong and dairy prices improved, leading to good markets for producers. Corn and soybean harvests are under way and excellent yields are being reported. Overall about all the commodities are having a good year. Many grain farmers defer sales from one year's crop into the next so many farmers may have sold some of the 2003 crop that year but waited until early 2004 to sell the remainder capturing high prices and looking at a bumper crop in 2004.

With this scenario, paying taxes may be inevitable but properly managing taxable income will result in the minimum amount of taxes being paid. For proper planning, good records are essential. Without good, accurate records, farmers can't know where they stand.


Farmers should consult with a qualified tax advisor to establish a plan prior to the end of the year. The advisor should be able to provide details and regulations concerning deferred sales contracts, prepayment of expenses and other possible planning measures.

Under no circumstances should sound marketing practices for grain or livestock be abandoned in order to defer income to a later year. Instead there are several tax management strategies to utilize.

Prepayment of 2005 operating expenses is the most commonly used strategy but to be deductible, the payment must be for a specific quantity of specific inputs.

Another strategy would be to use accelerated depreciation on equipment or other capital gains. But remember the first criteria in using this strategy should be that the purchase of equipment be based on need for the item without tax consideration If the equipment is justified from a management standpoint, then the most advantageous use of it can be made for tax purposes.

The goal of any business is to make money and if you are spending money you don't need to for your business, that's not wise management.

This year is going to be a high tax year, but next year could be worse without proper tax planning.

Farmers need to keep accurate information on breeding livestock which is handled differently than other livestock for tax purpose and Phase II tobacco payments which are not taxable in Kentucky.

Another factor tobacco growers need to consider is what the buyout may do to their income in 2005 and consider that when making tax plans for 2004.

The goal is to keep income level.

With the volatility in farming, that may not always be possible, a look at the five-year history of someone who manages their income and tax situation well will show a pretty level track.

Are you ok?

A farmer with a truck full of animals is on the way to the market for auctioning.

He comes upon a hitchhiker and gives the guy a lift. On the way to town, the farmer starts nipping at some home brew, swerves off the road and crashes in a big ditch.

The hitchhiker is thrown out of the truck, suffering from broken ribs, a broken arm and a busted leg. The farm animals were also seriously messed up. The farmer, who survived with only a few cuts and bruises, gets out of the truck and inspects his animals.

The chickens have broken legs and wings, and can barely move. "These chickens are useless now!" The farmer explodes. "Nobody will buy these chickens!" He grabs his shotgun from the truck and shoots the chickens.

Next, he sees that the pigs are all busted up and bleeding. "These pigs are worthless, too!" He reloads his shotgun and shoots the pigs. The farmer looks at the sheep, which are in the same shape as the chickens and pigs. "Worthless sheep!" he screamed. He reloads the shotgun and blows away the sheep.

The injured hitchhiker witnesses all this carnage in horror.

The farmer then moves over to the side of the ditch and looks at the hitchhiker. "Are you okay down there?" asks the farmer. Instantly the hitchhiker answers, "NEVER FELT BETTER IN MY WHOLE LIFE!"

Jerry Little is county extension agent for Agriculture/Natural Resource

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