What makes this Tax year so different than any other for farms? The changes are coming!

There are some things to consider with the possible changes in the Federal Tax Law.

At the end of the day on Dec. 31, 2012 a number of tax benefits that many Americans have received will either no longer be available or be reduced when they wake up on the morning of Jan. 1, 2013 if the U.S. Congress and President are unable to do anything to counteract these changes. Unfortunately, these changes can have an adverse effect for many farms and their families.

According to the United States Department of Agriculture’s (USDA) National Institute of Food and Agriculture and the National Agriculture Statistics Services 2007 Agriculture Census that almost 96 percent of farms are still family owned. The potential changes in taxes can have profound effects that flow directly to many families in rural America. Presently in 2012 if an individual’s taxable income who files “married filing jointly” is $70,000 they would be in the 15 percent tax bracket just under the 25 percent, but in 2013 if no changes occur, the new tax bracket for this example now be in the 28 percent tax bracket. This example does not begin to take into account all of the changes, eliminations and or reductions of any other credits, deductions, exemptions and phase-outs of all of these. But this would create a significant difference in the amount of tax liability an individual or family (and farm) would incur.

In a normal year many farms will begin to look at their needs for the coming growing season and begin to purchase a number of items to make sure that they have secured the products they need and in many cases to lock in a lower price than they would receive if trying to make that purchase during the planting or growing season. The purchases are treated as expenses lowering the farm’s taxable income. While this occurs many farms have commodities and or products in storage that normally would not be sold until the coming year with the hopes of receiving a higher price.

But due to the unknowns, many farms are opting to not purchase their prepaid items and add it to their inventory and are selling their commodities/products early. This will allow them to increase their income in the 2012 tax year securing that their income will be taxed at a lower rate than if they take the income in 2013 assuming that the government will either not come to agreement on tax law and all changes will go into effect on Jan. 1, 2013 or that the agreement the government will come up with will still negatively affect America’s family farms.

Once this income is received and all taxes have been paid what’s next? This needs to be given careful thought. The first thing that must be considered is cash flow. How do the changes the use of income and expenses changing in which year they occurred affect my cash flow? The farm may rely on all of that cash to maintain its ability to pay bills, if this is the case it needs to sit in the farms’ checkbook or savings account.

In many cases, we will still need to purchase inputs for the farm in 2013 that normally may have occurred in the previous year. These inputs may be considered a cash expense and lower the 2013 years income. Capital equipment could be purchased but it must be noted that the 2013 Section 179 direct expensing limit will be decreased from the $139,000 (2012) to only $25,000.

Anything that is not necessary to make cash flow could then be used to pay down debt. Since the paying off the principal value of farm debt/loans provides no tax expense to the farm since it was taken as an expense when funds were used to purchase inputs, beyond being able to treat the loans interest as an expense, this would be a good opportunity to pay down debt with any of the extra cash you may have.

If you have any questions about agricultural taxes, please contact your local Michigan State University Extension farm management educator.

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