Did you have record or near record farm income in 2008? Are you a cash basis taxpayer? Should you be thinking about or working on tax planning prior to the end of the year so any adjustments can be made? If you have answered “yes” to any of these questions, we have some potential ways to reduce your tax liability.

Most grain farmers made record amounts of income this year because of high commodity prices, and should spend time with their tax preparer prior to the end of the year to make any necessary decisions that will reduce their tax liability. Purdue economist George Patrick offers several cost recovery alternatives for 2008. They include the Modified Accelerated Cost Recovery System (MACRS), the 50% additional first year depreciation, and the expanded Section 179 expensing for 2008.

Depreciation offers the opportunity to recover the cost of assets, and MACRS offers the further opportunity to place assets in varied length classes with a 150% declining balance, and a later shift to straight line depreciation. The classes vary from 3 years to 20 years and contain specific farm assets. For example the 3 year MACRS would be breeding hogs and semi-trailer tractors. 7 year MACRS would be most field equipment and grain bins. 20 year MACRS includes farm buildings, barns, and machine sheds.

Patrick says the fastest cost recovery is afforded by the 150% declining balance method, and said a $10,000 grain bin would have a cost recovery of $1,071 its first year and $1,913 in the second year. Patrick says once a depreciation method is selected, it must be used for the life of the asset, and that decision should be made when it is placed into service. For a farmer who expects to have higher levels of income in future years, Patrick says a slower depreciation method would be preferred.

The recent Economic Stimulus Act that bailed out several Wall Street entities, extended to rural route America, with an increase in the Section 179 expensing limit up to $250,000 for the current tax year. Qualifying property purchased this year can be expensed, rather than depreciated. Your tax preparer will help you remember the limit falls back to $125,000 for 2009. The qualifications include:
1. Farm equipment, grain handling equipment, buildings, breeding livestock, and field tile, if purchased by an active farmer and not a cash rent landowner.
2. The property can be new or used, but inherited property is not eligible.
3. Although real estate is not allowed, the “boot” portion of any other 1031 exchange property is eligible.
4. If the qualified property exceeds $800,000 in value, the expensing election is phased out dollar for dollar above that amount.
5. The expensing deduction is limited to one’s taxable income, but a schedule F income can be increased by a spouse’s off farm income.
6. It is not necessary to use the entire $250,000 expensing limit, and several small items can be aggregated to take advantage of the provision. Patrick says, “Generally, it will be more advantageous to allocate the expensing deduction to longer-lived assets and to assets that are likely to be kept in the business for their entire depreciable life.”

The Purdue economist says the recent Economic Stimulus Act also provided for additional first year depreciation equal to 50% of the adjusted basis of qualifying assets placed into service this year. To qualify, it must:
1. The property must be new.
2. It must qualify for the MACRS system for 20 years or less.
3. If the property is not purchased, a binding purchase contract must be signed in 2008.
4. The property must be placed into service in 2008.
5. The Alternative Depreciation System is not required.

These changes for 2008 encompass assets purchased or placed in service in 2008, and they do not provide for any changes for older property on your depreciation schedule. Patrick says, “There are trade-offs between the present value of tax-savings in one year due to rapid write-offs versus tax-savings being spread over several years.”

Summary:
Changes in the tax code, spurred by the Economic Stimulus Act recently approved by Congress to help jump start the economy, can be a boon to farmers who may have used some of their record 2008 income to purchase farm assets, including buildings and machinery. Cash basis tax paying farmers would be wise to consult with a tax preparer prior to the end of the calendar year to discuss the changes and possibly reduce their tax liability.