Farm Horizons, November 2007

Tax planning is a must

By Myron Oftedahl
Farm Business Management Instructor, Glencoe

High grain prices, milk prices, and other livestock prices are at all time highs. Granted, most of your input costs have gone up just as much, but many of you could be looking at a sizable tax bill.

It will be critical for you to do some income tax planning with your Farm Business Manangement Instructor or your tax preparer.

With that information, you can make informed decisions as to how much income to bring into 2007? Should I prepay some input costs this year, and how much? Are there changes to the tax laws that I should be aware of?

An example of a fairly new change is the production deduction. This allows farmers with eligible wages, which are wages subject to FICA and federal income tax withholding, to take a 6 percent of net income deduction. The deduction is limited to 50 percent of the taxpayer’s qualifying wages for the year.

For example: Ted has net income of $100,000. Ted also has W-2 wage expense of $8,000. The production deduction would be $100,000 times 6 percent, or $6,000. Eligible wages of $8,000 times 50 percent would be $4,000. Ted will be able to use $4,000 for his production deduction.

Let’s assume that Ted’s W-2 wage expense was $14,000. Eligible wages of $14,000 times 50 percent would be $7,000. Ted’s net income is now $94,000. So, 6 percent of $94,000 is $5,640. Ted’s deduction will be $5,640.

Does the extra $1,640 offset the increase in FICA and withholding? Assuming the extra $6,000 wages were for his two children and Ted pays only the FICA withholding, this would be 15.3 percent of $6,000 or $918. So, the extra $1,640 deduction is greater than the $918 cost for FICA.

So, by simply paying family labor, Ted can now get an additional deduction. If Ted has a sideline business that is a service business (such as trucking), and that side business generates more than 5 percent of gross receipts, then Ted will have to figure separate profit and loss statements, and only the production side of the farm business will be eligible for the production deduction.

The 6 percent deduction will be in effect for 2007 through 2009, and then will increase to 9 percent in 2010.

Energy tax credits are still eligible for 2007. This basically amounts to a 10 percent credit for insulation, exterior windows, and doors with a limit of $500 for 2006 and 2007 combined. Qualified furnaces, air conditioner, and heat pumps are eligible for the tax credit.

The bottom line for 2007 is to have your records done as soon as possible, get a tax estimate completed, and be prepared to make decisions accordingly.

The key in some cases will be to maximize the 15 percent bracket and then shift income to 2008, or go back a year and do some income averaging. n

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