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MAY 2017 ■ www.CPAPracticeAdvisor.com 21 BUILDING YOUR NICHE PRACTICE By Ken Berry, J.D. Ten Income Tax Benefits for Farmers What sort of tax provisions are we talking about? Periodically, the IRS provides insights through online postings. Here are ten items that may be of interest. 1. Depreciation deductions: Like other businesses, farmers can take advantage of enhanced writeoffs for property placed in service in 2017. Specifically, a farmer may claim a maximum expensing deduction of $510,000 under Section 179, subject to a phase-out for acquisitions above $2,030,000, plus 50% "bonus" deprecia - tion on qualified property. 2. Crop insurance proceeds: Crop insurance may be purchased by farmers to protect against losses caused by natural disasters --such as hail, drought and floods -- or lost revenue due to declines in prices of agricultural commodities. However, the proceeds generally have to be reported as income in the year they are received. 3. Sales due to weather: On a related note, if a farmer sells more live- stock and poultry than would normally occur in a year because of weather- related conditions, the business gets a reprieve: It can postpone reporting the gain from sales of the additional animals due to the weather until the next year. 4. Farm income averaging: Regular income averaging has gone by the boards, but farmers may still average all or some of the current year's farm income by allocating it to the three prior years. This may lower tax for the current year tax if current income from farming is high and taxable income from one or more of the three prior years was low. 5. Deductible farm expenses: As with other businesses, farmers may write off ordinary and necessary costs of operating a farm for profit. An "ordinary" expense is one that is common and accepted in the farming business, while a "necessary" expense must be appropriate for the business. 6. Employees and hired help: Similarly, a farmer can deduct reasonable wages paid for labor hired to perform farming operations. This includes both full-time and part-time workers. Of course, the business is responsible for withholding income and payroll taxes for its employees. 7. Items purchased for resale: Not all farm products are home-grown. Farmers may to deduct the cost of items purchased for resale in the year the sale occurs. This includes livestock and freight charges for transporting the livestock to the farm. 8. Net operating losses: If the deductions claimed by a farm- ing operation exceed its profits, it may report a net operating loss (NOL) for the year. The NOL can be carried back for two years and then forward for up to 20 years to offset income in other years. As a result, the farm business may be entitled to a refund from a prior year or benefit from a tax reduction in a future year. 9. Loan repayments: When a tax- payer takes out a personal loan, he or she can't deduct interest on the subsequent loan repayments. However, if loan proceeds are used in a farming business, the taxpayer may deduct the interest paid on the loan on the farm's tax return. 10. Fuel and road use: Finally, farmers may be able to claim a credit or refund of federal excise taxes on fuel used on a farm for farm- ing purposes. Other taxpayers often illegally claim this off-road credit, but it's legitimate for those in the farming industry. Do you want to know more about the special rules for farming activities? You can find valuable information in IRS Publication 225, Farmer's Tax Guide, at https://www.irs.gov/pub/ irs-pdf/p225.pdf. ■ FARMING HAS OFTEN been viewed as the backbone of the American economy. While technology and other recent developments may have changed this thinking, farmers still enjoy a preferred status, at least as federal income taxes are concerned. For instance, there are several special tax code provisions relating to farming, most of them beneficial. At the same time, taxpayers in the agriculture field may be in line for the same tax breaks available to businesses in general. reported on his 2016 Schedule F 5a) "CCC loans reported under election". In tax year 2017, Joe sold his wheat for $125,000. He reports the $125,000 on 1a) "Sales of livestock and other resale items" and the tax basis of $100,000 on line 1b) "Cost of other basis of livestock or other items reported on 1a" for a total 2017 taxable amount of $25,000. To change between treating CCC loans as income method to the loan method of reporting, Form 3115 is required. This form grants automatic change but needs to be filed both with the tax return in the year of change and also a separate copy filed with the IRS National Office. If you choose to use CCC loans, a word of caution should be mentioned regarding the Farm Loss Limitation Rules. Farm losses are limited to the greater of $300,000 ($150,000 MFS) or the total net farm profits from the prior 5 years if you have an applicable subsidy or CCC loans. The 2014 Farm Bill eliminated the program payments that formerly fell in the applicable subsidy zone leaving only CCC loans left that will bring about the Farm Loss Limitation. Example : In tax year 2016, Joe Farmer took out a CCC loan on his wheat. He had an overall loss on his Schedule F of $500,000. In the prior 5 year, 2011 – 2015, Joe had net farm income combined of $250,000. On his 2016 tax return, Joe is limited to the greater of $300,000 or $250,000, thus $300,000 of Joe's $500,000 loss can be claimed in 2016. The remaining $200,000 will be suspended and carried forward to 2017 as a Schedule F deduc- tion and each year after until used. The Farm Loss Limitation also affects the NOL that would be available to carry back 2 or 5 years or forward 20 years. Example : Using the facts for Joe Farmer in the previous example: ■ 2011 Net Schedule F Profit: 600,000 ■ 2012 Net Schedule F Profit: 100,000 ■ 2013 Net Schedule F Profit: 100,000 ■ 2014 Net Schedule F Profit: - 100,000 ■ 2015 Net Schedule F Profit: -450,000 ■ 2016 Net Schedule F Profit: -500,000 + 200,000 suspended = -300,000 ■ 2017 Suspended Loss Carried Forward: -200,000 Joe Farmer would be unable to maximize his 2016 NOL by carrying the entire 500,000 back 5 years to recoup the high ordinary income tax paid in 2011. Careful planning and consideration should be implemented for the use of CCC loans in order to maximize the benefits available from the program. ■ Judy Gilbertson, CPA, is the principal of Judy Gilbertson CPA in Jamestown, N.D. Article reprinted with permission of AgCountry Farm Credit Services.