This is the second of a two-part series focusing on tax savings, planning opportunities, and other tax considerations for year-end 2019. Part I, published on AgFuse in November of 2019, focused on planning opportunities for farmers with higher than expected earnings in 2019 while Part II focuses on tax planning opportunities for farmers with lower than expected current year performance.
Farmers tend to think that tax planning opportunities are only available in high-income years or when they close on a big transaction (selling your property, selling a large amount of stock for a capital gain, etc). However, just as tax planning is essential in those situations, it is also critical to consider tax planning strategies during a down year. One of the major goals in this scenario is to avoid a tax loss for the year because the new loss rules in effect for farmers are much different than they were before the passage of the Tax Cuts and Jobs Act of 2017.
The first step for year-end tax planning is to understand the new rules that were enacted as part of the Tax Cuts & Jobs Act of 2017 which was passed on December 22, 2017. A number of these rules were effective on January 1, 2018, while the full phasing in of other provisions was delayed until 2019 or beyond. One of the largest changes for farmers under the Tax Cuts & Jobs Act of 2017 is the treatment of net operating losses. As currently written, most companies are no longer able to carry losses back to prior years. For example, non-farm C-Corporations are not eligible to carry losses back and are only eligible to carry losses forward indefinitely. However, farmers are given a special, beneficial rule. If a farmer has a current-year Schedule F Farming loss, the farmer is eligible to carry that Schedule F loss back two tax years to offset taxable income. However, only the farming loss portion of the NOL can be carried back. After carrying the farming loss back, any remaining farming loss is then carried forward indefinitely into future years. Farmers can elect to waive the carryback of the farming loss and can simply carry the loss forward. Unfortunately, any farming loss carried back or carried forward is only eligible to offset 80% of taxable income in that tax year. These rules replaced the previous excess farming rules that existed before 2018.
Farmers who operate as any business entity besides a C-Corporation should also be aware that their non-farm current-year loss is subject to the Excess Business Loss limitations (outside the scope of this article) and the maximum current-year total loss (including all of a taxpayer’s business activities including the business activities of the taxpayer’s spouse) is $250,000 if filing single, $500,000 if filing a married joint return. Any non-farming loss is carried forward indefinitely to future years. However, excess business losses carried forward cannot offset Farming income on Schedule F which is subject to self-employment taxes. Therefore, losses carried forward will not minimize the amount of self-employment tax a farmer will pay on their Schedule F earnings.
As previously mentioned, the goal for a farmer in a down year should be to avoid a net operating loss and to at least break even. There are a few different tax planning opportunities available to farmers to increase current-year earnings. First, farmers can choose the tax year an insurance claim payment is recognized and counted towards your taxable income. As written about in “10 Accounting & Tax Benefits for Farmers & Farming Businesses” farmers who receive insurance claims can elect whether to apply the claim payment to taxable income in the year the payment is received or in the year the crop would have been sold. This is very common in Florida where I am based due to the declining citrus industry and the regularity of major hurricanes. As an example, suppose your cop would have normally been sold in November. However, due to delays, the insurance claim payment was not physically received until the following January. While the insurance claim is always included in taxable income, the farmer can choose whether to include it in the tax year of receipt (January) or the tax year the crops would have been sold (November). While the decision is a facts and circumstances election and your CPA should be consulted before making a decision, there could be a tax benefit in electing to recognize the claim in the year the crops would have been normally sold in an effort to reduce the current year loss. The flexibility given to farmers in this situation allows them to attempt to equalize taxable income across multiple years.
Another way to increase taxable income for the year is to try to accelerate the recognition of revenue if the farmer is a cash basis taxpayer. As noted in the article “10 Accounting & Tax Benefits for Farmers & Farming Businesses," most farmers can elect whether to use the cash or accrual basis of accounting. If using the cash basis, income is recognized when cash/payment is received. Therefore, to increase profits for the year, perhaps a farmer could attempt to receive cash payments earlier than previously expected. Issuing a discount to a purchaser to pay for goods before year end is a simple, but effective way to increase earnings. It’s common for farmers to have existing deferred payment contracts as well. These contracts allow great flexibility in determining which tax year to assign a sale. If the farmer is not able to adjust the timing of revenue, a farmer who uses the cash basis of accounting could also defer expenses (including any potential conservation easement deduction) to 2020 to reduce the amount of the current-year loss.
Because of the complexity of the loss rules and the potential delay to receive any benefit of the loss (if carried forward), farming taxpayers should attempt to avoid generating losses at all costs. As we enter the final month of 2019, tax planning is critically important for farmers who are experiencing a down year.
This article should not be construed as, and should not be relied upon as legal or tax advice.
Tyler Davis is a CPA who works for SVN Saunders Ralston Dantzler real estate as an asset manager and advisor. SVN Saunders Ralston Dantzler was founded by Dean Saunders in 1996 and is a leading agricultural land brokerage based in Lakeland, FL. Tyler also owns his own CPA Firm, Tyler Davis CPA where he provides tax preparation, consulting, and research services. Tyler can be contacted at email@example.com.