As you gaze toward the end of 2019, are you worried about generating a profit? This year might be far from a banner year for your farm, but you should plan to avoid showing a net operating loss (NOL) on your tax return.
The current tax law only allows farmers to carry back their NOL two years or elect to carry it forward, explains Paul Neiffer, CPA and tax principal with CLA. The maximum loss a farmer can recognize is $255,000 if single or $510,000 if married.
The drawbacks to showing a NOL is you lose a standard deduction bracket and the ability to qualify for some child and earned income tax credits, says Randy Eikermann, CPA with Eikermann & Associates.
“If my income was $25,000, for example, I would probably pay no taxes on that $25,000; if I have zero or less in income, I lose my standard deduction,” he says.
Presenting your banker with a negative tax return during your operating loan renewal meeting could negatively affect your chances of funding, Eikermann adds.
To prevent these losses, Neiffer says, farmers have multiple options:
- Recognize more income by selling grain in 2019, or elect to bring some deferred payment contracts into income in the current year.
- Elect to capitalize appropriate fertilizer costs.
- Elect out of 100% bonus depreciation on some or all asset classes (for example, take bonus on 15-year property but not on five- or seven-year property).
- Elect to capitalize all repairs. Some farmers can rack up $200,000 or more in machinery repairs, Neiffer notes, so this strategy increases your income.
- Use Section 179 to reduce taxable income to appropriate levels to soak up the 10% and 12% tax brackets and standard deduction, etc.
“With one of these strategies, we can get income up to $30,000 to $50,000,” Neiffer says. “Make sure you don’t show losses from a tax standpoint. It doesn’t gain you anything and, in the future, it might even hurt you.”
Schedule a meeting with your tax adviser to develop a strategy. “In good times, tax planning is beneficial. In bad times, it is essential,” Eikermann says.
For more analysis and insights on tax questions, visit Paul Neiffer’s blog at AgWeb.com/farm-cpa