I've always preached the most important hour of our time as tax advisers is that last one in December when we finalize year-end tax planning. Here are some of the more sophisticated issues your tax adviser will bring into play:
INCOME AVERAGING
It isn't how much income you report, but at what marginal tax rate. Farmers are the only taxpayers who can use income averaging and dump current income back to rates applicable to the prior three years. But that takes some complex analysis, occasionally involving amending a base year before averaging some portion of the current year.
CHARACTER MATTERS
And it matters in your tax return, too. Is it ordinary income or capital gain? Is it subject to self-employment tax? And does the alternative minimum tax (AMT) come into play? In some cases, AMT is a curse and in others an opportunity to bring in more income at a lower 26-percent rate.
If you are a proprietor or partner, the self-employment (SE) tax is particularly harsh: 15.3 percent on roughly the first $107,000 or so, and 2.9 percent on all remaining earnings. Strategies to control SE tax include an S corporation, or rent can be paid from the proprietor's farm schedule to the spouse's landlord schedule.
DEFERRED GRAIN SALES
Cash method farmers typically push payment for current year grain sales into the next year to create tax deferral. By having several smaller contracts, you create the flexibility to pull some of that income back into 2009. If your return is extended, that could be as late as Oct. 15, 2010 for individual filers.
If the Obama tax rate increases come in 2010, you will have the flexibility of electing out of installment treatment and retroactively taxing some or all of those deferred contracts in 2009. Presently, the administration is saying the tax increases won't happen until 2011, but if the economy improves more rapidly, all bets are off. With this uncertainty, give yourself some flexibility by having multiple smaller grain contracts deferred into 2010 so that your numbers can be fine-tuned retroactively.
LAST DEPRECIATION OPPORTUNITY
It looks like 2009 will be the last year for the enhanced first-year depreciation deductions. In 2010, the Section 179 deduction will drop from its $250,000 limit back to the former level (about $130,000 with inflation indexing), and the 50 percent bonus on new assets will be history. So if you have any equipment needs, 2009 can produce greater deductions than 2010.
Editor's Note: DTN Tax Columnist Andy Biebl is a CPA and principal with the accounting firm of LarsonAllen in New Ulm and Minneapolis, Minn., and a national authority on ag taxation. Pose your tax questions by e-mail to AskAndy@dtn.com or watch Andy's 60-minute, pre-recorded webinar reviewing 2009 Tax Strategies by registering at https://dtn.webex.com/….
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