1. J C. Hobbs Associate Extension Specialist Agricultural Economics Dept.
Agricultural Economics Learn at Lunch End of Year Income Tax Management December 18, 2018  
J C. Hobbs
Associate Extension Specialist
Agricultural Economics Dept.

2. End of Year Tax Management
Never let the tax tail wag the business dog
The decision must make sound business and economic sense
Some tools work prior to year end
Some tools work after the tax year has closed

3. Purchase Depreciable Assets
Changes to depreciation and expensing
First year additional depreciation (Bonus)
Section 179 expensing election
MACRS changes
Shorter recovery period (New machinery and equipment)
200% declining balance method (faster depreciation write off or cost recovery)

4. First–Year (Bonus) Depreciation
100% first-year depreciation (Jan 1, 2018 – Dec 31, 2022). Now allowed for both new and used property.
80%
60%
40%
20%
Bonus deprec. sunsets after Dec. 31, 2026

5. Code Section 179 (Expensing)
Made permanent and indexed for inflation
For 2018, Section 179 allowed amount is $1 million with investment limit of $2.5 million
SUVs limited to $25,000
Full size crew cab pickups (<6,000 lb. GVWR) with a short box (less than 72 inches) are SUVs by definition
No change in carryover rules of excess

6. Bonus vs Section 179 Bonus Depreciation
Must elect out of bonus depreciation and can elect out on certain classes of assets (3-, 5-, 7-, and 10-year class life assets)
Can offset W-2 wages as well as other income
Conversion to personal use does not require recapture of excess over regular MACRS depreciation

7. Bonus vs Section 179 Section 179
Must elect to use but election can be for one specific asset or percentage of asset
Cannot create a farm loss but can offset W-2 wage income
Conversion to personal use causes partial recapture (amount over regular deprec.)

8. New Rules for Farm Machinery and Equipment Depreciation
Shorter Recovery Period: Machinery and Equipment placed into service after Dec. 31, 2017:
Cost recovery period is now 5 years for new machinery and equipment; used is still 7 years
Grain bins, fences, cotton ginning equipment, and land improvements are 7 year assets

9. Farm Asset Depreciation Rule Change
Faster Write-Off: for some Farm Business Assets placed into service after Dec. 31, 2017:
NOW: 200% declining balance is to be used on 3-, 5-, 7- and 10-year property (all farm assets other than multi-purpose farm buildings, drainage facilities, water wells and land improvements)
150% declining balance on 15 and 20 year property (includes multi-purpose farm buildings, drainage facilities, water wells and land improvements)

10. New $150,000 Tractor Depreciation Alternatives

11. Farm Income Averaging
Reduce high income of current year by taking advantage of unused lower tax brackets from the 3 prior years.
Ex: 2015 – $20,000 below beginning of 25% bracket $25,000 below beginning of 25% bracket $30,000 below beginning of 25% bracket.

12. Farm Income Averaging
Move $60,000 from 2018 and put $20,000 additional income in 2015, 2016, and 2017.
Income averaging does not reduce self-employment tax or net investment income tax

13. Prepaid Expenses
Amount paid during the current tax year for items that will be used in the following year
Must be a payment; not a deposit
Must be made for a valid business purpose
Must not materially distort income
Refer to IRS Pub 225: Farmer’s Tax Guide

14. Deferred Payment Contract
A contract that requires that the payment will be received in the year after the commodity is sold.
Requirements:
Must be a bona fide arm’s-length contract with the buyer.
Seller cannot have any right to the commodity after it is delivered.
Must avoid constructive receipt so contract must be in place before delivery.

15. Crop Insurance and Disaster Payments
Generally report the payment in the year received.
However can elect to postpone if all 3 of the following conditions are met.
Use the cash method of accounting.
Receive the insurance proceeds in the same tax year the crops were damaged.
Show under normal practices the sale would have occurred in the year after the damage.

16. Decrease Taxable Income
Make needed repairs
Pay accrued interest on loans
Establish a retirement plan and deduct contributions (traditional IRA, SEPIRA, Simple IRA)

17. Increase Taxable Income
Sell grain and livestock in 2018 that could be sold in 2019 (must evaluate weights and prices)
Delay paying for supply, feed or other expenses until 2019
Collect fees, rents, and accounts in 2018 that will be due in 2019
Delay payment for repairs until 2019
Note: be sure it makes economic sense!

18. Tax Planning and Management
Year-round every day job.
Basic tax law knowledge needed.
When you don’t know, ask questions.
Ask “what if” rather than say ‘this is what I did’. (The oops cannot always be fixed.)
Professional advice may be needed.
Year-end tax planning is always useful (level taxable income over lifetime).

19. Evaluation Link
Thank you for your attention!!
IRS Publication 225: Farmer’s Tax Guide for 2018
J C. Hobbs
Associate Extension Specialist