Farm Tax Tips 2007

Compiled below are farm tax tips to keep in mind when preparing 2007 income tax returns.

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Publication 225
Obtain the “Farmers Tax Guide,” publication 225, at any IRS office or call (800) 829-3676. 

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On this page, Reporting Farm Income and Expenses find additional advice for farm owners.

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Farm Income and Taxes

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Compiled below are farm tax tips to keep in mind when preparing 2007 income tax returns:

  • Income averaging can by used by producers to spread tax liability to lower income tax brackets in the three previous years. This is done on schedule J.
  • Crop insurance proceeds can be deferred to the next tax year if you are a cash-basis taxpayer and can show that normally more than 50 percent of your crop sales are made the year after the crops are grown.
  • Livestock deferral can be done for those who had a forced sale of livestock because of a weather-related disaster. Two methods can be used. In the first method, income can be deferred to the next year for all types of livestock sold prematurely. In the second method, income from livestock held for draft, breeding or dairy purposes is not taxed if like-kind animals are repurchased within four years (or more depending on weather conditions or disaster declarations) from the end of the tax year in which the animals were sold.
  • Only the gain on the sale of those animals above and beyond what was normally sold would qualify for postponement.
  • The 179 expense election generally allows producers to deduct up to $125,000 of machinery or equipment purchases in the year of the purchase. There is a dollar-for-dollar phaseout for purchases of more than $500,000.
  • The domestic production deduction credit is a credit against tax liability. Generally, producers who grow and produce grain and livestock and have hired labor qualify for this deduction. For 2007, the deduction has increased from 3 percent to 6 percent. The calculation is 6 percent of the lesser of net farm income (from Schedule F) or adjusted gross income. This is limited to 50 percent of the wages paid by the producer. This deduction is not claimed on Schedule F. It is not used in computing self-employment income. It is claimed on Form 1040 by using Form 8903.
  • Switch grain loan elections. Grain loan rules allow producers to make an annual election on whether to treat Commodity Credit Corp. loans as loans or income. Previously it was a one-time election that could not be changed without permission from the Internal Revenue Service. It may be advantageous in reducing tax liability to switch methods.

Source: North Dakota Farm Bureau and IRS

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