Five Things New Farmers Should Know About Taxes

When all is said and done, make sure you get a full copy of the tax return, signed by yourself and the tax professional. You are often going to have to present that tax return for loans or business transactions.

3. PLAN AHEAD BY GOING BACK

After picking a tax professional, be ready to show them prior-year tax returns as well as your receipts.

The earlier you talk to a tax professional about expenses and receipts, the better off you will be in planning for taxes in the last quarter of the year. If you go into the office in February and simply drop off receipts, nothing can be done but file that return.

4. UNDERSTAND WHO IS A FARMER UNDER IRS RULES

USDA may call anyone with $1,000 in farm sales a “farmer,” but the IRS is a little stricter on a few rules.

To avoid sending in quarterly estimated tax payments, two-thirds of a person’s gross income needs to come from the farm, Holcomb noted. If that’s the case, then the producer gains some flexibility when it comes to estimated taxes and filing a complete return.

If a farmer does not make estimated payments, then the tradeoff is the farmer’s tax return is due March 1. If a farmer goes ahead and makes a Jan. 15 estimated payment, then that extends the tax return deadline to April 15.

“There is some flexibility that comes into play with that, but this is a huge thing where producers don’t have to make estimated tax payments, they just have to file the return by March 1,” Holcomb said.

Producers who do not fall under that “two-thirds” rule also should pay more attention this year to ensure they avoid underpayment of those estimated payments, noted Bob Rhea, CEO at Farm Business Farm Management based in Urbana, Illinois, and an instructor at the University of Illinois Tax School. With higher interest rates, the IRS will expect to have higher interest rates on their penalty charges at the end of 2022 as well.

Also, keep in mind that farm machinery sales are not deemed as farm income for this definition of an estimated tax payment.

5. FARMING OR PROCESSING?

Schedule F, the form for farmers, involves selling the raw commodity. For a lot of smaller niche operations, there’s also some processing of those products and likely changes the income to a Schedule C business income.

This comes up a lot now with the expansion of vineyards and wineries, Holcomb said. Just selling grapes from a vine is agricultural production and considered farm income. Processing those grapes into wine becomes non-farm income.

A FEW OTHER INCOME CONSIDERATIONS

You may want to ask your tax professional how versed they are on a few of the following issues as well:

— Income averaging

Having a really good income year? Farmers and fishermen have the option to average income under Schedule J. Income averaging allows income from 2022 to push back some taxable income into the past three years. Farmers can look back at the three prior years and see how much income they could push back into 2019-21 under a lower bracket. This will help farmers who find their Schedule F this year has spiked income.

— Installation Sales

A farmer also can deliver grain in October but collect the check the following January to report income in the following year, which is known as an installment sale.

On the flip side, a farmer also has the option to elect out of an installment method to move the income out of early 2023 back into 2022 if that is beneficial.

— Government Payments

Farm program payments, crop insurance indemnities and payments for Conservation Reserve Program (CRP) all involve different rules. There is case law on who must pay self-employment taxes on CRP payments.

“That’s one of those you probably have to sit down with a tax professional to get nailed down,” Holcomb said.

— Fertilizer Deductions

Likely never a more important topic than in 2022. Expensing fertilizer is an election farmers make every year on a return, and most farmers use that option, though producers do have the option to amortize over multiple years as well.

“Most farmers I’ve ever come across, we expense the fertilizer on the tax return,” Holcomb said.

For a deeper dive into issues on farm taxes, check out DTN’s Ask the Taxman column: https://www.dtnpf.com/….

To watch the full webinar, go to https://www.youtube.com/….

USDA will post the slides for the webinar at www.farmers.gov.

Chris Clayton can be reached at [email protected]

Follow him on Twitter @ChrisClaytonDTN