Changes effecting capital purchases and net income:
New 1031 rules – a tax-free exchange (1031) only applies for real property. Personal property or equipment exchanges are treated as a sale and therefore require a “bill of sale”.
New depreciation life and limit – Federal 179 deduction limit is $1,000,000. It limits qualified capital purchases to a dollar-for-dollar phase-out starting at $2,500,000.
Warning – using depreciation as your only tax management tool:
• “Choosing to offset gain on traded equipment with bonus depreciation or a 179 deduction could easily create a negative Schedule F, thus reducing Social Security tax and will reduce your retirement income later.”
• “Tax-deductible” doesn’t necessarily mean it makes your farm more profitable.
Tax adjustment tools:
- Prepay operating inputs.
- Defer crop insurance proceeds.
- Pay your kids a reasonable wage for farm work.
- Pay any accrued interest.
- Consider income averaging.
- Review CCC loan tax treatment.
- Review deferred payment contracts.
- Fund your retirement account.
