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Tax planning for 2014

 

University of Kentucky College of Agriculture, Food and Environment

 

LEXINGTON, Ky. — In making farm visits this fall, Kentucky Farm Business Analysis specialists are finding some clients with a potentially high 2014 taxable income. Kentucky grain farmers had a large carryover crop from 2013 that sold for a relatively high price during the 2014 tax year. In addition, some producers prepaid 2014 expenses during the 2013 tax year, so actual cash expenses are lower for the 2014 tax year.

Kentucky grain farmers have experienced record profits in agriculture in recent years and some of the profits have been used to upgrade equipment and/or building facilities. If this was been done in cash, then producers could potentially have taken 50 percent additional first-year depreciation on new equipment and buildings. Producers also had the option to use I.R.C. 179 expensing on purchases of selected used and new equipment of up to $500,000.

However, current tax law has the 50 percent additional first-year depreciation expiring on Dec. 31, 2013. In other words, it’s not available for purchases made in 2014. Another potential problem is that I.R.C. 179 expense election is currently at $25,000 with the total investment limit at $200,000. So if a producer buys over $225,000 of section 179 property, then all property must be depreciated over the life of the equipment or buildings.

Most reading in the tax and agriculture popular press indicate that a bill will be passed during the current lame-duck session to reinstate the 50 percent additional first year depreciation and increase I.R.C. 179 expensing back up to $500,000 with a phase-out starting at $3 million. But it hasn’t happened yet. Specialists are advising clients to have two plans ready for the 2014 tax year. If Congress does update the tax law, then one can use the expanded bonus and Section 179 rules to write off accelerated amounts of the equipment and buildings for current tax year expenses. If Congress fails to act on this issue, producers need to have enough cash or operating money available to prepay expenses. Producers need to realize that they cannot prepay over 50 percent of their total cash expenses for the year.

It is important that all producers consult with their tax preparers and/or specialists before the end of the year. The goal of tax planning is not to avoid taxes but to manage the income tax brackets over several years.

This article was written by Rush Midkiff, agriculture economist at the University of Kentucky College of Agriculture, Food and Environment. The article first appeared in the Nov. 25 edition of Economic and Policy Update.