Year-end tax considerations for cow/calf producers discussed

For any agricultural operation, it is important to keep good financial records year-round in order to determine what will be owed in taxes. It also helps to have a tax preparer who understands tax rules that apply to cattle production.  

Oklahoma State University Extension Income Tax Specialist J.C. Hobbs has been advising tax preparers, farmers and ranchers for 20 years. 

“I work with cow/calf producers, stocker operations and crop farmers,” he says. “The rules change now and then, and it is important to keep up with the current regulations.” 

Depreciation

“Some of the options we deal with include depreciation planning. Under current laws for depreciation, our opportunities for tax management have greatly increased. We have a lot more options and tools tax laws have provided,” says Hobbs. “For example, under the new law, if a farmer/rancher buys new equipment and machinery, he can write it off much faster than we could a couple years ago.” 

“Agricultural producers can now use the modified accelerated cost recovery system 200 percent declining balance rules for depreciating farm assets. If new machinery and equipment are purchased, we can depreciate it over five years,” he explains. “The new rules will result in more depreciation in the early years of ownership, but farmers and ranchers can still use the slower 150 percent declining balance as well. This increases the tax management options using the current depreciation rules.”

He mentions another provision for depreciation is the Section 179 Expensing Rules. This allows a farmer or rancher to write off up to $1,080,000 in equipment purchases – up to an investment limit of $2.7 million for 2022 as long as it doesn’t create a loss on the Internal Revenue System (IRS) Schedule F (Form 1040), which is used to report taxable income earned from farming or agricultural activities. 

“Producers can buy equipment and use this provision to offset a considerable amount of taxable income this year, which probably won’t be the case for most farmers and ranchers in 2022. 

However, this could be utilized to help manage taxable income,” he explains.

Another item  still in place for 2022 is bonus depreciation, which is a tax incentive allowing one to immediately deduct a large percentage of the purchase price of eligible assets. 

“It allows us to write off 100 percent of the purchase price of assets in the year we purchase and place them in service. If we buy $100,000 worth of equipment, we can write it all off using the bonus depreciation for 2022,” shares Hobbs. 

The percentage phases out from 2023 to 2025 and completely goes away beginning in 2026. These are tools allowing farmers and ranchers an opportunity to manage taxes before the end of the year, he notes. 

Income averaging 

“A tax provision farmers and ranchers frequently do not use but should be using is called income averaging,” he explains. “If we have a large amount of income in 2022, we can elect to use income averaging to move income from 2022 into the three prior years.”

He adds, “If the income in those years was taxed in a lower income tax bracket than what exists for 2022 taxable income, we get some tax relief for this year by not paying as much in the higher bracket, and taxing the income moved to the prior years at the lower brackets for those years.”

“For example, if producers have a lot of income this year and it puts them into the 24 percent bracket, tax preparers can move some of the income back to prior years and have it taxed at the 12 percent bracket and have some of the income taxes owed reduced,” says Hobbs.

Income averaging is a provision only allowed in agriculture, since farm and ranch income can vary greatly from year to year, due to weather, markets, etc. This rule provides some relief for periods of income volatility, which farmers/ranchers experience often.

Not operating loss 

If this year results in a net operating loss, farmers and ranchers have the ability to carry back the net operating loss for 2022 and offset up to 80 percent of taxable income in those two prior years. 

“The carryback creates a tax refund which can ease loss of cash income in the current year. On the other hand, if we think tax brackets will be greater in future years, or if we will have higher income in those future years, we can elect to forgo carrying it back and carry it forward instead, until it used up,” explains Hobbs. “If we have a major loss this year, we don’t want to lose this opportunity to reduce our tax. We can use part of it and carry the rest of it forward to offset future income or carry it back to offset prior year income and get a refund.”

Other tax planning tools 

“A farmer/rancher may also pre-pay expenses like buying feed that would normally be used in the following year and deduct the payment in the current year,” he shares. “For example, given the uncertainty about feed prices, some ranchers this year have purchased additional feed and protein for their beef animals to get them through the winter. The rules state the payment must be a purchase, not just a deposit for the feed and the purchase cannot distort income.”

He adds, “The IRS Publication 225, The Farmer’s Tax Guide, explains all rules that apply to prepaying expenses.”

During any time of the year, a producer who is doing a good job of tax planning should look at all income immediately after selling any livestock.

“Tax planning needs to be done year-round. We are not trying to minimize our taxes, we are trying to maximize our after-tax income,” he concludes. 

Hobbs encourages producers to consult in a tax advisor about these and other tax planning opportunities available for agriculture. 

For more information, visit ruraltax.org.

Heather Smith Thomas is a corresponding writer for the Wyoming Livestock Roundup. Send comments on this article to roundup@ wylr.net.