Economist: Tax changes provide farmers many happy returns

Several major tax provisions passed by lawmakers in recent years have raised the deductions producers can claim. In some cases, farmers can avoid federal income taxes altogether — at least for the current tax year, said George Patrick, a Purdue University agricultural economist.

Patrick and David Frette, a certified public accountant from Washington, Ind., will explain the new tax laws and other tax changes that affect farmers during the Income Tax Management for Farmers in 2006 workshop. The annual Purdue-sponsored workshop takes place from 7:30-9:30 p.m. EST Thursday (Dec. 7) and will be broadcast to locations in 13 counties across Indiana.

The workshop is free. Those attending will receive tax materials and can ask questions of Patrick and Frette via phone, computer, e-mail or fax.

As a group, farmers have benefited from recent federal tax legislation, Patrick said.

"One of the things Congress changed a few years ago was the so-called Section 179, or the expensing option," Patrick said. "This is a deduction for any type of machinery and equipment that is used in the farm operation, as well as certain types of livestock and some land improvements like field tile or storage or things of that nature.

"This year, that deduction is up to $108,000. If a farmer qualifies, they could write off that amount rather than putting those capital purchases on a depreciation schedule. It's probably not very good tax management, but it's one of the options that they have."

Another tax change allows farmers who hire labor to claim a deduction on part of the net farm income they earn, Patrick said. This "domestic production activities" provision provides a deduction of 3 percent tax on qualified income. The deduction increases to 6 percent for the 2007 tax year and 9 percent for the 2010 tax year.

Farmers who time their crop or livestock sales just right can put off paying tax on the commodities, Patrick said. But they'll have to wait to receive income for those commodities, he added.

"This is fairly common, where they enter into a deferred payment contract," Patrick said. "So if they are delivering corn or soybeans or hogs, they should have that agreement in place before they make the delivery, and it should also specify that they can't get the money until the next tax year. Because most farmers are on a cash basis of accounting, they wouldn't be reporting that income until it was received in 2007."

Whatever tax strategies farmers choose, they need to make their decisions soon, Patrick said.

"Farmers need to sit down before the end of the tax year and figure out where they are in terms of their receipts to date and their expenses to date, because they can make changes until Dec. 31," he said. "After that, it may be hard to accomplish some of the things they are trying to do."

The agricultural tax workshop broadcast originates from Pfendler Hall on Purdue's West Lafayette campus. Counties planning to receive the broadcast include Bartholomew, Dearborn, Decatur, Delaware, Hancock, Howard, Marshall, Monroe, Orange, Pulaski, Vanderburgh and Vigo. For broadcast locations and other information, contact the Purdue Extension offices in those counties or the toll-free Purdue Extension hotline at (888) 398-4636 (EXT INFO).

Much of the information covered in the workshop is contained in Purdue Extension paper 363, "Income Tax Management for Farmers in 2006" by Patrick. The paper is available online.

Writer: Steve Leer, (765) 494-8415, sleer@purdue.edu

Source: George Patrick, (765) 494-4241 gpatrick@purdue.edu

Ag Communications: (765) 494-2722; Beth Forbes, forbes@purdue.edu

Agriculture News Page

Related Web site:
Purdue University Department of Agricultural Economics

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