Tax Tips For Farming Industry
How Does The IRS Determine If I Am A Farmer?
How to Avoid the Drought! Taxes for Farmers
Transcript:
Marcelino: Welcome to The Tax Answers Advisor. I am Marcelino Dodge, Enrolled Agent, and we’re on show number 17, and building. Yes, moving forward here. I want to extend a big thank you out to those listening throughout the United States and even around the world to this podcast yes thanks to all in China, Canada, and Colombia. Your listenership to this is certainly appreciated as we try to give you the best information to take care of your US tax returns and help businesses in general to avoid problems.
Feel free to contact me at Cash Tracks Financial or success@cashtracksfinancial.com, or even please give me a call 844-394-4287. You can visit me on Facebook at Cash Tracks On Facebook. Updates from the last show just last week, a few different things occurred just a reminder out that with the most recent legislation the employee retention credit that was originally a part of the Cares Act back in March of 2020 that has been extended into 2021 for qualifying employers.
There are some qualifications to be able to take that credit, and we’d be happy to discuss those with you. Also the IRS recently announced or actually gave the reminder that all taxpayers are now eligible to get an IP pin, that is a pin number that would be required in order for you to electronically file your tax return, which was previously to this only available to those who had their identities stolen, but now you can participate in this voluntary program if you so choose which basically what it does is it locks your tax return.
And if anybody tries to e-file it without that pin, it gets rejected by the IRS. To get this IP pin, you go on to IRS.gov and there is an IP pin tool you can use. There is some verification, you have to go through to verify your identity, to be able to even get the pin, but it is there, and you can certainly participate in that program if you would like it sounds like it would be a good deal to help you to continue to protect your identity.
Also, the IRS this week announced that power of attorney can be now submitted online through remote access for tax preparers like myself, and individuals can those can be now submitted which is touchless and makes it very user friendly to be able to look up tax information which I always find useful to use such tools and we’ve used such tools, quite often in this office to help taxpayers to resolve their tax issues.
Keep in mind that Cash Tracks Financial here ready to serve you and help you out with the e-signature and various options available upload documents. We can do web meetings, through Zoom to have a good face to face chat, to really come to understand your situation and to help you to save money and run your business or even individually help you to build up wealth and so on. Because we are here to help you not just preparing your tax return, but helping you to achieve excellent results as these times keep changing and providing solutions to help you to reach your goals.
Going to jump in today’s topic now which is, “Avoiding the Drought, taxes for Farmers.” Yes, some people feel that, well I’m a farmer now because I own farmland, I’m living on a farm, or I’m raising a few crops, or livestock. So, but just because you own farm land, maybe even live on a farm, or even if you are raising a few crops or livestock there, you’re not necessarily a farmer. There are challenges to that, and there are motives, profit motives that have to be determined to see if you even are truly a farmer, or if you’re just trying to take some deductions to be able to offset some other income.
Because there are actually legitimate farmers in business, and then there’s other individuals who are actually doing farming but it is more of a hobby than really a profit motive. So, let’s take a look at what can actually qualify you as a farmer, a big part is, is there a profit motive, while when you go and you do your livestock or you’re raising a few crops are you really conducting that in a business-like manner? Are you looking to make some money with it?
And there are some people who, who actually do this I work with some who have a legitimate farming business on the side, they’re out conducting business in a business-like manner. Buying and selling, raising, buying feed and so on but conducting it in a business-like manner not just trying to get a deduction. And as you conduct business is it indicative of making a profit motive, not just trying to lose money but trying to make money.
And a big one that comes in with this is with a profit motive, just like any business when you’re trying to conduct a business, is what you’re doing necessary for your livelihood. Are you depending on selling of the livestock or selling of the crops that you are raising? Is that part of your income that’s going to support your livelihood? If it doesn’t, if you have it more as a side, if you have a full time job, and you’re doing this, far more as kind of a secondary job.
There may still be a profit motive, but yet it could also still just fall into the hobby category, especially if you’re not fully dependent on it, or dependent on it for a certain extent for making a living and having your livelihood and be able to maintain your lifestyle that can call into question whether there really is a profit motive. Also with the comes to farming are the losses, beyond your control, or is it just normal startup of course losses, a lot of farmers, we have a drought in our area. Right now they’re having losses because of lack of moisture. That’s something beyond the control of the farmer, that’s what we’re looking at is, in many times in farming has to do with weather related whether it’s a drought that’s not growing grass to feed cattle or other livestock or its lack of moisture to prefer if you’re doing dryland farming, to be able to grow your crops.
So losses like that as compared to losses that you’re just spending money to buy feed or spending money to buy chemical or spending money to buy, just to spend money so that you have a loss so that to offset other income then. Those are, those can be losses within your control. That’s a bit that can be very difficult to go either way. But yet, that’s another area determine, is there really a profit motive, within it? Are you doing the same thing over and over?
Now this actually is what makes farming in a way similar to other business like a sole-proprietorship non-farm business. Is that are you changed? Are you always you just doing the same thing over and over and over again, and not making money, or are you actually doing, trying different methods or maybe reading some publications related to farming to say how you can maybe alter your methods in doing your livestock or in raising your crops or doing other items, so that you can possibly do better, or actually turn your farm or your ranch operation into a profit motive.
Because I do business with several who do actually make money because of the way that they conduct their business, they changed methods or they adjust, they look for the times, they look for trends, and they adjust according to the trends. Also is about knowledge is there, proper knowledge there to farm successfully, which also relates back to as I mentioned, are you reading or studying in certain publications, trade journals related to farming there’s several publications around the area I’m in that many farmers read one called the AG journal that they keep up on what’s happening in markets, what’s happening in the grain markets, what’s happening in the cattle markets.
There’s also knowledge of when sale barns are several sale barns around the area where cattle and other livestock are sold. Are you knowledgeable about when those are? Do you know when to go and buy and sell? Are you just showing up without any knowledge about the particular livestock that you’re looking to perhaps buy or sell? What are you doing, is there actual knowledge of farms successful? Do you know about plowing the fields or fertilizing times to fertilize times to maybe put down other chemicals for weeds?
There’s a lot of areas of knowledge. Do you really do this? Are you trying to get that knowledge? And I tell you many farmers I work with, they do very well, but this is a key distinction between is this just a hobby, or are you just kind of just really doing this to be seriously to make to make money at. How have you been profitable in similar areas in the past is also another potential area that can determine whether there is a profit motive in this. Have you sold your crops, your wheat, your corn, milo whatever you’re doing it and made money at it in the past? Well, certainly, you can have a profit motive and be able to be doing that so certainly, as you work in the farm and work on it if you have this profitability, and you’ve had profit in prior years because farming is one of the most challenging business because you are so dependent upon the weather.
That if you’ve had profits in prior years, especially when there’s been high moisture years a lot of rain or maybe perhaps a lot of snowpack and depending where you are in line for the ditch to get irrigation water. All of that can play a part in your profits and if you get the water, enough water to use it certainly get some good wheat crops because there’s a lot of wheat around our area plus, a lot of a wheat, corn and a few other crops, that’s grown and sent off to feed yards or sold to individual ranchers for as feed for their cattle or horses.
So, as you sell this, are you making profits? Have you made profits in prior years? Do you have future profits expected? And certainly, is certain methods that you use as you have a livelihood and you’re looking at doing it in proper motive. You certainly do expect to have profits, you should do if you’re really conducting your farm in a business-like man or you’ll be able to earn these profits and be able to say, I’m looking towards future profits because we’ve made these adjustments we learn these techniques we’re going to maybe expand our herd of cattle, and look at making this change so that we can grow.
So we can have more and more calves each year, be able to sell more calves and then of course adjust our herd as we need to. So yes, we’re expecting future profits, if all of these areas that I’ve already mentioned, indicate a profit motive, then definitely, yes, you could have and be in the farm business and be able to have the advantages that go along with being a farmer. Now, but if you don’t match up to these actual motives for a farm, you could just have what’s known as a hobby farm, which is not filed on a Schedule F which is where you file a farm.
It is not going to offset any other income. Now, if it is a hobby of course, you do have income from it. And it’s a hobby farm. Why would they have a cost of goods sold as all you can use to offset it, but you got to report the income. Now, you don’t pay self-employment tax when it’s considered a hobby on the income, but you just don’t get any of the other benefits of being a farmer. Now of course, as we looked at you do have a profit motive.
And you’re doing good on a farm, and you’re really wanting to make a business out of it and some people start small, that when they start small, they can appear to be a hobby, because they’re trying to maybe work another job to support while they build up their farming business but they could still be legitimate farmers, that’s what they’re wanting to do that’s where they’re going, they’re buying cattle, or they’re leasing farm land, and they could very well be in the farming business, and with being in the farming business and just like any business, we initially start up. You do have losses. And these losses when you’re legitimately in the farming business can offset other income, like wage income from a W-2 or maybe income from a flow through entity like a partnership or an S-Corp.
So, it can help with those areas to be able to help you to grow up but yet, not pay a lot of tax because you get the offset. When you do have profits on the farm, though, just like a sole-proprietorship, a non-farming business, you are subject to self-employment tax and this is an area that I think is very important for those in the farming business realizes that it is a good thing to pay some tax every year.
And this where an issue has come up for some people in the farming business because they’ve spent so much trying to not pay tax that by not paying their self-employment tax, in the long run, they’ve actually hurt themselves, because they didn’t pay these, the amounts into Social Security, and into Medicare that would normally be paid into if they were a W-2 employee of somebody else. And so, I’ve worked with several farmers on this and recognize and look their taxes and said, you know you have an issue here because you didn’t pay self-employment tax this year.
And so, we avoid having a zero year because you don’t want any zero years because they take the top 35 years. When you do Social Security and they calculate it, and if you can keep out any zero years, you’re going to only be helping yourself by doing that, and certainly in a year and there’s so many years that you can take an election to actually pay some self-employment tax, so that you avoid having these zero years, and that’s an area where to me many farmers especially farmers that are sole-proprietorships, kind of overlook that and they just don’t think about it.
Either that or their tax person whoever has been doing their taxes, hasn’t had the discussion with them which is what I’ve often seen too when I talk to these individuals is that. I’ll ask them about prior tax returns, you’ve been farming. How much employment tax we paying? Well, I’ve been paying any taxes for every year, like you haven’t paid any taxes at all. Well, then I explained to them this deal about the importance of self-employment tax, and then all of a sudden the light comes on, they’re like, you know, that makes a lot of sense.
So I’m always encouraging what you need to be paying something in on self-employment tax, even as a farmer in order to make sure you get a good amount of Social Security, and that you’re also qualified for Medicare by avoiding those zero years, but having as few of those as possible, so we can make the election to be able to pay some self-employment tax, even if you have a loss so that’s a nice deal that’s in the tax law there.
Are you wanting to grow wealth faster, save time and build a nest egg? Hire a tax pro who makes you money and does more than just file your tax return? Marcelino Dodge of Cash Tracks Financial identifies your key numbers, works year-round, improve your numbers, keeps you compliant and helps you achieve goals faster. Call Marcelino Dodge today, 719-336-8739 to schedule your free tax strategy review. Call 336-8739 or visit cashtracksfinancial.com.
Many people want to build wealth or grow their business faster, but do not know what specific numbers to look at that actually helped build monthly cash flow. Hire a tax pro who makes you money and does more than just filing your tax return? Marcelino Dodge of Cash Tracks Financial identifies your key numbers, works year-round to improve your numbers, keeps you compliant and helps you achieve goals faster. Schedule your free tax strategy review by calling 719-336-8739 or visit cashtracksfinancial.com.
Marcelino: Welcome back to The Tax Answers Advisor. This is Marcelino Dodge, very much appreciate you listening to the program today, as we’re discussing about taxes for farmers and the importance, as we were discussing right before the break for farmers to pay self-employment tax. That is a drought, you definitely want to avoid is not having enough social security, and enough quarters in to pay, and get yourself on Social Security when you do come up to retirement age, whether you choose to take it at 62, or later on closer to full retirement which is working up to age, 67, and each of that is an individual basis, I don’t advocate either way, what I advocate for when it comes to taking Social Security is doing what’s best for the individual.
At the time, and but what I do advocate is for farmers in the farming business pay at least some self-employment tax each year to get your four quarters and to avoid zero year among your top 35. Another benefit of being a farmer, is when you do your income, you’re eligible for what’s known as Farm Income Averaging, which can save you on income taxes through the year with the profitable farm by averaging it out over a three-year period often underutilized area with but is an area I tried to always utilize when I worked with farmers, in my particular business because it is a very good tool, and saving income tax.
Now a unique provision that farmers have is also relief on estimated payments, which is really nice because a farmer makes all of their estimated payments and filed their tax return by March 1st, that’s this year, then they don’t have any estimated tax penalties for not making the estimated payments through the year when they do owe tax. That’s a very nice provision that’s in the tax law for farmers, many do take advantage of that by getting their taxes paid, and their return filed by March 1st.
Now, a person can be a landlord on farming, as well, which you can own the farm, the land that is. And the assets, but not actually be farming on it, but you can still be considered farming now what you can be, though, is you can be leasing out the land or the assets to a farmer, you can be leasing it out for cash, and just get a regular amount of cash rent. Each year for further use of the land which some around in my area and I’ve worked with some that do this that lease out their land.
They don’t farm it but others farm it and they do it, and ones do it very nicely and they just get their, whatever their lease payment is each year for that or they lease out their land for pasture, and I have because I have clients that actually pay rent to landowners, for use of their land to be able to put their cattle on for pasture, and works out both what works out really good for both. Also, that the other way you can lease land to a farmer is to get a share of the crops produced, which these percentages can vary, yet you’re leasing out your land.
I mean, you could have your house like almost right there, right next to the land but you’re just living in the home but yet, you’re the land around is actually being farmed by someone else and I have some clientele that actually do that they lease out the land around them, but they don’t actually farm themselves, what they do they get a share of the crops that are produced off of the land each year. Now what’s really handy about this arrangement, when you are leasing land for a percentage of the crops produced is that that income is not subject to self-employment tax. So you get some additional income, not having to pay self-employment tax, but you do pay just regular income tax on that you do get some expenses.
But, the key point is on that as a landlord is that you do not materially participate in that. Now there’s four tests, and if you meet just one of those four tests. You can be considered materially participating in it and thus, instead of being not subject to self-employment tax if you’re considered materially participating, you can end up having to pay self-employment tax on it.
So, it’s just best if you’re going to do that just to, I’ll just say be hands off, maybe visit with your tenant every once in a while, and just keep doing as little as possible and just enjoy the income coming in off of the crops. And what’s nice is that when you do this you often do get some government payments too from various government programs. It’s also considered taxable income but it’s still a nice provision, you can get now income reporting.
There’s various farm income types we’ve discussed several of them are, some of them already, but some do we’ll do custom hire work, where they’ll go over and they’ll do some bailing or they’ll go and do some other type of work on a farm, to help out a neighbor, to get some of their crops in, and that’s that work is reported on Schedule F and oftentimes that custom higher work 1099 is issued out to that individual doing the work, and then they report that is custom higher work that they did.
If you’re getting cash rent from just leasing up your land, be it leasing of it that what they’re actually producing crops on or if you’re leasing it to someone who’s putting cattle on it for grazing purposes. That is just the Schedule E, cash rent, that you can get a few little land expenses like the taxes on the land and perhaps maybe some insurances that you can take as expense to offset that income, or maybe have a loan of course on the land as well.
And then if you’re getting crop rent, and you’re getting a share of the crops, that’s considered farm rental income which falls into another farm which is 4835. Usually when you have a sharecropper and you get a lot more expenses, but still it’s a good source of income. And it provides you with income that is not subject to self-employment tax. A little bit specific on sales of livestock as some don’t actually do direct farming or raising crops but some individuals may have had clients that really work, all they work with his livestock, and they’ll go in and they’ll purchase, they’ll go to the sale barn, and they’ll see a group of calves that they’re going to go in and buy they’re called feeder calves. These are younger animals that they’ll go in and purchase for a certain price, and then they, you go in, you feed them for several months. Get them up to a certain weight, and then once they get up to that certain weight then you will turn around and sell to make a profit on them. And there’s places on the tax return, while on the Schedule F where they actually have a spot where you buy cattle like this these younger animals, where you buy him you put in the price where you bought him and you put in the price where you sold them that’s actually determined to your profit and that’s separate from the other expenses that you have down below.
But, it is one area of livestock that I see some doing some once again, they do very well at it. Breeding these we have a breeding goal once we’ll go in and buy heifers, oftentimes they’ll use it for reading purposes before five years they, these particular cows. They come in as farm assets, because they’ll produce calves each year then calves, calves that are then sold. And then there’s what’s also called Market livestock, which basically these would be calves that are then produced by the farm assets.
In this case, you have the heifers, and start producing calves, and then these calves are then raised up to a certain age and then they’re sold those for the purpose of the one doing the raising that’s considered market livestock. So they produce them there on the farm, then they sell that livestock out sell those calves, which there’s are many ranchers that will go in and do this and it says, that’s what their business is they’ll produce so many calves each year.
I was just listening to the radio this morning and one of the live, one of the sale barns in the areas having a sale, they’re talking about all these calves that many of these areas ranches are bringing, they’re going to go and sell these calves are going to be market because they raised them, and they sold them, they take them out and they sell them. And this course, these sales go on in our area there’s one about seems like there’s about a sale barn is having a sale about every day during the week but it’s just as part of the business and this would happen these cattle are constantly bought and sold, depending what is going for whether they’re feeder or they’re the breeding or they’re the market, whatever they are, they’re going out and it’s creating income for the rancher that is using them.
Now farmers, they have farm income of course, and the vast majority of farmers are what’s cash basis which is basically when you have cash basis farming, you count the money when it comes in when you take possession of it because you get the check that’s cash basis on income and cash sales, when you write that check out and you’ve paid that expense. And certainly that cash basis is very most common that’s, I haven’t worked with any farmers that do what’s known as accrual basis we pretty much always stay on cash because it’s simpler it’s easier and makes everybody’s life so much simpler. And you do get income, I mentioned about resale of farm products which is basically like what I mentioned earlier about feeder cattle, they’re reselling up, they’re buying them, then they’re reselling them later at a different price. And then of course, the other farm income is of course, like your market once, or the produce which is cattle or other livestock that is purchase that is raised on the farm, and then sold and sale.
A farm products, also includes like your wheat, your hay, Milo, other farm products that are raised, raised from the ground that they sell as well. So there’s a lot of areas that fall in there and when I’m working on one of these I always got, got to get these items clarified because there’s different lines where these go and it’s very important to have each of them in the right spot. Also you have cooperative distributions which some farmers will get which these are from farmer owned companies, and they get a distribution when they do get a distribution when those cooperatives are profitable.
There’s a distribution that will be put out to the farmers for that and those do come out those are considered taxable income. I also see a lot of payments from the USDA for land it could be payments for maybe crops not producing a certain amount, it could be disaster payments, could be drought payments, there’s a lot of different USDA payments that go out. Also, another type of payment which is CRP payments in the business, which is basically CRP is payments that are going out for those who are taking care of land that they’re just basically letting it go to grass, they’re kind of preserving it, and leaving it out, leaving the land out there for wildlife to do it.
No, but they do a little bit of work on it, have a little bit of payments but they get these payments from the government to be able to do that, and certainly those payments there. Now what’s nice about CRP payments, though, is that those payments when a person, a farmer gets up to the age, and they’re getting Social Security. Those CRP payments become not taxable, not subject to self-employment tax, that’s a nice thing.
So, another good provision for those who have land or participating in some of these government programs, and of course, some of the other cash basis areas that farmers can have is a Crop Insurance, which all depends on the amount that they insured and what they insured but these payments are taxable and they can be. Depending on the year, like right now with a drought, this last year these payments could be pretty significant that I’m gonna see, haven’t seen too much but, there’s a lot of Insurance Agents and Crop Insurance.
So it’s going to be interesting to see how the Crop Insurance comes out this year. Of course, I mentioned custom higher earlier cash basis when they get paid. And then there’s a lot of other little areas that can fall in there under other farm income as well as for cash basis, so just a few of the items we can hit on here certainly as cash comes in, they utilize it in turn about reinvest oftentimes most farmers will take about reinvesting equipment and do all kinds of different farm-related activity to of course, take care of their farm and raise. And properly, being in a business as a farmer, there are many tax advantages that a farmer can get, for example, when one area that can happen is at a farmer can prepay up to a year of expenses.
Yes, it must be an actual purchase for things like feed, chemicals, and supplies, it can’t just be a deposit it must be an actual purchase of these items. For it to be able to be a deduction which, this could be handy especially if there’s a lot of expenses in a year. I mean a lot of income, or an unexpected bumper crop as they say, you have a lot of income, well, you can go ahead and make these purchases, a year in advance but make sure it’s an actual purchase to be able to give the additional ride off.
Another area that’s very nice for farmers, is farm vehicles, farm pickups, used primarily in the farm. I like this provision, because one of my biggest pet peeves is I talk to people in businesses do you have a logbook of the use? Are you keeping track of your mileage? Because in every other business, type of business. You must keep a logbook for verification of vehicle expenses. This is where farmers are differ, though, is that for a farm vehicle, a vehicle, it could be a car or a pickup that is used primarily for farming and that can be on the farm, that can be going to and from the feed store.
They can deduct 75% of all of those expenses for farming, without having to have any type of logbook, or mileage record. That is just simply marvelous. Now of course if a farmer does keep a log book that can show more than 75% use, then you can of course take the higher deduction that is an excellent provision, excellent advantage of being a farmer. We’re going to go ahead and take a little break now and then come back and talk a little bit more about some of the tax advantages of being in the farm business. This is The Tax Answers Advisor with Marcelino Dodge, on the Voice America Business Channel.
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Are you wanting to grow wealth faster, save time and build the next egg? Hire a tax pro who makes you money and does more than just file your tax return? Marcelino Dodge of Cash Tracks Financial identifies your key numbers, works year-round to improve your numbers, and keeps you compliant and helps you achieve goals faster. Call Marcelino Dodge today, 719-336-8739 to schedule your free tax strategy review. Call 336-8739 or visit cashtracksfinancial.com.
Many people want to build wealth or grow their business faster, but do not know what specific numbers to look at that actually helped build monthly cash flow. Hire a tax pro who makes you money and does more than just file your tax return. Marcelino Dodge of Cash Tracks Financial identifies your key numbers, works a year-round to improve your numbers, keeps you compliant and helps you achieve goals faster. Schedule your free tax strategy review by calling 719-336-8739 or visit cashtracksfinancial.com.
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This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today, please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to success@cashtracksfinancial.com. Now, back to The Tax Answers Advisor.
Marcelino: Welcome back to The Tax Answers Advisor. I’m Marcelino Dodge, certainly appreciate you listening in today as we’re talking about taxes for farmers avoiding the drought, and certainly some of the tax advantages of being in the farming business or there we were just talking about the logbook requirement or I should say, no logbook requirement for farm vehicles. We then been able to deduct 75% of those expenses that is a wonderful provision in the tax code.
Another tax advantage that farmers have, is income averaging over a three-year period. Now, when this particular method is utilized. It does not save self-employment tax. What it does do though, is it can reduce your income tax, which is still a tax savings, but yet as I mentioned earlier the importance of paying the self-employment tax is vital, and if a farmer does have a certain, certain amounts that they expect to possibly make even maybe quarterly estimated payments could be a good idea.
But once again, it depends on the individual situation. I can’t just say, this is a blanket for everybody. Now with this income averaging, for example, there could be a tax benefit to selling some stored grain in one year, and then reap the benefits because you’re taking it out, you’re averaging it out so there could be some there once again, just kind of got to look and benefit and see if it is going to be an actual benefit which is part of the process that we use through our year-round process here is helping individuals such as farmers to make decisions like that. Should I sell that this year? Should I not sell that? That’s our whole process help ones to make that determination. Another advantage of farming is the special fast depreciation on certain buildings and assets.
Yes, most farm buildings have a 20 year write off period. And there’s also some new provisions that after 2019, anything that you purchased new after 2019, or equipment as a five-year life to it. But if you bought something used in 2019 or later which brings us up to today, those have a seven-year life, but has a certain method that those that use the equipment must use in there. Now of course, being that this equipment is five and seven years, you can still take items such as bonus depreciation or section 179.
What you do, just really depends on your individual circumstances. I can’t advocate what’s best for everybody, all I can advocate for is the saying that has to be looked at. We look at it, we determine what’s going to be the best for the individual, not just on this tax return, but yet going forward. Do you really need to take a certain amount of depreciation on this tax return or would it be a benefit to you, instead of taking all of the bonus or taking everything on section 179, by doing it in a way that is going to benefit you now and going forward because maybe you’ll need an expense in future years.
So certainly, depreciation is something that’s deeply discussed with the client here to help to make a good decision based on good information. Then other tax advantages of course, two thirds of income from farming estimated taxes do paid by once again, filed by March 1st, you’re in good shape as a farmer, that’s a beautiful, beautiful thing and the other provision that they make for farmers. Now of course, as we keep in mind with farming is that these are necessary, whatever expenses are ordinary and necessary are taking as expenses on the farm.
Of course, as I mentioned about a pickup or a vehicle used in farm you can take it 75% expenses, and with no allocation records, my goodness, that’s just a beautiful area to be able to do that without having to have that verification that my farmers don’t have to worry about because I just say, okay we can do this and they’re like okay, whereas everybody else I have to write them about a mileage log.
And there’s certainly apps that can help ones to do that as well. Even as farming, you can take a home office deduction for areas exclusively and regularly used for farm management within the home. And there’s of course a percentage, that could be used or once again the simplified method could be used, whatever works best and certainly we once again sit down and discuss, and figure out which does work the best for the client, because each of you as a client or potential client is an individual. And that’s one of my areas where I just take a lot of pride in is just making sure that as I take care of you. I look at you as an individual, look at your individual situation, and we make a tax return based on what’s good for you as the individual. And if simplified whole method is good, we go that way.
Going percentage is good, we go that way, just another example of how, as I look at people and try to help them do my best through our year-round process we make these decisions and helps you to do and be successful financially, and also pay as little tax as possible. A farmer may have a tenant house that they use for the help. Of course, you can deduct the cost of maintaining and furnishing this home.
And what’s really nice about the tenant? They don’t pay tax, there so it’s very good for them. If you lease property, that can be an expense that you can have. Now, the exception to this though, is the home where the farmer actually lives so if you’re leasing property and the home happens to be with it, there has to be a distinction somewhere of this amount is for the farm land. And this amount is for the farm house.
Ideally there should be something in the lease agreement that says, say this $5,000 we’re paying, this $500, $600 goes towards the home. But I don’t know how often that actually happens but that would be my definite recommendation is to have something in there that says, how much is where the home and how much is for the actual property. If there’s a conditional sales contract now these are always an interesting area is, Lease Agreements and I put lease quotes there because sometimes leases are more of a conditional sales contract which basically means you may have a $1 buyout which at the end, which after three years or five years whatever it is, it’s like, you actually own the item.
But with this type, who’s doing maintenance? Who’s doing repairs? Who’s doing all the work on the equipment? Well, if you’re doing all of that work on the equipment, then you really don’t have a lease. What you have is a conditional sales contract and you’re actually purchasing the item and there’s some really details in the IRS rules about these type of contracts, and that you’re actually going to have to recover that cost by depreciating the item.
Not the lease payments, because in a true lease when you’re leasing something place that you’re leasing it from takes care of maintenance, takes care of repairs, all of that, all you do is pay the lease. And so whenever I run into these type of contracts, I always say, bring me the contract, I need to look at the contract and see what it actually says. See if you truly have a lease, and that’s an area where I sometimes get into deep discussions and sometimes maybe even a little heated discussions, is trying to calmly explain to the client that this is what you got yourself into. And this is how we take care of it and this is what we do now. So just be aware of that, on these sales contracts and we’re always here of course to help you to see what you need to do. Of course there’s nondeductible items when it comes to farms. Some of these are of course, anything personal.
Anything raised used by the farmer, even value of livestock that died is not a deduction, especially your cash because if you raise the livestock, of those calf that was lost, which I always have some clients that will lose a calf or whatever. They try to establish the value on it which is good to know but for tax purposes, it’s not a deduction. And then of course, we keep in mind depreciation of vehicles, machinery, buildings, breeding stock that is used in the farm all of that is part of what needs to be, or what can be deducted.
Oftentimes on a farm and in many some years we have a net operating loss. Now, there’s been a lot going on with net operating losses since the Tax Cut and Jobs Act at the end of 2017. But for 2020, it’s really gonna 2020. You can carry back five years or carry forward indefinitely, for 2020 return. But in order to carry forward, you can waive, you don’t have to carry it back but you have to put in an election to waive that carry back period.
Otherwise you have to carry it back. Now, what’s nice about the 2020 is add back and offset a 100% of taxable income. That’s where we are for 2020. But then as we go into 2021, where we are now, unless something changes just based on current law is that it will go back to, for this year. For 2021, it’s back to two years back or carry forward indefinitely. But once again, we waive the carry back period which is majority of the time with most of my clients, that’s what we do, because in many cases it’s not really a benefit to carry it back.
So what we end up doing is carrying it forward. Now, for 2021 going forward based on current law, it does limit the offset to 80% of taxable income so not as good as we have a loss of 2020 which could be good for those in 2020. Because at why I shouldn’t say 2020 should be good because there are probably some that have a lot of losses that they’ll be able to maybe carry back, which you go back five years that could be very good that’s where once again looking at individuals and then making adjustments where necessary.
Going to touch a little bit more just here on Farm Income Averaging, a little bit more because I mentioned it, and talk just a little bit, but it’s nice because it allows some where all eligible farm income, you can use some of it, and you can select what you want to use on farm income averaging, you can actually lower your income tax. Now, as you take that amount of can’t be greater than whatever your taxable income is which it really comes down to, once again as I mentioned there if you’re paying self-employment taxes, this is where this is really nice when you’re paying self-employment tax, and you really do need to as a farmer, pay your self-employment tax, you still may be subject to regular income tax. Now this is where farm income averaging come in to help you to not at least have to pay the regular income tax, because through the farm income averaging you can or you can average out whatever your income is then bring down that income tax for the year.
And what’s nice is that when it comes to farming. It’s not just for individual farmers who are sole-proprietors, this can show up for partners. This can be used for shareholders like in anS-Corp, so that all can reduce their income tax there it’s really a wonderful provision in the tax law that’s been made available, and it can be used for tax years for a tax saving tool even if you have no tax savings in the year using it, it can actually help you for future years.
So there could be tax saving there which is why we try to always put it on every return because it can definitely help, so there’s no real downside to have on the tax return each year. Now, as we’ve been talking about farmers and avoiding the drought and being very careful and what you do, and taking the proper expenses, making sure you pay yourself employment tax. These are all areas that when we work with individuals through our intelligence solutions area that we really try to help individuals of all types and various businesses to avoid a drought, to be able to work together.
Yes, I like to work together with people in their financial picture, this is any type of occupation, so that we can help you put together the necessary components of your financial picture because it’s a challenge for us all to do with on our own. And thus, we can help you, we can come in here and help you. We enroll you in a bundle, can be an individual bundle, can be a business success bundle, to help take care of the tax and bookkeeping stuff. \
But even go beyond that, reach down into what you need to look at your goals, simplify your financial picture, get the core components, get defined action items throughout the year. So, we give year-round support by means of our business. And this is through various technical means, yes, we are available year-round, we got web portal, secure web portal that is used so easily transfer information.
We got video chat available, or I will sit down, talk to you face to face that way. So to really come to understand your goals, and what your needs are. And of course, you can always get a hold of me at cashtracksfinancial.com, or success@cashtracksfinancial.com. The phone, 844-394-4287. Then of course, you can always visit me on Facebook, facebook.com/cashtracks. Yes, we are available year-round to help you meet not only your compliance needs, but help you to create an action plan to help you to be able to reach, whatever financial goals that you need, and we do offer a free mutual exploration meeting to discuss your goals, in detail, then to help to determine what your bundle is to be able to put together an action plan for you in a roadmap. So you can know where you’re going, what you’re doing, how we’re going to help you. Next week, we’re going to discuss, “Wisely choose your Tax Preparer.” But yet,SA go beyond just wisely choosing your tax preparer, but choose one who can also be your financial partner, it’s going to be very interesting how we go into that next week and discuss the importance and emphasizing even more.
So from the last time we talked about this just about a month ago, frankly, of choosing a tax preparer that not only does your tax return, but can help you out in many other areas as well. Again, I thank you for tuning in today, and we’ll see you next week at 9am Pacific. This is Marcelino Dodge, on The Tax Answers Advisor on the Voice America Business Channel.
Thank you for listening to The Tax Answers Advisor with host, Marcelino Dodge. We’ll be back again next Thursday at 12 noon Eastern time, and 9am Pacific time, on The Voice America Business Channel. We’ll have more to share next week.
Cash Tracks Financial Inc.
117 W Beech St
Lamar, CO 81052
Office:(719) 336-8739
Toll Free: (844) 394-4287
Fax: (719) 336-8799
Email: success@cashtracksfinancial.com
Quick Contact
Phone: (719) 336-8739
Toll-Free: (844) 394-4287
Fax: (719) 336-8799
Email: success@cashtracksfinancial.com
Resources
Resources & Articles For Managing Your Finances On Your Own
Tax Tips For Farmers From Cash Tracks Financial Inc.
How does the IRS determine if I am a farmer? How to avoid the drought! Taxes for Farmers transcript from the The Tax Answers Advisor Blog with host Marcelino Dodge. Get more information about farmers’ taxes at the Tax Tips For Farmers web page.
Is Your Website ADA Compliant? A Tax Credit Can Help You!
ADA compliance for Websites – it’s important! How can I determine if my website is ADA compliant? ADA Website Compliance from the transcript of Tax Answers Advisor with Marcelino Dodge, Get more information at the ADA Website Compliance page.
Tax Impact Of Scams From Tax Experts Cash Tracks Financial
Tax scams are here to stay, so watch out for the IRS Dirty Dozen! Article from the Tax Advisor’ answers transcript with host Marcelino Dodge, owner of Cash Tracks Financial Inc. Get more information at the Taxes and Scams web page.
Contact Us
When you need help to prepare your tax return or to solve your tax issues contact Cash Tracks Financial Inc., serving Lamar, Colorado and Colorado Springs, Colorado.
Lamar CALL: (719) 336-8739 TOLL FREE: (844) 394-4287 FAX: (719) 336-8799
117 W Beech St, Lamar, CO 81052, USA
Colorado Springs CALL: (719) 359-8789 TOLL FREE: (844) 394-4287 FAX: (719) 336-8799
525 N Cascade Ave, #200, Colorado Springs, CO 80903 USA
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