Time to review your tax strategy

Current rules have few of the complex but generous provisions of laws passed during the COVID-19 pandemic.

“It’s back to more normal,” says Kristine Tidgren, director of Iowa State University’s Center for Agricultural Law and Taxation. It also could be a calm before big changes.

At the end of 2025, many of the provisions from the Tax Cuts and Jobs Act of 2017 expire. Unless Congress acts, income tax rates will rise, key deductions will go away, and the estate and gift tax exclusion will drop from almost $13 million now to an estimated $7 million, depending on inflation. 

Before worrying about that, however, Tidgren, a national authority on ag tax law, recommends running these timely issues by your tax adviser.

First, thanks to cash accounting allowed to farmers, you have time-honored ways to shift expenses and income from one year to the next. 

If you’ve had a good year, you can prepay expenses. Not so great? With a deferred payment grain sales contract, “you can choose to pull income back into 2023,” she says. It’s a decision you make when you file your return. 

Also, as late as April 15, you can contribute to an individual retirement account. 

“They also might want to establish a retirement plan through the business. If they’ve had a significant income spike, they could investigate a defined benefit plan,” Tidgren adds.

The Section 179 rapid expensing for farm machinery bought this year remains a popular way to accelerate deductions. The 80% bonus depreciation that you can take after Section 179 property is expensed will drop to a 60% bonus depreciation in 2024.

However, Tidgren cautions that with income tax rates possibly going up after 2025, you may not want to write off new machinery or other eligible property too aggressively now. 

Paperwork and paperless for the IRS

Just as farmers can pay penalties for improper reporting of income, the paperwork required for the IRS is another potential risk. When Tidgren teaches tax preparers, she covers the rules for sending Form 1099. If you pay anyone $600 or more during the year, you may need to send the IRS and the person paid a Form 1099-MISC to report the amount. 

Common examples are renting farmland and paying a veterinarian. Usually, you won’t need to send a 1099 to a corporation. If you rented land from a farm management company, a 1099 isn’t needed. If you rented from your brother, it likely is. You must report payments to a veterinarian, even if that practice is a corporation. The IRS has several versions of 1099 forms. Form 1099-NEC reports nonemployee compensation going to independent contractors providing services such as custom farming. It is also used to report attorney’s fees, even if the firm is a corporation.

Sound complicated and confusing? This is just one reason to get advice from a competent professional. Another is that the IRS levies significant penalties when these forms are filed late — $60 for each late filed form no more than 30 days overdue (up to a maximum of $220,500 for a small business). The deadline to send Form 1099s to those you paid in 2023 is Jan. 31. The IRS needs copies of the Form 1099-NEC on the same day, but you can provide the IRS with the Form 1099-MISC by Feb. 28 on paper or by April 1 if filed electronically. Before issuing a 1099, you must collect a W-9 form from the person you’re paying.

If you send the IRS more than 10 information returns of any kind (including W-2s and 1099s) you must file those forms electronically in 2024. This is a change from 2023 when the threshold was 250 forms. Tidgren expects many farms to be affected by this.