We are near the end of another year and year-end tax planning for the 2008 calendar year is upon us. Pre-paid farm expenses are one area of concern for many farm operators as they look at look at year-end tax planning strategies.
If you ( the farmer) use the cash method of accounting to report your income and expenses, your deduction for pre-paid farm expenses in the year that you paid for them is limited to 50 percent of the other deductible farm expenses for the year (all Schedule F deductions minus pre-paid farm expenses). This limit does not apply if you meet all of the exceptions described below.
Here's an example: During 2008, you bought fertilizer ($4,000), feed ($1,000) and seed ($500) for use on your farm in the following year. Your total pre-paid farm expenses for 2008 are $5,500. Your other deductible farm expenses totaled $10,000 (total Schedule F expense minus pre-paid expenses) for 2008; therefore, your deduction for pre-paid farm supplies cannot be more than $5,000 (50 percent of $10,000) for 2008. The excess pre-paid farm supplies expense of $500 ($5,500 - $5,000) is deductible in the later tax year that you use or consume the supplies.
In recent years we have seen good profitability in farming. Many cash-basis tax filers utilize pre-paid expenses at year-end to balance expenses with income. This practice also allows farm producers to guarantee delivery and lock-in prices on crop inputs for the following year. However, there is a limit as to how much a farm operator may pre-pay. The concern on this topic is caused largely because this last summer, many crop inputs experienced substantial price increases. In prior years, if a producer has been close to the maximum pre-paid amount, this year's price increases will make it very easy to go over the limit and not realize what just happened.
There are a couple of exceptions: The limit on the deduction for pre-paid farm expenses does not apply if you are a farm related taxpayer and either of the following applies:
1. Your pre-paid farm expense is more than 50 percent of your deductible farm expenses because of a change in the business operations caused by unusual circumstances.
2. Your total pre-paid farm expense for the preceding three tax years is less than 50 percent of your other deductible farm expenses for those three years.
The maximum pre-paid amount is calculated each year based on the final figures on the Schedule F. Fall-applied fertilizer and lime does get treated differently. If fertilizer and lime are purchased late in 2008 and applied before January 1st, 2009, the fertilizer and lime expense is not considered a pre-payment for tax purposes and thus is not subject to the 50 percent rule.
The best advice is to be sure and check out your situation with your tax preparer. There are some new tax laws out there with some new wrinkles that could affect your tax return.
On the subject of taxes, the potential exists for a so-called "cow tax" The Environmental Protection Agency (EPA) has issued an advance notice of rulemaking regarding greenhouse gas emissions (GHG). The bottom line is that under existing law, if GHG emissions from industry are regulated as hazardous emission, the rules will also impact the livestock industry. USDA has stated that any operation with more than 25 dairy cows, 50 beef cattle or 200 hogs emits more than 100 tons of carbon and would have to obtain permits under Title V in order to continue to operate if GHG are regulated. Given the margins in the livestock industry today, this would create real serious economic worldwide. Hopefully, we will not see this come into play.