For the tax years 2008 and 2009, there are a number of items that will be of interest to farm families. Changes have resulted from the passage of federal tax laws including the Small Business Work Opportunity Act of 2007 and the Economic Stimulus Act of 2008. This includes changes in Section 179 depreciation allowance, reinstatement of bonus depreciation, income averaging, health spending accounts and taxation of CRP payments. This information in this article is for educational purposes only and is not intended to be legal or financial advice. For specific questions regarding your farm business, consult with your tax preparer.
Federal Minimum Wage Increase: The minimum wage was increased in 2007 with the first yearly increase set at $.70 additional per hour. This went into effect on July 24, 2007 and set the minimum wage at $5.85 per hour. The next $.70 per hour went into effect in July 2008 and increased the minimum wage to $6.55 an hour. The last increase will happen this summer in July and will take the minimum wage to $7.25 an hour.
Depreciation: Depreciation rules continue to change. Currently the law reads:
Section 179 depreciation: for the tax year 2008, the deduction limit is $250,000, and the phase-out amount is $800,000. These increased amounts will not be indexed for inflation. For 2009, as of this writing, the preliminary numbers are a deduction limit of $133,000 with a phase-out of $530,000. Qualifying property for Section 179 depreciation includes breeding livestock, machinery, single purpose ag structures (such as a hog confinement building), and drainage tile. Property can be new or used. Property eligible for Section 179 can not be purchased from a related party.
Bonus depreciation has been reinstated for the 2008 income tax year only. Businesses are allowed to depreciate an additional 50% of certain property. Eligible property includes tangible property that has a recovery period not exceeding 20 years, purchased computer software and qualified leasehold improvement property. Only new assets apply.
Taxation of CRP Payments: Taxation of CRP payments has been an ongoing issue. The issue is whether or not the CRP payment is subject to Self-Employment tax. Recent Farm Bill legislation states that CRP payments made to individuals receiving Social Security retirement, survivor, or disability payments are not subject to Self-Employment tax. Any other individuals receiving CRP payments would be subject to self-employment tax on those payments.
Income averaging has been reinstated for farmers only. Farmers can elect an amount of their current farm income to divide equally among the previous three years. The amount applied to the three previous years is added to the previous year's taxable income. Savings result if the previous year's income was taxed at a lower tax rate than the current year. This election applies to any income that is attributable to a farm business. Farm income includes items of income, deduction, gain and loss attributable to the individual's farming business.
Health Spending Accounts
The rules for health spending accounts remain in effect. A Health Spending Account (HSA) is a tax-exempt custodial account that must be used in conjunction with a high-deductible health plan. The contributions are treated much like a traditional IRA. In order to qualify for a Health Spending Account, you must be enrolled in a "High-Deductible Health Plan." The minimum annual deductible amounts are $1,100 per individual and $2,200 for a family in 2008. Maximum annual out-of-pocket expenses amounts are $5,600 for an individual and $11,600 for a family in 2008. Additional requirements include not having any other health insurance coverage, not being entitled to Medicare benefits, and you cannot be claimed as a dependent on someone's tax return.