As a farmer, you may have many questions about farm tax law. The most important among them is likely: How can I maximize my farm tax deductions? Reducing your tax burden and maximizing the amount of money you have available are critical to the financial future of your operation.
That’s why we wrote this article. We want to help local farmers in the Illinois Valley expand their knowledge so they can maximize tax deductions and keep their farms on a strong trajectory for years to come.
Utilize the Section 179 Deduction
One of the tax benefits available to farmers is Section 179 of the Internal Revenue Code. It allows you to immediately expense 100% of the cost of qualified property (new or used) during the tax year in which it is placed in service, as opposed to capitalizing it and depreciating it over time in future tax years. For 2022, the deduction limit is $1,080,000. Section 179 deductions cannot create a loss.
Qualifying property includes:
• Farm machinery and equipment
• Drainage tile
• Single-purpose farm structures
• Purchased breeding livestock
Section 179 enables you to invest in your business without being saddled with a massive tax burden.
Add Bonus Depreciation
Bonus depreciation is like Section 179 in that you can currently claim 100% of the cost of qualified new or used property. The difference is that there is no limit to the total amount of bonus deprecation a farmer may claim. Bonus depreciation does apply to general-purpose barns.
2022 is the final year 100% may be claimed using bonus depreciation. The percentage will reduce to 80% in 2023 and continue to gradually decrease until it expires after 2026. Bonus depreciation can create a loss. For 2022, the state of Illinois has decoupled from the federal government and does not recognize bonus depreciation.
Keep Track of Deductible Expenses
You can’t claim what you don’t track. Recordkeeping is vital for farmers so that all qualifying expenses related to the management and operation of the farm are claimed. They include:
• Seeds and plants
• Fertilizers and lime
• Chemicals
• Feed
• Veterinary expenses
• Insurance
• Supplies
• Repairs and maintenance
• And much more
Consider Income Averaging
In some circumstances, it’s beneficial for farmers to do income averaging. An election under the Internal Revenue Code, farm income averaging allows farmers to divide their current farm income equally among the three most recent tax years. Income averaging is beneficial if your income for the current tax year is higher than income from the previous three years.
Income averaging enables you to balance your tax bracket with the tax brackets from the previous three years. You’ll be shifting income from the current tax year to lower brackets for the previous three years, which lets you realize tax savings to the extent that such income would be taxed at lower rates in the previous years.
Maximize Farm Tax Deductions with the Help of Professionals
For farmers, tax preparation can be complicated, confusing and time-consuming. But it doesn’t have to be. Working with an experienced local accountant ensures everything will get done right and save you as much money as possible.
At Kilday, Baxter & Associates, we’ve been serving the Illinois Valley for over 30 years. We help farmers maximize tax deductions through our business tax preparation and business tax planning services. We are available year-round to help you and answer your questions. Contact us to speak with one of our experts or schedule an appointment.