Purdue Economist Gives Tips For 2009 Tax Season

Tax time will be here soon enough, and according to Purdue University agricultural economist George Patrick, it may cause some confusion for farmers. However, for manufacturers, a little knowledge about what taxes impact farmers, can potentially boost equipment sales.

In pushing for end-of-the-year equipment sales, remind farmers that one means for them to offset taxable income is to purchase some of the next year’s inputs before the end of the current tax year.

“Many farmers buy some of the inputs they need before the end of the tax year,” Patrick said. “If they make a real purchase, not a deposit, they can go ahead and deduct those expenses in the tax year when the bill is actually paid. This gives farmers the flexibility, if they have a high-income year, to buy some of their [materials] to reduce the income for the year. The thing to remember is for prepaid expenses, it has to be a true purchase, it has to specify what is purchased and the price, and farmers have to show a reason for it. But, given the volatility of input prices the last few years, just getting a definite price may be one reason a farmer is doing it.”

Also one tax provision to remind farmers about is the additional first-year depreciation on new assets. Farmers can take 50% of the cost of a new farm item as depreciation in the first year. They can also continue to take the normal depreciation on the remaining 50%, which, Patrick said, gives farmers the opportunity for potentially large write-offs. If large write-offs are not needed, farmers can elect not to take the additional first year depreciation.

“Section 179 allows farmers to write-off the cost of an item, but there is a limit based on what each individual farmer’s taxable income,” Patrick said. “Where this gets confusing is that before they extended the depreciation and expensing options, Congress declared that new agricultural machinery and equipment would be five-year property instead of seven for depreciation.”

These provisions do expire on Dec. 31, 2009. This Association, along with the Dealer’s associations will be pushing Congress for another one-year extension for 2010.