With the year’s end upon us, it’s time to gather your records and evaluate your tax situation. This is an opportunity to manage your tax consequences before the year closes and explore ways to reduce your tax liability or raise possible credits.
First, consider prepayment of expenses, such as for feed, fertilizer, chemicals, and seed, as these will require cash outlay sooner rather than later. You may also benefit from a cash discount in addition to the possible tax savings.
Deduction options
The direct expensing (Section 179 election) limit for capital purchases in 2024 is $1,220,000. The Section 179 deduction dollar limit is reduced by $1 for every $1 of investment over a threshold of $3,050,000 for 2024. If you exceed the limit, another option is leasing some assets to bring your total back under the threshold.
Since the like-kind exchange of personal property ended in 2017, the 179 election has been used more frequently to offset the gain reported on trade-ins. This can reduce self-employment income by using the 179 election to lower Schedule F income and offset gains reported as capital gains on trade-ins. While this saves on self-employment tax, there are some potential consequences, such as not contributing enough to Social Security to maintain credits for disability, retirement, and Medicare eligibility. Without self-employment income, you may also miss out on certain credits.
Another option is the special depreciation allowance, commonly referred to as bonus depreciation. This allows for a deduction of a percentage of the property’s basis in the year it is placed in service (60% in 2024 and 40% in 2025). Bonus depreciation applies to property with a general depreciation system (GDS) recovery period of 20 years or less, so nearly all depreciable agricultural property is eligible.
The 179 deduction is taken before bonus depreciation. However, bonus depreciation is less flexible than the 179 deduction. It’s a class-by-class election, meaning that if you elect to use bonus deprecation, all the assets you purchased in a specific class —such as five-year property — must use bonus deprecation. The advantage of the 179 deduction is that you can decide how much depreciation is needed to achieve your desired tax outcome.
Keep in mind that when using either the 179 deduction or bonus depreciation, you’re reducing your future depreciation deductions, which can create a larger tax liability down the road. If an asset is financed and all the depreciation is used in the current year, you won’t have that depreciation available in future years when paying the principal on the loan, potentially leading to a higher tax liability. These issues also arise during transition planning when liabilities exceed the remaining basis in assets being transferred to the next generation.
Note that some states do not follow federal rules for the 179 deduction or bonus depreciation, so it’s important to be aware of how this may impact your state return.
Be aware of credits
We’ve seen a rise in tax planning for farmers using marketplace health insurance. Since the credit is based on adjusted gross income, we often plan taxes to help farmers get the credit for health insurance to a level they feel they can afford. Many farmers view it as a tax, but it’s actually the cost of their health insurance. With the rising costs, this has become a larger concern for many clients.
Be aware of available tax credits and deductions, as there are times when it might be more beneficial to increase income to take advantage of credits that are only available with self-employment income, such as the earned income credit.
Tax planning can give you peace of mind, helping you understand your tax situation when there’s still time to explore options before year end.
