Economic and Marketing Information
FOR INDIANA  FARMERS
Prepared by the Agricultural Staff of Purdue University, Lafayette, Indiana
November 30,   1970
Income Tax Management, 1970
by Edward li. Carson,
Agricultural Economics
NCOME TAX MANAGEMENT decisions are important
to a large number of Indiana farmers with respect to their
1970 income. The corn blight, and other factors, has resulted in sharply lower incomes on some farms. These
farmers will want to take steps to increase their taxable
1970 income to at least equal their regular exemptions and
deductions (which have been increased).
High hog prices for part of the year, and high corn and
soybean prices, particularly where corn blight was not serious, have resulted in sharply higher incomes on other farms.
These operators will be looking for ways to reduce their
taxable 1970 income. For others, postponing taxable income to 1971, or later, eliminates the surcharge, and takes
advantage of higher personal exemption and deduction
allowances.
The first step is to size up your own situation. Next, add
up your income and expenses to date. Then estimate and
add on the expected additional transactions for the rest of
the year. You will probably want to check with your tax
consultant when you do this, particularly if there is much
depreciable property involved. Obviously, the better your
records are, the easier it will be.
Whether your expected taxable income is low or high
you have a number of appropriate actions open to you prior
to the end of the year. After December 31, your options
are limited essentially to depreciation decisions, and for
those with high incomes, income averaging.
The objective of income tax management is not just to
minimize taxes, but to maximize after tax income. Thus
tax management is an integral part of farm management.
However, if business decisions are made and transacted
solely in an effort to reduce tax, net income after tax may
actually be lower.
Example: By postponing a sale of livestock into the next
year, a $100 tax saving could be made. But, an expected
lower price might result in a $200 loss. Thus net after tax
income would be $100 less.
Frequently there is no conflict between a wise tax decision and a good business decision, but when the choice
must be made, follow the one expected to result in the
larger net income after tax.
To do this requires enough awareness of tax law provisions to recognize the tax aspects of your decisions and to
know when you need advice.
Changes Resulting from the 1969 Reform Act
The Tax Reform Act of 1969 included a number of
provisions of significance to farmers. Before considering
specific steps farmers might take to adjust their 1970 earnings, it will be useful to briefly highlight these changes.
1
Changes of Direct Significance to Farmers
Income Averaging Liberalized, Simplified. Among the
most important changes for farmers experiencing above
average incomes are those regarding income averaging. If
1970 taxable income exceeds the 1966-69 average by 20
per cent plus $3000, it would pay to check this out.
Repeal of Investment Credit. Another significant item
affecting farmers was the repeal of the 7 per cent investment credit provision for property acquired after April 18,
1969. Certain transitional rules apply, particularly regarding binding contracts prior to April 18, 1969, and replacements.
Holding Period for Livestock. The 1969 law requires
that cattle and horses acquired after December 31, 1969
must be held for at least 2 years to qualify for long term
capital gains treatment. Other types of livestock remain
subject to the 1-year holding period.
Recapture of Livestock Depreciation. The Tax Reform
Act of 1969 requires that gain on the sale of purchased
livestock be treated as ordinary income up to the full value
of depreciation reductions taken after 1969.
Limitations on Real Estate Depreciation. The Tax Reform Act of 1969 limits the so-called fast methods of
depreciation on new depreciable real property—primarily
buildings and their structural components. New farm
buildings acquired after July 24, 1969, are limited to the
1 50 per cent declining balance depreciation method. Used
buildings are limited to the straight-line method. Special
rules apply to non-farm buildings.
Crop Insurance Proceeds. Farmers may now elect to
defer reporting these proceeds for federal income tax purposes until the year following the year of loss. However,
they must establish that, under their usual practice, income
from the damaged or destroyed crops would have been
reported in the year following the years of loss.
Extension of Filing Date. The due date has been extended from February 15 to March 1 for the filing and
payment of income tax returns by farmers and fishermen
who do not file declarations of estimated tax.
Recapture on Soil and Water Conservation Expense.
Gains on such improvements made after December 31,
1969 are fully taxable as ordinary income for 5 years, then
adjusted 20 per cent a year up to 10 years after the acquisition of the property. This could be significant to any farmer
selling real estate after December 31, 1969.
Gifts of Farm Products to Charity. Deductible only at
their cost basis. Raised products have zero cost basis (expense has already been taken); therefore, there is nothing
to deduct.