Taxing complications for farmers

Apr 2, 2013

Farmers will be filing their taxes on April 15 this year—just like most other Americans. But usually farmers have to file and pay by March first. It’s just one of many ways that taxes are different for farmers. 

Roger McEowen runs the Center for Agricultural Law and Taxation at Iowa State University. He offers trainings for lawyers and accountants all over the country to ready them for preparing farm tax returns.

“Farm tax, in many instances, is totally different from taxation with respect to nonfarmers,” McEowen said.

For example, farmers can average their income out over four years to reduce their tax burden, they typically don’t pay quarterly estimated taxes and they can defer crop insurance proceeds—which were a big part of income for many in 2012.

“Farmers didn’t necessarily have a great crop to harvest, but they harvested a huge amount of income last year. It was one of the biggest years, inflation-adjusted, since going back to the 1970s,” McEowen said. “But the bulk of that was, for many people, crop insurance. Well, there’s a special rule with regard to crop insurance.

There are many special rules for farm taxes. McEowen says the manual for his farm-tax schools runs 1000 pages. With Congress only finalizing fiscal decisions at the start of January, the IRS pushed the farm tax deadline out to April 15.

Fifth-generation Story County, Iowa farmer Mark Kenney, doesn’t shy away from numbers. He has a master’s degree in agricultural economics and said he loves spreadsheets. He knows not every farmer embraces the finances the way he does. But he said they’re part of the job.  

“If you’re involved in agriculture today, to any scale, you need some tools, some fiscal tools in your toolbox, just like you’d have wrenches and pliers and that sort of thing,” he said. The later tax deadline means he doesn’t have to write a check as early as usual. But other than that, he said the impact’s minimal because he still had to make most tax-related decisions before Dec. 31—such as whether to buy this year’s fertilizer and other chemical inputs during 2012 or wait until 2013. Despite the April 15 deadline, he said his return is ready.

“All the filings that have my name on it, I believe we’re up to 110 pages right now,” he said, “So it does get complex.” (Kenney’s operation, which he runs with his dad and brother-in-law, includes a partnership, a corporation and an LLC, each of which has certain tax implications.) So even with his financial expertise, Kenney’s got a lawyer, an accountant and a financial planner who he works with. Roger McEowen said increasingly farmers recognize the value of such a team.

“There’s more of an understanding that they need to have a professional by their side,” he said, “or a team of professionals.”

And those tax preparers have had a particularly challenging time this year.

“This has been a very difficult tax season,” McEowen said. “It’s the worst one I’ve ever seen and that’s because of the lateness of the legislation and the lateness of forms and so many uncertain things so late in the year.”

But there are some farmers unaffected by the extension. Those not turning a profit or who don’t earn at least two-thirds of their income from farming always have until April 15. Matt Russell works off-farm at the Drake University Agricultural Law Center in Des Moines and operates Coyote Run Farm with his husband. He says they’re still putting all their proceeds back into the small meat, eggs and produce operation they launched eight years ago.

“There’s an incentive in the tax code to do that and there’s an incentive to the farm,” Russell said. “And Congress has done this intentionally because that’s a very effective multiplier—it’s a very effective way to stimulate the economy.”

The local equipment shop and grain elevator, even neighbor kids he hires, benefit from the money that stays on his farm, Russell said. Still, he anticipates that someday Coyote Run Farm will bring in enough cash that after all the possible deductions, they’ll have to pay taxes. He’s okay with that.

“My dad has always told me from when I was little, if you have to pay taxes then things have been going pretty well,” Russell said. (Though his farm is small, Russell’s taxes are complicated by the fact that the federal government doesn’t recognize his marriage. He and his husband file jointly in Iowa but separately as non-family members in a business partnership for their federal returns.)

Heading into the new season, the Agriculture Department predicts another record year for farmers in 2013. And that means they’ll have more to report at tax time next year.