Paul Neiffer: 2022 Year-End Tax Planning Tips

Tax planning seasons is rapidly approaching for farmers. The normal process is to determine the optimum amount of taxable income to report. Then you determine how much income to defer into the next year or how much farm in-puts to prepay this year. 

Rarely do we want to show no taxable income. Our goal is to show enough income to soak up the standard deduction plus pay tax in the 10% and 12% tax bracket. Higher income farmers will soak up even more income.

However, this year has some changes. Here is a brief guide.

Should we elect to defer crop insurance proceeds and Emergency Relief Program (ERP) payments? Many farmers will collect crop insurance this year. A farmer is allowed to defer their crop insurance proceeds to the following year if they meet the following requirements:

• They are a cash-method farmer.
• They normally report 50% or more of their crop sales in the year after harvest.
• The crop insurance proceeds were for damage in 2022.

However, any part of crop insurance proceeds related to price cannot be deferred (The IRS finally updated their Publication 225 to reflect this.). A lot of crop insurance proceeds this year will include both damage and price. The crop insurance company will usually let you know how much to expect.

None of the proceeds from the ERP can be deferred. Proceeds received in 2022 relate to damage that occurred in 2020 or 2021. Even payments related to the 2022 wheat crop likely are for drought damage that occurred in 2021 and can’t be deferred.

What about expensing farm equipment purchases? Due to supply chain issues, a farmer might not be able to receive their new farm equipment before year end. If so, the deduction will need to be taken in 2023 even if you received and paid an invoice in 2022. Remember, 100% bonus depreciation will drop to 80% next year unless Congress extends it at year end.

Should I try to create a loss? A net farm loss can be carried back two years to offset income reported in 2020 and 2021. But, this applies only to the net farm loss, and you can only offset about $524,000 (singles can offset half this amount) against other income. If you still have a net taxable loss, you can carry it back two years or make the election to carry it forward to 2023. If you expect income to be higher in future years, then electing to carry it forward might make the most sense.

THE BOTTOM LINE

This year, more than ever, requires you to spend time with your tax adviser to pin down the right amount of taxable income to report. Good luck.