Farmers are allowed preferential treatment through the tax law (and most states) when it comes to filing and paying their taxes. If they make one estimate of their taxes owed by January 15 of the following year, they have until April 15 to file their taxes. Most other taxpayers who are small business owners and don’t have withholding by the employers are required to make 4 deposits a year. The other option for a farmer is to file and pay by March 1 to avoid penalty.
So that gets us to the question, who is a farmer. To qualify as a farmer a taxpayer must have 66% of their gross income from farming sources. This would be typical farm related income like corn, soybeans and livestock. For example Farmer A has $300,000 in corn and soybean sales and Farm Spouse B has $100,000 in wages. The gross farm income is 75% of the total. Their joint return could be filed by March 1 and any tax due paid at that time with no penalty.
The Tax Cuts and Jobs Act or 2017 (TCJA) muddled the waters with the change that business use depreciable equipment is no longer eligible for 1031 (like kind exchange) treatment. When a business, including farmers, trade in a piece of machinery they must treat the trade value as a sale and then set up the new equipment on their depreciation schedule. Section 179 and bonus depreciation continue to be available, but some farmers may run aground in their state if the state has not adopted the federal limits.
So let’s look at our example again. Farmer A now has $300,000 in typical farm income and he traded in a combine that had previous section 179 and regular depreciation and had a zero basis. He received $100,000 in trade value for the used combine which creates a $100,000 Section 1245 ordinary gain. Farm Spouse B still has $100,000 in wages. The return now has $500,000 in gross earnings and the farm is 60% of the total. This return is not a farm return this year and the couple would end up with a penalty if they relied upon the farm specific exclusions to file and pay their taxes.
As always, please consult your tax preparer if you have questions.
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