Bates, C. H.

Cherry, R. G.

Texas A&M University

L-409
Farm and Ranch
Income- Tax Management
TEXAS AGRICULTURAL EXTENSION SERVICE
J. E. Hutchison, Director, College Station, Texas
Acknowledgment is made to members
of the North Central Farm Management
Extension Committee for parts of the
material used in this leaflet.
Farm and Ranch
Income Tax Management
C. H. BATES
Extension Farm Management Specialist
R. G. CHERRY
Extension Economist
The Texas A.&M. College System
LIKE OTHER FARM AND RANCH COSTS, income taxmay be reduced by good management. This
leaflet explains how business transactions may be
handled throughout the year to the advantage of
farmers and ranchmen.
I t is the privilege of each taxpayer to use
all permissible means to reduce his income taxes.
At the same time, the amount of self-employment
tax paid determines credit for social security
benefits. (See pages 6 and 7.)
The federal income tax is levied on net in-
come. Unless this is higher than total personal
exemptions, the unused portion of exemptions is
lost. For example, Mr. and Mrs. John Farmer
who support three children are entitled to $3,000
on their personal exemptions and three dependents.
Also, they have an additional 10 percent standard
deduction, based upon the amount of adjusted gross
income. (Amount shown on line 11, page 1, Form
1040.)
If their income is solely from farming and
their net farm profit (summary of Schedule F)
was only $2,650 for 1957, they lost $350 of their
3
personal xemption 2,650 == 350) .
Furthermore, the 10 t another 265 in e the
were entitled to 10 per ent tandard deduction on
the 2,650 farm income.
Expre ed another wa , Mr. and Mr . Farmer
}'Vould not ha e paid an in orne ta had the
managed to make a net farm profit of 3,300 be-
cause of the e privileges:
5 exemptions @ $600 _
10% standard deduction on 3,300 __
Total exemptions before ta applie
3000
330
3,330
So, if drouth or other condition limited hi
farm income Mr. Farmer might ha e ought off-
farm employment or other m an of increa ing hi
earnings to at lea t 3 330. Thu, he ould ha e
avoided any 10 s on permi ible exemption for
1957, which cannot be carried 0 er to 1958.
&l Farm and ranch op rator hould on ider the
options open to them in order to plan i el and
check with a tax consultant on po ible ta a ing .
The government expects only the amount of
tax due. If overpayment is made becau e of 0 er-
sight or improper reporting, no refund will be
made unless an amended return i ubmitted
within 3 years showing the correct ta liability.
• Adequate records are neces ar to ub tantiate
tax reports. I terns of taxable income and busine s
deductions must be shown accuratel .
1. In case of farm or ranch sales, consider using
the installment sales method to spread liability on
4
aain 0 er a period of ears. This method can be
used onl· if payments received in the year of
ale are not more than 30 percent of the selling
price. (ee example on page 29 of Farmers' Tax
Guide.)
2. If a farm is bought, promptly divide on your
record the total cost of the farm among:
(a) growing crops, (b) depreciable improvements,
(c) dwelling and site and (d) remainder of land.
( ee pages 31 and 32, Farmers' Tax Guide.)
These allocations will affect the depreciation al..
lowed, deduction for crop expense and other items.
Complete records ma ave worr and time in
determining capital gain in case the property, or
portion thereof, i old later.
3. Use depreciation method most suited to your
operations. The declining balance method gives
the highe t depreciation during the first few years.
nother rapid write-off is the "sum of years
digit" approach. The traight-line method keeps
it uniform; hence it is simpler to maintain in
records. Decide whether you would be benefited
more by recovering cost quickly or having de-
preciation spread over the entire life at a con-
tant rate. You can use the straight-line method
for some items and declining balance on other
item of new equipment. Also, you may use de-
clining balance for the fir t year or two, then
shift to straight-line for the remainder of its
u eful life. (ee page 23, Farmers' Tax Guide.)
4. Plan personal deductions so that you get
maximum benefits by itemizing them. Items such
a charitable contributions, personal property taxes
and organization dues might be prepaid so that
itemization reduces the current year's taxes. The
following year the standard deduction, 10 percent
of adjusted gros income, but not to exceed 1,000,
can be taken.
5. Make expenditures for optional items during
years of high gross income. The costs of painting
buildings, minor repairs on improvements and
equipment, small tools, seeding legumes or grasses
do not come every year. However, these costs
are deductible the year they are paid.
6. Consider paying wages to your children for
work performed on the farm or ranch. Such pay-
ments for bona fide services count as farm labor
expense even though you list these children as
dependents.
7. Work out arrangements to spread income to
more family members. For example, give children
5
part of your income-producing property-land
cattle or machinery and let them report income
from their work and capital. Family partner hip
sometimes are used for this. Keep in mind that
such arrangements, as well as gift, mu t sati fy
certain legal requirements.
8. If you sell timber, use the optional method
of reporting that will benefit ou. For the mall
owner with lower income level, it might be de-
sirable to count timber sale a ordinar income
the way you would count other crops, eggs or
pecans. The higher income will increase social
security credits. for those having Ie s than 4,200
net income. The special capital gain treatment
may be helpful to those in higher brackets. The
method chosen must be continued in later ear,
unless consent to change i granted by the di trict
director, Internal Revenue ervice.
9. In years of unusually big crops or favorable
prices, consider holding over a portion of storable
commodities for sale the following ear (for ca h
basis taxpayers). Or you can ell a portion with
buyer contracting to make pa ment the following
year. This will assure orne cash income for
the next year as "insurance" against crop failur
or low yields. Many producer in high ri k area
use this method to level out ta liability over the
good and bad years.
.M~n9 1ncome to. .Jlid
go.ciaJ geculJ.iJ'I Bene!iJd,
Farmers and their families rna
crease income to be eligible for th
desin:~ to in-
high\~st po -
6
ible ocial ecurit benefit. If the present in-
come Ie el i ubj ect to tax, an income boost
automaticall ill in rea income taxes. How-
e er, orne rna prefer to pay these increased
ta e to becom eligibl for higher retirement and
ur i or' benefit. Man operators with depend-
ent mu t pa a If-emplo ment tax on net income
ithout pa ing an in orne tax. The starting rate
for federal incom ta i 20 percent and the self-
emplo ment rate will increa e from 3~ percent to
3% percent beginning Januar 1, 1959.
Per on e king to increa e their income by
changing enterpri es hould make certain that es-
timated profit ar ba ed on reasonable expecta-
tion. Plan f r enterpri e changes might be
di cu ed ith the local county agricultural agent
ho can gi e h lpful uggestions. Also, these
~ /~r. ,et"
--~ ~
per on hould det rmine if the added income can
be counted for elf-employment credit. County
agricultural agent, law er, bankers and other
profe ional per on can a i t with such questions.
Th taff of the oci,J ecurity offices is not in a
po ition to ugge t method of increasing benefits.
Their primar job i checking compliance and
ertif ing applicant for benefit .
Where th method of handling certain expense
item i optional the farmer eeking to increase
ta able incom rna hoo e the method giving
maller deduction. E ample include: (1) shift-
ing from rapid depreciation method to slower
traight-line m thod (2) electing to treat soil and
ater on er ation co t a capital investments
rather than a annual operating expenses, (3)
di po ing of orne depreciable capital items to
reduce total depre iation deduction and (4) in
en ral r du in prating 0 t to a minimum.
7
<Ja~ RepO-'diH.r; Remi#lJelJ.d,
1. If board i furni hed to hir d h lp the por-
tion which is purcha ed i a dedu tible bu ine
expense.
2. Amounts paid to ~ ta c n ultant for help
on income ta return I a dedu tible farm
pense; also include re ord book and fee for
management er ice or to organization uch a
the Dairy Herd Impro ement 0 iation.
3. Itemize personal deduction f r merchandi e
livestock or tract of land given to church or edu-
cational institution .
4. Be sure that Commodit Credit Corporation
loans are not counted a incom t ic in 1 ear
when borrowed and ne t ear hen crop i old) .
5. If using the ca h method d duct the 0 t
of purchased livestock lost, tra ed, tolen or
which died during the ear.
6. If using the accrual method record all pur-
chases of livestock. Make a "Ii e tock number
check" to see that the total number purcha ed,
born and on the beginning in entor equal the
total number old, died, butchered and on the
ending inventory.
7. Deduct cost of auto and truck licen e , In-
urance, etc.
8. Deduct auto, utilitie and telephone e pen
which are actuall u ed in the farm bu ine (half
i not enough in man ca e ).
9. Take all depreciation allowable on depre-
ciable improvements, machiner and equipment
and on purchased draft, breeding and dair Ii e-
stock. Accrual basis taxpa ers rna remove pur-
chased as well as raised animals from inventory at
maturity and put them on a depreciation schedule.
10. Keep records to insure deduction of ea il
o erlooked items uch a farm magazine, organi-
8
zation membership bank service fees, overnight
bu ines trip, portion of dwelling used for farm
u e and 10 e n hou hold good used for feeding
or lodging hired help.
11. Keep record of ource of bank deposits
uch a gift, borrowing , sale of bonds, etc., so
that the ill not be con idered taxable farm
income.
12. Keep record of all medical, dental and
ho pital bill including pa ment for accident and
health in urance.
13. Keep exact records of dates of purchase,
co t date of ale and sale price on all items sold.
14. Do not include in income any indemnity for
di eased animals if the payment has been or will
be u ed to purcha e "like or similar" animals
ithin 1 ear.
15. Re ord hould be kept carefully. Keep all
paid bill, invoice, canceled checks, etc., for at
least 5 ears, including checks u ed to pay income
taxe. P a bill b check whenever possible.
Record all other payments in an account book.
Get the bank tatement each month and check it
against the farm account book.
16. E tabli h a charge account at a hardware
tore elevator or other places where considerable
bu ine s i done during the ear. Pay this account
b check upon receipt of monthl statements. This
pre ent the omi ion of many small expense items
which might otherwise be paid by cash and the
ticket lost. Every dollar of cost not deducted
will re ult in at lea t 20 cent unnecessary income
tax being paid.
17. Remember to check special provisions re-
lating to damages to land from pipe lines, oil weBs,
right of wa and imilar circumstances.
9
NONTAXABLE TRADES
AND EXCHANGES
When property is traded or exchanged for other
property, or for services, the transaction may re-
sult in an ordinary gain or 10 s, or a capital gain
or loss.
There are certain trades and exchange which
postpone the gain or los , until the property re·
ceived is sold. These tran actions are tho e which
result in a continuation of your original invest-
ment in about the same form. For example, if
you trade your farm for another farm, your in-
vestment is still in the same kind of property as
before. The trade involving no "boot" produce
no taxable gain or loss even though the farm re-
ceived may be worth more or less (on a ca h
market) than the one traded.
Three points to keep in mind on trades are:
1. For gains to be nontaxable, it is neces ary
that the property exchanged be of "a like kind."
(See pages 34 and 35 in Farmers' Tax Guide.)
2. Property mu t be held for trade or busine s
or for investment.
3. If any "bcot" is received, the gain, if any,
is taxable to the extent of the "boot." The "boot"
may be cash or other property not of "like kind."
FORCED SALES OR
INVOLUNTARY CONVERSIONS
If property is either partially or tntally destroyed,
stolen, seized, requisitioned or condemned and
other property or money ( uch a in urance pro-
ceeds and condemnation award) is received as
payment, the former property i said to have been
"involuntarily converted" into other property. (See
pages 35 and 36, Farmers' Tax Guide.) Extra-
ordinary sales of livestock because of drouth con-
stitute "involuntary conver ion" after December
31, 1955.
INVOLUNTARY CONVERSIONS
RESULTING IN GAIN
To treat an involuntary conversion, first deter-
mine whether such conversion results in a gain or
a loss. To do thi , a compari on mu t be made be-
tween the adjusted basis (remaining cost) of the
10
propert con ert d and the proceed received, a
if the propert w r oluntaril old or exchanged.
If the con r ion re ult in a gain, whether the
gain i taxed depend upon the circumstances in
the ca . For e ample, if the property is con-
erted 01 1 into other propert which i similar
or relat d in er ice or u e to the property con-
verted, the gain i not included in income. But,
if the propert icon erted into money or other
propert not imilar r related in ervice or use
to the propert con erted, the gain must be in-
cluded in income unle within the time explained
in the following paragraph the amount of pro-
ceed are in ted in imilar propert as "replace-
ment.' Th term proceeds means money plus the
alue of an di similar property.
REPLACEMENT PROPERTY
For propert to qualify a replacement property
it mu t be imilar or related in service or use to
the prop rt con erted. Thi test requires that
the new propert be functionall the same as the
property con erted. Thu, dairy cows must be
replaced with dair cows, etc.
PURCHASING OTHER PROPERTY
uall the ta payer has 1 year after the close
of the ta able ear in which gain from involuntary
conver ion i recei ed. For example, if 30 cows
are old on June 25, 1957 because of drouth con-
ditions, the owner ha until December 31, 1958 to
purcha e replacement, a suming his tax year is
on a calendar ear ba i . nder certain conditions
thi period may b extended by the Internal Reve-
nue Service upon application by the taxpayer.
--
-
Ii
GAIN FROM RESIDENCE-FARM SALE
Any gain from the voluntary farm sale used as
business property, unless the taxpayer resided
thereon, is subject to taxation in the year of sale
or in which any part of gain is received. (See
exception on installment sales, pages 4 and 5.)
A personal residence does not constitute property
used in trade or business, but is a capital asset.
If the farmland and the residence are sold to-
gether, the nonrecognition of gain provisions-that
is, not t:Lable if reinvested in 1 year-apply only
to that part of the property used as a residence.
The portion of the selling price and the cost or
other basis which are allocable to the residence
involved must be determined. (See example on
page 28, Farmers' Tax Guide.)
i(o * * 7~ 7~
Farmers and ranchmen do not have
to be "tax experts" to find simple ways
to minimize their income tax. Study of
publications such as the Farmers' Tax
Guide, available free of charge from the
Internal Revenue Service or from county
extension offices around December 10,
will be profitable to every taxpayer en-
gaged in agriculture. If further infor-
mation is desired about points men-
tioned in this leaflet, discuss them with
a competent tax consultant, an area in-
ternal revenue agent or write to one of
the following:
District Director, Internal Revenue
Service, Austin 14, Texas
District Director, Internal Revenue
Service, Dallas I, Texas
Publication No. 17, "Your Federal In-
come Tax for Individuals," also may be
helpful to individual taxpayers. This
bulletin can be ordered from either of
the district offices for 35 cents per copy
or from some large newspapers around
the first of the year.
Keeping accurate records is advan-
tageous in tax management. Like other
practices, when the decision is made to
start, the "reward of doing is within
one's grasp."
Cooperative Extension Work in Agriculture and Home Eco-
nomics, The Texas A. & M. College System and United States
Department of Agriculture cooperating. Distributed in further-
ance of the Acts of Congress of May 8, 1914, as amended, and
June 30, 1914.
7lhM-8-58


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Farm and Ranch Income Tax Management.

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Farm and Ranch Income Tax Management.

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