Income, self-employment and estate taxes have always been a pain in a farmer’s backside, and so have the recent low
prices on commodities.
But by hiring a certified public accountant, farmers, as well as the average individual, can frequently save themselves from a
lot of headaches.
Financial distress due to low prices on commodities is one area that requires careful tax planning. Unexpected consequences
could result from bad decisions made in the process of debt settlements and for that reason, it may be helpful to hire a
“The key thing becomes to seek advice before you jump into a debt workout situation,” said Mississippi State University
professor Zoel Daughtrey, CPA. “It’s impossible to change the tax consequences once an agreement is signed.”
Daughtrey, who specializes in agricultural and forestry taxation, said individuals should be careful when doing their taxes.
Although it may not be the easiest thing in the world to find someone to consult with, since the number of people who work
extensively in the agricultural and timber tax areas are declining, finding a CPA who works in the field is still very important.
The self-employment tax, which for farmers is the equivalent of social security, is also an area that may require the help of a
CPA. Because the farmer plays the role of both employer and employee, the tax is twice what an employee pays. Also, the
Internal Revenue Service is keeping a “rather scrutinizing eye,” as Daughtrey put it, on farm situations where
self-employment tax may be due.
One arrangement commonly used in larger farming operations is a corporation. Some individuals conduct their farming
operation through a corporation but hold their land outside the corporation. The land is then rented to the corporation. The
IRS is asserting that the rental income is subject to the self-employment tax, making taxes more costly for farmers when tax
time rolls around.
Similarly, there are a large number of farmers who are participating in the Conservation Reserve Program, in which farmers
set aside land and take it out of production. The IRS position is that the government payment for taking the land out of
production (which USDA calls “rest”) is also income subject to the self-employment tax. The Tax Court, although in favor
of the individual, saw its decision overturned by the 6th Circuit Court of Appeals. This in turn is increasing taxes for farmers
in what are already hard times.
There are bills pending that would simply change the law so the IRS’ position would not be the controlling law anymore. But
with nothing set in stone as of yet, farmers are still facing a tough time with taxes.
The estate tax comes into play in larger farming situations.
“I think we will get some relief, but maybe not as much as many folks would hope for,” Daughtrey said. “At the present, you
can wind up in some cases not being able to continue the business.”
In some cases, the marginal rate for estate taxes can be as high as 55%.
With a CPA’s help, special relief can be found to help reduce some of these tax burdens on farmers.
“This year we may be dealing with drought losses. There are tax provisions to provide some relief in such situations,”
Daughtrey said. “For those who have drought losses and get crop insurance, there’s an opportunity to defer that income
until the subsequent year, if the crop is normally sold in that subsequent year.”
Another thing that can sometimes help farmers is income averaging. If, during one year, a farmer had a high income,
followed by several years of low income, the income could, in effect, be spread out over those years. By using income
averaging, a farmer can find a lower rate to pay. Changes in the rules and regulations to make the provision more
farmer-friendly are still being lobbied for.
Chris Braswell, a CPA with Jackson & Braswell CPA in Cleveland, has seen a lot of hard luck stories enter and exit his
firm. He, like many farmers and CPAs, is hoping agricultural subsidy checks will help to keep farmers in business this year
and from here on out. Farmers are in the process of receiving checks now because of low commodity prices they have
But regardless of the subsidy checks being issued by the government, Braswell has still lost a few clients. Last year some
were lost as a result of drought, he said.
“When you have a combination of low yield and low prices, it’s not a very good combination,” he said. “You hear a lot of
people complain about farmers getting these subsidies, but how many businesses are getting the same prices for their
products they were 25 years ago?”
A lot of the low commodity prices are related to the world market. What happens is that supply beats down the demand
tremendously, making for the resulting low prices.
But aside from low commodity prices, Mississippi farmers also have to be wary of the lack of rainfall. All over the state,
farmers who have a water supply are irrigating their fields, but the location of the water table is making that more and more
“If we don’t get some rainfall this fall and winter it’s going to be a problem,” Braswell said.
And with the lack of rainfall has come fires on forested land in many parts of the state. But those fires can be treated as a
Again, a CPA would be invaluable in such a situation. “It’s not just the fair market value that is taken into consideration, but
the cost basis in timber,” Daughtrey said. “The important thing is to determine if you have a cost basis in the timber and what
it is in order to determine what you would have in casualty loss. The loss is limited to the lesser of the cost basis of the
timber or the loss as measured by fair market value.”
Another loss farmers and private non-industrial forest landowners alike are seeing is drought losses of pine seedlings.
Generally, this loss is not a casualty loss, but farmers can many times get a deduction for that loss based on what the cost is
in the seedlings and planting.
“The only thing that’s unpleasant, tax-wise, is the recapture of investment tax credit,” Daughtrey said. This occurs if the
timber owner has taken advantage of the reforestation amortization election.
But in order to be sure you’re getting enough bang for your buck, said Daughtrey, “It’s always best, I think, to at least have
someone to consult with so you don’t overpay or underpay your taxes.”
Interest and penalties placed on individuals can be almost as much of a burden and in most cases more of one, than taxes
themselves. CPA’s can be an invaluable source of knowledge.
Contact MBJ staff writer Elizabeth Kirkland at firstname.lastname@example.org or (601) 364-1042.