Are You a Farmer?
Farmers are allowed a special provision for paying estimated taxes to the IRS. If at least two-thirds of your gross income is from farming, you are allowed to simply pay one final estimated tax payment on January 15 of each year. You can also elect to pay no estimated tax payment if you file and pay all of your tax by March 1.
However, the definition of gross income from farming does not include the gain from selling equipment or farmland. The IRS issued regulations on the definition of gross income from farming before I was born and the IRS issued a ruling in 1963 that specifically stated that gross income from farming did not include any gain from selling farm equipment. However, gains from selling livestock were specifically included as part of gross farm income. With the new rules preventing 1031 deferrals on trade-in of farm equipment, this may prevent some farmers from qualifying as a “farmer”.
Here is an example:
Jerry has $1 million of gross receipts from selling corn and soybeans in 2019. He also trades in farm equipment that generates a $600,000 gain. His gross income from farming is 62.5%, therefore, he does not qualify as a farmer for estimated tax payment purposes and also will not qualify for the special March 1 filing provision since he technically is not a farmer. This means he will need to pay quarterly tax estimates on April 15, June 15, September 15 and January 15.
However, there is special relief in this case. If Jerry qualified as a farmer in 2018, he automatically qualifies as a farmer in 2019. But if he is not a farmer in 2019, he needs to carefully review his situation in 2020 to make sure he retains his status as a farmer.
Plus farmers are only required to pay in the lower of 100% of last year’s tax or two-thirds of this year’s tax to prevent any penalty. If they don’t qualify as a farmer, the two-thirds provision jumps to 90%.
Most farmers will continue to retain their farmer status since their gross income from selling crops or livestock still should substantially offset the gains from trading in equipment. However, there will be many more farmers that won’t be a farmer for this provision and the penalty can add up.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
In my experience, the penalties are less than interest on money borrowed to pay the estimates.