In brief, taxes are a constant, like death. Failure to plan for either gives a headache to who discovers your lack of planning.
In the past, some farm operators accepted losses and gleefully avoided paying tax and opting instead to pray at the Altar of No tax via the intoxicating Section 179 and Bonus depreciation rules. Subtly slid into the new tax law as a wet blanket over the “fun” of having losses year to year to year.
First, the tax code took away the CCC free pass. Under the old rules, CCC loans made losses limited in deductibility but were allowed to be carried forward and the next year treated like a new loss.
Now losses of all types are now subject to "excess business loss" limitations. Excess business losses are carried forward as part of the taxpayer's net operating loss (NOL) instead of claiming the loss on Schedule F.
Previously, excess farm losses offset farm income without limitation. Because it went on Schedule F, it also offset income subject to self-employment tax, which is a great thing, huge really, wonderful, the very best kind of tax break to paraphrase the executive branch head.
Now, an excess business loss is NOT deducted on the Schedule F and does NOT offset self-employment income. Also, post-2017 NOLs can only offset 80% of pre-NOL taxable income.
Therefore, even if you have a loss in 2019 followed by a profit in 2020 (which happens for example, when you have fat calves that don’t sell in the same calendar year on occasion), you could offset no more than 80% of the 2019 taxable income. Farmers are allowed to carry back farm NOLs two years, giving some flexibility. However, the farm NOL will be limited to $250,000 for single filers and double that for joint filers.
So, what are some strategies? Start by avoiding creating NOLs. If losses are unavoidable, keep business losses less than $250,000/$500,000
- Stop prepaying expenses.
- Hold off equipment purchases.
- Don't elect to expense equipment purchases under Section 179 or bonus depreciation.
- Sell assets you do not need to generate profits.
- Elect out of deferred payment contracts.
- Depreciate instead of deduction of repair costs.
- Depreciate fertilizer and lime costs over their useful life instead of taking them as a current year expense.