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February 1, 2002
New income averaging
rules farmer-friendly
By Mike Barnett
Editor
New rules issued by the Internal Revenue Service concerning income averaging should save farmers and ranchers tax dollars.
"It's very encouraging that the IRS has taken the time to study this issue, listen to farm accounting experts and work to make the regulations as farmer-friendly as possible," said American Farm Bureau Federation tax specialist Pat Wolff.
One of the more significant new provisions allows farmers to use a negative number in their three-year income averaging formula. Originally, the IRS had only allowed zero to be used for averaging negative income years.
"By nature, their (farmers and ranchers) income is cyclical," Wolff said. "Some years income is up, some years income is down. When their income is up, they pay taxes at very high rates, but they can't offset that with a bad year unless they can average their income.
"That means if they have a bad year where they show a loss in their income, they'll actually be able to use a negative number," she continued. "Prior to this, farmers had to put a zero in there. "It'll make a big difference for farmers and save them tax dollars."
Cropshare landlords will also be able to use income averaging for rental income from the tenant's farming business.
"A landlord who cropshares, their rental income goes up and down just like the farmer who's farming the land, and under these IRS rules, they'll be able to use income averaging, too," Wolff explained.
Congress provided farmers and ranchers with three-year income averaging in 1997. Proposed regulations were issued by the IRS in late 1999. The American Farm Bureau Federation and several state Farm Bureaus provided comments for an IRS hearing in February, 2000. Also at that time, 32 senators signed a letter urging IRS to act favorably on the regulations.
Other provisions of the final regulations include the following:
•Farmers and ranchers who do business as S corporations will be able to use income averaging for wages received from the S corporation that is attributable to farming.
•Taxpayers will be able to choose income averaging on a late or amended return, to change the amount of income averaged and to revoke a previous averaging decision. This was greatly restricted under previous IRS rules.
One issue that remains unresolved is the triggering of the Alternative Minimum Tax by the use of income averaging. This can't be fixed administratively and therefore requires action by Congress. AFBF is working to secure passage of:
•H.R. 658, that would restore the full benefits of income averaging for farmers and ranchers by ensuring that the use of farm income averaging does not trigger the Alternative Minimum Tax.
•S. 312, the Tax Empowerment and Relief for Farmers and Fisherman Act, a comprehensive tax package that creates: FFARM accounts; clarifies that self-employment taxes should not be collected on cash rent payments; ensures that the use of farm income averaging does not trigger the Alternative Minimum Tax.
