One of the few things more inevitable than paying taxes are the changes that accompany the tax code from one year to the next. This year is no different, and farmers would be well advised to be aware of these changes, says Keith Kightlinger, University of Georgia Extension economist.

Some of the “high points” of the recent tax law changes are as follows:

The Economic Growth and Tax Relief Reconciliation Act of 2001 introduced a 10-percent income tax bracket for individual taxpayers. For tax years 2001 through 2007, the first $12,000 of taxable income of a married couple filing jointly and $6,000 for single individuals and married filing separate is taxed at the 10-percent rate. In 2008, the bracket ceiling increases to $14,000 for married filing jointly and $12,000 for single and married filing separate. Beginning in 2009, the ceiling of the 10-percent bracket will be adjusted annually for inflation.

The 15-percent tax rate continues unchanged, says Kightlinger, except for annual adjustments. The higher individual income tax rates, however, are being reduced beginning in 2001.

Individual Income Tax Rates
Old tax rates 28% 31% 36% 39%
2001 Rates 27.5% 30.5% 35.5% 39.2%
2002-2003 27% 30% 35% 38.6%
2004-2005 26% 29% 34% 37.6%
2006 & Later 25% 28% 33% 35%
Married Filing Joint Standard Deduction As a Percent of Single Standard Deduction
Tax Year Percent
2005 174
2006 184
2007 187
2008 190
2009 & Beyond 200

Marriage penalty relief is being accomplished by making the 10-percent income tax bracket for married taxpayers filing jointly twice as large as it is for single individuals, says Kightlinger. Major relief begins in 2005, with the increase in the standard deduction for married taxpayers filing jointly. In 2009, the standard deduction amount for married taxpayers filing jointly will be twice that of the standard deduction for single taxpayers.

The Job Creation and Worker Assistance Act of 2002 permits an additional 30-percent first-year (AFY) depreciation deduction for assets used in a trade or business purchased after Sept. 10, 2001, and before Sept. 11, 2004. The asset must be placed into service before Jan. 1, 2005.

Only the original user of the asset may claim the 30-percent AFY deduction and used property is disqualified, says Kightlinger. In the case of breeding livestock, female animals are eligible if acquired before delivering their first offspring, whether or not they were bred when acquired. For male animals, the test is whether or not the animal previously has been used for breeding purposes.

The Farm Security and Rural Investment Act of 2002 abolished the quota system of peanut production and marketing. Peanut quota owners are eligible to receive a buyout of their 2001 base quota. The quota buyout can be taken either as a single payment of 55 cents per pound or in a series of five annual payments of 11 cents per pound.

Peanut quota is considered by the Internal Revenue Service to be an interest in land, says Kightlinger. As such, its cost or other basis is recoverable by the taxpayer only when the asset is disposed of. As an interest in land, peanut quota is considered to be real property. It also is usually considered property used in a trade or business, whether or not held by a producer. Under Section 1231 of the Internal Revenue Code, the disposition of property held for more than one year and used in a trade or business is treated as follows:

  • Gains are long-term capital gains, taxed at the long-term capital gains tax rates.

  • Losses are ordinary losses, included in full on the taxpayer's return for the sale year.

The 2002 farm bill uses direct payments and counter-cyclical payments to producers to replace the production flexibility contract payments and market loss assistance payments of the 1996 farm bill.

Producers have some flexibility in determining when they will receive these payments, and payments are included in the taxpayer's income in the year they are received. Payments are subject to both self-employment tax and income tax if the recipient is a material participant in a farm business.

Share-rent landlords are not subject to self-employment tax on this or any other farm income, if they do not materially participate in the farm business and are eligible to report their farm income and expenses on Form 4835.

The taxation of payments received by landowners under the Conservation Reserve Program (CRP) has been an issue of debate since the mid-1990s. The position of the Internal Revenue Service has been that CRP payments are agricultural program payments subject to self-employment tax if received by a material participant in a farm business. This position was upheld in Ray v. Commissioner, T.C. Memo 1996-436.

In the case of Wuebker v. Commissioner, 110 T.C. No. 31 (June 23, 1998), however, the Tax Court agreed with the taxpayer that the payments were rent rather than agricultural program payments.

The court further agreed that the payments were not subject to self-employment tax under the rule that rent paid for land used in agricultural production is subject to self-employment tax if the lessor is a material participant in agricultural production on the rented land.

The court based this part of its decision on the fact that the CRP contract requires that enrolled land be taken out of agricultural production. The Wuebker Tax Court decision was reversed by the Sixth Circuit Court of Appeals in 2000. The Court of Appeals held that the payments were not rent, since the government did not occupy the land.

While Circuit court decisions are not binding law outside the circuit making the ruling, the Sixth Circuit ruling is the highest substantial authority at this time on the issue, and it supports the previous position taken.

e-mail: phollis@primediabusiness.com