Dt-Lanustcr Farming Saturday, Octobar 25,1986
BrocHett’s Ag Advice
« By John E. Brockett
V Farm Management Agent
,,’7 Lewistown Extension Office
Tax Management ‘B6
This year will be the start of the
transition into a new era as far as
taxes are concerned. Will they be
any easier to prepare than they
have been in the past? Actually, if
past tax law changes are any
precedent, they will probably be
more difficult. It appears as
though there may be one fewer
form to file because investment
credit will no longer be available.
To offset this, it appears as though
other forms will require more
information.
Most of the 1986 tax return will
fall under the old rules. There is
one real problem area for you as a
farmer. Investment tax credit
(ITC) will no longer be available
on purchases made after
December 31, 1985. All carryover
of investment credit that you had
up to 1986 will be available for use
for the tax year of 1986. However,
carryover investment credit left in
the 1987 tax year will be reduced by
17.5 percent. There are some
strategies you may take to
maximize your use of carryover
itc. However some of them may
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then result in higher social
security taxes or loss of the ad
vantages of long term capital
gains.
INVESTMENT CREDIT
If you have a large amount of
carryover investment credit, you
could do one of the following
things:
(1) Increase farm taxable in
come for 1986 by putting off pur
chases of next year’s fertilizer
until next year. Or, paying most of
1986 end of the year bills in
January. Or, selling crops and/or
livestock in December rather than
January. Advantage of this would be
to put income into 1986 when you
could use up itc and when your
total tax rate may well be lower
instead of higher. Disadvantage of
this would be that you would pay a
higher self employment social
security tax due to a higher earned
income for the year.
(2) Forego long term capital
sales for 1986 and look for potential
short term capital sales for the
year. Advtatag* of doing this would
be to increase taxable income but
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not long term capital gams which
are more subject to the “Alter
native Minimum Tax.” This in
crease would not cause you ad
ditional social security taxes. If
your strategy worked well, you
would have the extra income, but
would be able to offset the income
tax with investment credit that you
may lose in 1987. Disadvantage of this
move would be selling some assets
that may gain in value in the
future. There would be no real tax
disadvantage unless you went over
the carryover of investment credit
or your total income was such that
the “Alternative Minimum Tax”
was triggered anyway.
(3) Do nothing different. Ad
vantages would be less work and
record keeping and possible lower
social security taxes for 1986.
Disadvantages would be that you
would lose part of your investment
credit in 1987.
CAPITAL GAINS
After 1986, long term capital
gains will lose their special tax
treatment until the next law
change (probably in 5 years or
less). What should you do? If you
are considering a capital sale such
as a herd dispersal or land sale,
taxwise, it would probably be
advisable to do it this year. Why?
For 1986 long term capital gains
will be taxed at 40 percent of your
marginal rate. Thus if your
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margmal rate is 32 percent, the
gain is actually taxed at 12.4
percent. Even if the gain triggers
the “Alternative Minimum Tax,”
the tax will be at a maximum of 20
percent of the gain. In 1987, capital
gains will be taxed at a rate of no
less than 15 percent and possibly at
a rate of 28 percent.
For those of you who see a
conflict between this problem and
the one above concerning in
vestment credit carryover, there is
one. You will have to make a
decision in some cases as to
whether you want to maximize
your use of investment credit or
your use of long term capital gain
treatment. If you have no in
vestment credit carryover there
would be no conflict. In my
judgment, I would probably
suggest the following solutions for
the listed Scenes:
(1) Scene 1: You have a
carryover of investment credit and
intend to stay in business. You also
have some excess breeding stock
you could and will sell. My
suggestion would be to sell short
term gain assets as much as
possible rather than long term
assets. Carryover of investment
credit would cover the income tax
bill. Short term capital gains would
have no affect on social security. If
they were all sold in 1986 there
would be none to sell in 1987
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anyway, so taxable income would
be down for 1987. The year of 1987
will be a higher tax year than
either 1986 or 1988 for most small
businesses such as farms.
(2) Scene 2: You have no
carryover of investment credit and
intend to get out of farming in the
next year or so. My suggestion
would be to sell long term capital
assets this year if possible. An
installment sale evidently will not
work. Pay your tax, including the
“Alternative Minimum Tax,”
which would be no more than 20
percent of the gain. This will save
at least 8 percent in taxes over the
same sale in 1987.
(3) Scene 3: You have carryover
of investment credit and intend to
continue with farming. You do not
have any particular capital assets
that you can spare or desire to sell
at this time. My suggestion would
be to hold off on the payment of
year end 1986 bills until 1987. Use
up as much of your carryover
investment credit as possible. If
your taxable income is less than
$ll,OOO, you may be eligible for
earned income credits that will
pay part or all of your social
security tax. If it is over $ll,OOO,
rest assured that the social
security tax rate will probably be
higher in 1987 than in 1986 anyway,
so you may still have an overall
savings.
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