July 2012
The Business of Farming

Estimated Income Tax Payments

 

Unlike other businesses, a farmer doesn’t have to make an estimated income tax payment as long as two-thirds of his gross income is from farming, he files his tax return and pays his entire tax due by March 1. However, being able to gather all the required records and documents to meet this deadline can cause considerable stress.

To compound the stress, many brokerage firms have been filing amended 1099s and these are sometimes not mailed until the later part of February. Additionally, farmer operations have become more complex. The farm owner may be a member of one or multiple business entities sending Schedule K-1 that is not due until April 15. Even if a farmer is able to have all his records gathered, he may be missing some needed tax documents to file the return by March 1. Fortunately, the farmer has a few options in reducing stress.

Option 1. Farmers are allowed to make a single estimated tax payment by January 15. This payment can be based on the prior tax year’s tax liability. By making this payment, a farmer can wait and file by April 15. However, to avoid an underpayment penalty; the following criteria must be met:

1. If the total income and Social Security tax is less than $1,000, an estimated payment is not required.

2. Estimated payments must be 90% or greater of the current year’s tax liability or 100% of the prior year’s liability.

3. Farmers with an AGI (adjusted gross income) of $150,000 or more must pay 110% of the prior year’s tax liability to avoid an underpayment penalty.

Option 2. File a return by March 1 with the estimated income that will be on the 1099s and/or K-1, and file an amended return after you receive the needed documents.

Option 3. Wait until you receive the required documents, file by April 15th and pay the failure to file an estimated tax penalty.

Although three options are given, the best option is to make an estimated tax payment. This allows you time to receive all your needed information and ensure it is correct. You’ll have a longer timeframe to gather records and turn them over to your tax professional. The extra time will also take some pressure off your tax professional which will give them more time to ensure items on your tax return are not overlooked.

Some farmers might argue they don’t want to pay an estimate because they want to use their money as long as possible. This sounds like a reasonable argument; however, filing an amended return will cost more than the return that could be made on your money in that length of time.

Before you begin harvest, consider meeting with your tax professional to discuss your options in reducing the rush and stress tax season brings. Ultimately, keeping good records throughout the year will help you and your tax professional determine the amount of your tax estimate payment.

Resources:

Topic 416 - Farming and Fishing Income
http://www.irs.gov/taxtopics/tc416.html

Publication 505 – Tax Withholding and Estimated Tax
http://www.irs.gov/pub/irs-pdf/p505.pdf

Publication 225 – Farmer’s Tax Guide (See Section 15)
http://www.irs.gov/pub/irs-pdf/p225.pdf

The items covered in this article are informational only and are not meant as tax, legal or financial advice; consult with your tax professional, lawyer or financial consultant for guidance on issues specific to your situation. The author does not endorse any websites, companies or applications, and cannot attest to the accuracy of the information provided by third-party sites or any other linked site.

The author is an Extension Economist with the Alabama Cooperative Extension System. For more information about farm management and financial analysis, please contact your County Extension Coordinator or an Extension Specialist: North Alabama: Holt Hardin, (256) 574-2143 or Robert Page, (256) 528-7133; Central Alabama: Jamie Yeager, (334) 624-4016; Southwest Alabama: Steve Brown, (251) 867-7760; Southeast Alabama: Thomas Hall, (334) 693-2010.