A recent update from Iowa State University (ISU) Extension by Kristine A. Tidgren indicated that, “As tough times continue in the farm sector, more farmers are calling it quits. In particular, many operators who do not own ground and are dependent upon renting the land of others are struggling to hold on. Many are selling farm assets and securing full-time off-farm employment to make ends meet. It’s a quiet exodus, but it comes with hidden danger.
“Liquidating assets without a careful plan can generate tax consequences that will impair any hope for a fresh start down the road. As farmers weigh these tough decisions, it is imperative that they seek good counsel regarding their options. Although cash flow is tight, good advice is worth the investment.”
The ISU update explained that, “It is important to remember that depreciated assets, when sold, generate ordinary income tax liability. Depreciation is intended to allow farmers to write off the cost of a business asset over its useful life.”
Ms. Tidgren stated that, “If the owner sells the asset while it still has value, IRC § 1245 steps in to ‘recapture‘ ordinary income tax on the difference between the current basis of the asset and the sales price. The current basis is equal to the original cost, less any depreciation or expensing taken. In many cases, the basis may be zero. In other words, the sale of $100,000 of fully depreciated machinery will result in $100,000 of ordinary income, which is subject to income tax, but not self-employment tax.”
The ISU article also pointed out that, “A farmer enrolled in an [Affordable Care Act] insurance policy, relying on advanced premium tax credits to pay an affordable monthly premium, must realize that if year-end income exceeds 400 percent of the federal poverty limit, he or she may face a hefty tax bill. If the farmer enrolled in insurance expecting taxable income of $45,000, but ends the year with $49,000 in income, the advanced premium tax credit that must be repaid can climb into the thousands. Many who receive the advance premium tax credit do not understand the associated risks.”
Ms. Tidgren added: “These are just several of many traps for the unwary when navigating financial distress. The word of caution for financially distressed farmers is don’t let bad circumstances become worse. Consult with an attorney or tax advisor experienced in these matters before engaging in self-help measures, such as selling farm assets. The advice will be worth the cost.”
