Recently, I read an article stating the Chinese government has eliminated a 50-year-old tax on agriculture in an attempt to encourage farmers to stay in farming instead of migrating to cities looking for industrial jobs. About 800 million out of China's 1.3 billion people are farmers - that's about 62 percent of the population. Farmers make up less than 1 percent of the U.S. population.
Although tax reform is on President Bush's top ten list for his second term, I doubt that eliminating income tax on agriculture will be part of the reform. However, there are many aspects of the current tax code that are unique to agriculture, such as income averaging. Other parts of the code allow considerable flexibility that pertains to most businesses, including agriculture. One example of this flexibility is the many different methods through which the initial purchase price of a depreciable asset can be recovered. In 2004, the code allowed for a maximum of $102,000 of depreciable asset purchases to be recovered or expensed in the year of purchase. In 2005, the maximum moved up to $105,000. Depreciation methods are also available that allow for quicker or slower recovery over a longer term. Another example is how a business can deduct the expense of operating a vehicle, using either actual costs of operating a vehicle that includes depreciation, tags, insurance, fuel, etc., or a standard mileage rate. In 2005, the standard mileage rate is 40.5 cents per mile, up from 37.5 cents in 2004.
Many decisions such as these are available to each taxpayer every year. There generally are no right or wrong answers (unless one intentionally understates income or overstates expenses - that is fraud) - just different choices the Internal Revenue Service allows each taxpayer to help them determine the lowest amount of tax owed within the boundaries of the code. So, how does a taxpayer know which choices lead to the lowest tax bill? My answer to this question is that one should employ the services of a competent tax preparer who is knowledgeable of the sections of the tax code that pertain to agriculture.
Finding the right preparer can be somewhat of a challenge, however. Following is a list of helpful hints* you can use when choosing a return preparer.
- Avoid tax preparers who claim they can obtain larger refunds than other preparers.
- Avoid preparers who base their fee on a percentage of the amount of the refund.
- Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
- Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.
- Review your return before you sign it and ask questions on entries you don't understand.
- Find out the person's credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits.
- Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
- Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?
Tax evasion is a risky crime - a felony - punishable by five years imprisonment and a $250,000 fine.
Remember, no matter who prepares your return, you (the taxpayer) are ultimately responsible for all the information on your tax return. Therefore, never sign a blank tax form. Since less than 1 percent of the U.S. population is in production agriculture, there are not a huge number of tax preparers that specialize in the preparation of returns for clients involved in agriculture. They simply cannot make a living from the small number of agricultural producers. This emphasizes the need for each producer to study IRS Publication 225 Farmers Tax Guide and become knowledgeable of the areas of the tax law that affect agriculture. This will also better equip you to search for a preparer. Your search may be difficult, but when you find the right one, it will be worth the effort. Happy hunting!
* The helpful hints were taken from IRS Fact Sheet FS-2005-8.