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A new income tax deduction may be available for farmers
By Steve Bartels
Ohio Farm News

In the December issue of the Ohio Ag Manager, Donald J. Breece, farm management specialist, OSU Extension Center at Lima, said, the American Jobs Creation Act of 2004 created a new deduction based on income attributed to domestic production.

Qualifying property includes receipts derived from what is grown or produced. The new deduction begins for the 2005 income tax year and is limited to the lesser of:

•3 percent of qualified production activities (QPAI).

•3 percent of taxable income of an entity or adjusted gross income for an individual taxpayer.

•50 percent of W-2 wages paid during the year by the taxpayer.

Qualified production property for cash-basis farmers include receipts for sales of livestock, produce, milk, grains and other products raised by the farmer. Proceeds from the sale of raised breeding stock, reported on Form 4797 also qualify.

However, sales of purchased breeding or dairy animals will not qualify unless these were purchased as young stock and a substantial part of the animals’ value resulted from the farmer’s expense in raising the animal to maturity. Sales of land, machinery and equipment are also excluded from domestic production gross receipts.

Furthermore, custom hire is also excluded.

The 50 percent of W-2 wages limitation may become the most limiting factor for many farmers wishing to qualify for this deduction, or wanting to take the maximum advantage of it.

One way to increase W-2 wages is to pay wages for unpaid family labor. However, the increase of FICA taxes and decrease of self-employment wages for the operator would need to be factored in, as a result of this change.

Also, note that the following wages are not included for the calculation of qualified wages:

•Wages paid in commodities.

•Wages paid to a child (under age 18) of the farmer.

•Compensation paid in nontaxable fringe benefits.

Although the domestic production activities deduction is limited to 3 percent of qualified production activities for tax year 2005 and 2006, it will be 6 percent for 2007-2009 and 9 percent for years after 2009.

The tax form for this new deduction is Form 8903. See your income tax practitioner or the IRS website at www.irs.gov for further information.

To subscribe to the Ohio Agriculture Manager newsletter, send a message to ohioagmanager-on@ag.sou.edu

Published in the December 21, 2005 issue of Farm World.

12/21/2005