2026 Farm Tax Essentials: Webinar #1

Good day folks. Welcome to the 2026 basics of farm taxes and estate planning together by Alabama Cooperative Extension System in Auburn University. My name is Dennis Brothers, extension associate professor at department of agricultural economics and rural sociology. Uh today we're going to be talking about the basics of farm taxes and we're joined by Dr. Adam Canravich from Clemson University and you will be you'll benefit from the information we're going to be shared today and we will turn it over to Dr. Canvix. Let me share my screen and get his presentation going and we will go from there. Good day. Today we are going to talk about the basics of farm taxes. I am Adam Canvich. I'm an extension specialist of Agra business and director of the Clemson University Agra business team and income tax school our team um I help co-chair a national committee known as the national farmer income tax extension committee with my counterpart Ruby Ward and uh our committee works with the USDA on a project that also includes Mr. JC Hobbs from Oklahoma State. And so some of this is brought to you by that particular working contract grant that we have with the USDA. We also maintain a website with a number of publications, links to videos, and you can go to ruralax.org, or which is housed at Utah State University and be able to find all of those publications, tax management strategy tools, etc. there. And you also may visit farmers.gov/taxes and be able to sign up and receive notification of our near every month uh webinars that we have through farmers.gov. We may skip a holiday month in the middle of winter, December, January time period. Um, but other than that, we will typically have one webinar per month. Now, just so that everybody understands that the information that I'm providing today to you is that is for educational purposes. It should not be considered formal legal and or tax advice and is only for educational purposes. For legal and tax advice, please visit with a professional attorney and or tax professional that knows the subject matter and that you feel comfortable with. So, we want to make sure that they have a full understanding of farm taxation. Everything discussed today in this presentation is general. Every tax and legal situation may be uh may vary and may be very different based on facts and circumstances that surrounds that case. Each individual, each individual family, each individual farm is going to be unique and has a unique set of circumstances. And so what might uh make sense or follow a particular type of code for one may not necessarily be true for another. And that's why we say that a lot of what we are talking about in these types of situations like today is very very general just to give you some basic information to begin asking questions to reach out and to work with a tax professional that will end up knowing your situation. And of course as most of us know this particular phrase the only thing you can count on life is death which is going to come to everybody eventually. and that we are going to pay taxes in one fashion or another. So, we're going to talk a little bit about a couple of things. It's going to be overall we're going to break this off into a couple of parts. So, it's going to include tax management. Um, we're going to talk in a portion of that uh with estate and gift taxes as well summary and then some resources that you can actually look up at home. And we're going to split this presentation off into two parts. And the first part u of the talk is really going to be more of a review the basics of income taxes that are most common uh for farmers and farm families that deal with and then the second piece is going to pick up with actual tax management strategies itself. So let's begin our review. So every individual has their own personal um preference for the amount of risk they are willing to take on. And that includes our production risks. That includes how we handle our farm, what we're doing, how far we push things, and that also includes as relates to taxes. Now, as I was driving with a graduate student on the highway one day, I came across and right behind this truck and I decided to move over a lane, I handed my phone to the grad student. I requested them to please take this picture. And you might be able to see in this particular picture somebody taking a risk as we're going down the interstate at 70 mph and they have a door open on this truck. Um yeah, there's a couple of chalk blocks um right behind the wheels of that particular John Deere lawn tractor that looked if there was the right bump. I had watched those things kind of jostle and the like. But apparently this individual over here in a black hoodie uh has what might look like or was we believe to be a uh possibly a cigarette working with the gas cans. Now, in most cases, tax liability from a farm or business is actually going to flow and make its way to the individual's tax form. That's almost always the case with the exception of certain business structures like a Ccorporation. And our individual tax form is known as the 1040. And most farms are relatively familiar with the 1040F and that's 1040 schedule F um is the uh profit and losses from farms or farming activities and that ends up being used by many self-employed farmers or individuals that have farms and are earning um some revenue from those will be filling those out and again it is dependent upon the type of business structure that we have. And so if we're a sole proprietor or a single member LLC um and we are not filing as a corporation through that LLC, we typically will be using a 1040F which eventually makes its way onto the front of our 1040. those that have a partnership or a multimember LLC will be utilizing a 1065 in most cases that then each partner uh will receive a K1 which is their share of what took place for that particular business for that particular year based on their profit shares of that business and that will eventually make its way onto the front of the 1040. There may or may not also be it is dependent on a number of other variables A1040F involved. For those that might have a subchapter S, we might be using an 1120S. Um and then again eventually depending on the number of um shareholders with regards to that owner operators of that subchapter S corporation um will be receiving some additional forms eventually flowing through. These are all flow through entities. single member and multimemember LLC's and single shareholder and multi-shareholder subchapter S's. Now, we typically see in most cases two major types of income that farms will typically see. And one is our actual income tax um that is owed on ordinary income and this may come from the selling of feeder sears, the selling of corn, soybeans, tomatoes, strawberries. that is typically in most cases considered ordinary income. And ordinary income is going to be taxed at your marginal income tax bracket and we'll talk more about that in a few moments and it's going to be subject to self-employment tax and we will talk about that as well um in a few moments. The other type of tax that we typically see on farms is capital gains. So some examples of where capital gains may kick in is if I have a cow calf operation and I used to have one of those and if I if my cow gives me a calf and I and it's a heer and I raise that heer as a heer replacement to bring into the herd and then eventually um I may call some of my cows those individuals that were raised on on the farm, not purchased when sold. And as long as I held them for a certain period of time and there are different holding periods for different types of assets. Um, but as long as I hold them for the minimum holding period necessary, then when I sell them, they will be treated as long-term capital gains, which receives uh preferential treatment uh with lower uh tax rates for those than what you would find at the same level or similar level for our normal marginal income tax brackets. Now, if I don't hold on to a asset that is owned and it is completely depreciated out, and we'll talk about depreciation a bit in part two of of this video, um, if I don't hold on to that asset long enough and I turn around and sell it and make a profit on that, then I may end up paying shortterm capital gains instead of long-term capital gains. and that gets treated at your marginal tax rate and we'll talk a little bit more about those and what that means, what that looks like um a little bit later on the presentation. Now, I think this is a very important chart to show and you can see this runs from 1912 until 2024. We really haven't seen anything change uh for the most part since 2024 tax rules came in and really kicked into 25. So they're minor adjustments, but not too bad. And so this is showing what the highest marginal tax rate and the lowest marginal tax rate were over time. And you can see if we take a look at approximately in that time period of 1942, 1945, um, you know, maybe starting even about 1941. And in that general area, we can see that the highest marginal tax rate, which is on this green line uh circled in yellow, is in the mid90s, about 94%. Was the highest rate that individuals would be paying on some of their last dollars earned if they earned enough money to get to that that tax rate. At that same time, the lowest marginal tax rate was uh also about 23 24%. Um it was in that mid20s range. And if we go ahead and we take a look at each one of these steep steps, then we can say we stayed relatively elevated, maybe not quite as high as what we saw there, but still above 90% all the way into the early to mid 1960s when we have a significant drop that occurs in that 6465 time period. And we see a drop, not quite as dramatic, but a drop also on the lower tax rate where we went from about 20% down to approximately 15%. Now, that continued on. We had some ups and downs as well as we go through time. And then as we get into the 80s and in particular the early 80s, we begin to see significant drops uh at that point in time. and it had to come back up a little bit. We had some up and downs especially on our uh higher tax rates in particular our higher m marginal tax rates until we get to where we are at right now at hanging out just below that 40% marker in that 37 to 39% tax rate where our lower marginal tax rates or lowest is at 10%. We've been there now for a good 24 almost 25 years. Now, as we begin to take a look at um our individual income tax brackets, um and this is typically income that is derived, like I said earlier, from the sale of feeder, cattle, selling corn, tomatoes, those types of things. Um and it's going to be typically subject to self-employment tax. if we're um self-employed and and farmers are considered self-employed. And so you would also own a owe a separate tax on that. We'll talk about that here in a few slides. And so as you can see here, there's actually four distinct ways that any one individual under most circumstances are able to file their taxes. They can file as a single individual. They're not married and they have nobody that they are caring for. And then we have individuals that are legally married. And that means you can't be just married in the eyes of a religious organization such as i.e. the church, synagogue, temple, uh, mosque, etc. It actually has to be a state, municipal, or federal section sanctioned marriage where you went to city hall or your county building and you actually purchased a marriage license. And so that then allows you to file as married filing jointly. If you are single and you are taking care of uh dependents in your household and providing for the overwhelming majority of all of their costs, you might be able to file as head of household. married filing separate um is for individuals that are legally married. Um and there are other extenduating circumstances which may require them for uh their best benefits or for other things uh to be able to file as married filing separate. Each individual is going to have their own tax forms that they do and they file in this fashion. And so, as you can see with a lot of what you are looking at for numbers, if you go to married filing joint, essentially you cut that in half and you have married filing separate. So, if we take a look at married filing joint, I can earn up to $24,800 and anything all my taxes to that level um are going to be taxed at 10%. But what happens if all of a sudden I earn $30,000 for my household income between my spouse and I? The first $24,800 will be taxed at 10%. Well, the next $5,200 falls into the next income tax bracket, and that income tax bracket is the 12%. So then that next $5,200 will be taxed at 12%. And so we keep going up. The more you make, different amounts fill up each of these different marginal rates until you end up with all right, I got no more income. And um and then that's where it stops. So we've got portions of our income that are going to be taxed at different rates. And once you get to $768,700 at this point in time in my life and since I work for essentially the state um through Clemson University um unless you are a athletic coach or a president or provost top administrator, I I don't believe I will ever reach that uh level. um I don't think I have to worry about reaching the $768,700. That's going to be at the 37% tax bracket from that point and up. And if you take a look just off to the left there, there are the brackets for those that are filing as a single. And so a single individual that's not married, you don't just get to take, you know, it's it's not necessarily um like it is for married filing joint. It may start off where um we have some similarities, but in the end you will quickly see that it's not quite the same. And so there are changes when you begin to get into the higher tax bracket. The first few tax brackets are approximately half of married filing joint until you get to the 22% tax bracket. We may start off with the bottom portion being half, but if you take a look for a single individual, the top of the 22% tax bracket stops at $85,000 and $700, which is close to the $21400. Okay. Oh, made an error. Misspoke, please go back 10 seconds. I will start over that part for a single individual. When taking a look at the single individual, when we take a look at the um first few marginal levels, we begin to see that um we start off approximately half of married filing joint. And um and so but when we start getting down towards and you can see this quite easily, right? We start off in the 12% tax bracket. married filing joint 248 half of that is $12,400. And we can easily see that for the bottom of that 12% which is the top, you know, where the 10% ends and and the 12% begins approximately half. And we can see that pretty well holds true, you know, for a pretty significant portion except for when we get to that 37% portion. We start getting up into the 35 37 it begins to change a little bit. So that married filing joint 7687 700 um it it's um is when we get into the 37 tax bracket whereas with a single individual it happens um not at half but about $130,000 $120,000 less at the 64600. So this is what's called a graduated scale. And each of these numbers within these marginal brackets change from one year to the next. And they change with a uh an equation that the IRS uses that takes into consideration the rate of inflation. Now if I have ordinary income and I am self-employed, you will then have also something known as self-employment tax. And a lot of times we refer to this as SE tax. So if you're self-employed, you are going to have this tax and it is taxed on all of your earned income that is taxable. So um and there's a number of also additional caveats. If you work for somebody else like I do, um Clemson is the employer and I'm the employee. Clemson pays half of FICA, Social Security, Medicare, etc., and I pay half. But if you're self-employed, you're the employer and the employee, so you get to pay the entire thing. However, however, the important part of this 15.3% tax is that the employer portion gets to be deducted. And there is it's not it it's not an even half type thing, but it's close. And so there's an equation that gets used when you plug in the number of what's been paid and professional tax software automatically um does the equation for you. So we do receive that as a benefit just like if you were working for somebody. Now, as I just stated a few moments ago, self-employment tax is 15.3%. And that is made up of social security. And so 12.4% of that 155. So the overwhelming majority goes to social security. Now, for the 2026 tax year, you pay social security only on the first $184,500. And there's a whole bunch of people in myself included that don't have to worry about ever getting close to that 1845, but there's many others that do reach that and surpass that. Um whether it's farms or we may have the farm income um plus we may have off-farm income and between everything we we may hit that marker. And so you're only going to pay social security on up to 1845. After that, every dollar after that, you do not have to pay social security. Well, if I subtract the 15.3 from the 12.4, I obviously have approximately 2.9% remaining. And that 2.9% goes to Medicare. and you will pay on every dollar of ordinary income, you will pay that 2.9% tax towards Medicare. Now, in very specific circumstances, there are some thresholds which are $200,000 for a single individual, $250,000 for um a married filing joint couple. And if you reach these thresholds and um all other criteria are met, there may be an additional 0.9% that will kick in that will go towards Medicare as well. And as I've already stated, the self-employment tax deduction for the employer um will kick in under the SE tax, which allows you to take approximately 1/ half, which will then get deducted and calculated for your adjusted gross income. And so that will then help figure out what your income tax liability is when we remove a portion of this and it is treated similar to a an expense which is what it does. Also important to note that if you are self-employed and you um are purchasing health insurance on your own um and or through your farm entity, um there are a couple of different things that may occur. And so if it's through the farm entity because of a number of different circumstances, most likely those costs are being deducted as a cash expense to the farm. But if it's me personally um getting that health insurance um for myself and or family, there's something known as self-employed health insurance deduction that we might be able to make use of um within our tax forms as well. And that is something to have a conversation about uh with your tax professional. And in many cases, things may change with tax law. They can change from one day to the next because of court cases. um new guidance that comes out from the Internal Revenue Service or the IRS uh which and there's and that can come out in in a number of different ways. um or even a court case um that may have gone one way or the other, meaning um uh IRS may have won or the IRS may have lost and in favor of the other individual um that was either brought to court or brought this case to court against the IRS and those can have profound effects on tax law and um its implementation. And so that is something and also one of the reasons why we never recommend that um individuals do their own taxes because you are not keeping up with all of those things. You can't you've got other things to do. But a good tax professional especially if we're talk since we're talking about farming and same would go for timber is you want to find somebody that fully understands agriculture and farm taxation and or timber taxation under certain circumstances. Now, another little note here, social security disability. It is important to note that many unfortunately try to get out of paying taxes. And so, if I try to get out of paying taxes, in most cases, that means I'm going to try um to utilize various techniques. Or if I'm a really small farm just starting off, I may not be making any money. And if I'm not making any profits, that means I have no income and I'm not paying income tax. If I'm not paying income tax, I am most likely not paying any uh um as self-employment tax. And if I'm not paying self-employment tax, that means I'm not putting any money into social security and or disability. Okay? And so there are a lot of things that you need to be aware of that um may make you you know how your social security payment once you reach of age and you sign up to take social security how much that social security um is going to be is based on how much you have paid into it. So that is something to remember. Now, there is something known as um the farmer optional method that allows a farmer that may not have or may not be having to pay income tax or even SE tax, but allows you to pay the social security tax, i.e. the so the SE tax um and a portion of the social security and Medicare um is a one-page form in essence that gets filled out and you can pay that independent of have not having a profit um and make sure that we are at least making sure that I'm meeting my quarters and keeping things up so that I'm eligible for god forbid disability if I need it and also to make sure that I don't have a bare bones minimum minimum on social security because at barebones minimum social security typically doesn't pay. All right, so we've talked about ordinary income and early on we talked about that one of the other major types of taxes that we pay um is going to include capital gains. We've also talked about the self-employment tax. And so now capital gains typically come in a couple of different types. So most folks are are most familiar with long-term capital gains. And so I might I might have bought stocks, let's say, uh, for $10 a share in 2010, and then I turn around and I sell them in 2026 for $500 a share. $500 minus that $10 is $490 in quote unquote profit that I've made. Um, however, when we're typically talking about assets, uh, such as stocks, uh, those typically talk about instead of using the term profit, we typically use gains. It's not a loss, it is a gain. So, $490 in gains. And since I held on to that stock for more than a year, and that is the holding rule, so that I can receive that it gets counted or tracked as long-term gains versus short-term gains. For stocks, it is a holding period a minimum of one year. And under that scenario, I get a benefit of a lower tax rate for an equivalent amount of income compared to marginal tax rate that I would have to pay on the gain for that stock sale. The same hold true if I buy land and sell land or what happens if I buy a used tractor, depreciate that tractor out fully and then I sell it. Not only do I sell it and receive some revenue for it, but I actually sell it for more than what I paid for it. the amount between what I paid for it and that higher value that I received for it would be considered gain that I may have to pay a capital gain on. And going between short-term and c and long-term again in the case of a tractor is going to be a one-year holding period. But there are other assets that may have a 2year, threeyear or higher um holding period for. And so I'm usually not as familiar with anything above too much above the above a three-year. And so we do have some things like cows that may have to be held for longer than a year to be able to receive long-term capital gain. And again, but the differences with some of that it um is did I pay for the cow initially to bring in? Is it raised? And that creates some additional complications. We can talk about that a little bit later on in part two. So if I don't make the um the proper length for holding period for long-term capital gains and then what that asset's going to receive when I sell it uh and I made uh I pay I make more than what I have paid for it and it has a gain. It will be treated as short-term capital gain. Well, short-term capital gains actually get treated similar to ordinary income. Whatever my top dollar, whatever income tax bracket my last ordinary income dollar fell into is the in is going to be the tax rate that is applied onto that gain. The difference is here that I will not have to pay self-employment tax on that because that is considered investment income. And so under those types of rules, it you pay a gain versus ordinary income tax. And so it will follow those types of those rules. Okay. Now, there are also some additional tax rates um for uh capital gains that includes some in the mid20s and um collectibles are 28%. Collectibles would be things like an antique tractor or a classic muscle car. Babe Ruth card, um, an old rare shotgun from grandpa. Those types of things are are considered collectibles. And technically, they have a capital gain rate of 28% for long-term capital gain. So, um, again, federal short-term is treated at the ordinary income tax bracket, but not subject to self-employment tax. Long-term capital gains are treated at 0% for capital gains. if you're married, filing joint. Um, so if my ordinary income is less than $98,900, and then after we figure out our ordinary income, then we take a look at any long-term capital gains that I may have. And so any amount that falls above my last dollar for ordinary income that is subject to self-employment tax and $98,900 for married filing joint. Any capital gain that falls between those two locations of our dollars uh will get treated at 0%. we fall above that 989 and go all the way up to $613,700, then the capital gain tax rate on long-term capital gains is 15% on gain. Now, you should quickly realize that that 15% is much less than many of the higher um tax brackets that are out there. And once you reach $613,700, uh that very first dollar above that is going to get treated at 20%. So that's in essence as simplistic as we can make it on how this system works. If you have a Ccorporation, which is typically typically not recommended for most farms today, uh, and that gets into some other technical aspects that we don't we're not going to talk about or have time for today. Um, essentially they have one income tax rate. No matter what, no matter the income type, etc., it's going to be at 21%. And so again, here is a similar chart that kind of shows you a breakdown uh in a different manner of what those long-term capital gain rates are and for 2026 year. And that we conclude with um part one of a review of our income tax basics.