2026 Farm Tax Essentials: Webinar #2

Hello folks, this is Dennis Brothers. Welcome to part two of 2026 [snorts] basics of farm taxes and estate planning. Uh in this video, Dr. Cravicks is going to address tax management strategies strategies to use on the farm and help you figure out ways to best manage your farm tax situation. I'll get the presentation up, hit share, and we'll hand it over to Dr. Kandraich. Hello. Thank you for taking the time out of your day to review this video. For those that [clears throat] may have come across this, there is a quote unquote part one that I review some basic uh income tax uh [clears throat] types or tax types that are most found on farms. And so I may be also discussing and utilizing some terms from that particular video here. And this is where we get into um more of some of the tax management basics. Again, this is not going to be all inclusive. And so you need to really work with a tax professional to assist you with regards to this. Now, tax management is a basic part of any business management practice. Sometimes we don't think about it, and we only think about it typically in a 12-month period of time. But unfortunately, we find many farms and and other self-employed individuals that think tax management is trying to get out of paying taxes. If this is your particular strategy, and it's not a very good strategy, it usually comes back and you end up paying for it in the end because one of a few things ends up h happening. one that um because of various situations and econ and economics um you might have a really good year or whatever it happens to be um you've kind of run out of options and all of a sudden you blow the roof off and you have quite a large tax bill at that point in time because really all you've been doing is deferring your taxes. you haven't really been eliminating and you're more than likely just deferring it. The other way to get out of it is through death and somebody else has to deal with it at that point in time. So that's really what's occurring. And so proper proper tax management is using available internal revenue code to get the most amount of income through the tax system at the least cost to do so. So at the cheapest rate in essence, but I sometimes like to refer to it at the least cost and that's that tax liability. And to do this requires free planning and sometimes this is going to be years in advance. And easy examples of this is if I've got cow I I raise cows and my heer calves, I I will hold back a certain proportion of those heer calves as replacement for my cows as I as they call. And then I might decide all of a sudden, you know what, I want to expand my herd. So, I'm gonna keep a couple of my cows. Instead of callulling them, I'm going to keep them maybe a year extra and um I'm going to hold back on all of the heers that look like they would be good replacements instead of selling them to market and so I can expand. Well, that's going to be 36 months out approximately. I know it's not exact, but approximately that I may begin to see the additional revenue coming from new calves being sold. Okay? And so in that 36 to 48month period, it could be, you know, obviously a little bit less than 36 months depending on various situations and my choices, um, I'm going to have a lot more revenue coming in. And so I might be working today, literally three, four years before the revenue kicks in and begin to plan how I'm going to deal with that extra revenue to help limit my tax liability. That's a very good easy way to think about this. And the same would hold true if a farm was expanding because I just bought another 40 acres and I'm putting brand new peach trees on it or asparagus crowns, whatever it happens to be with those with perennial crops. And so I might be looking five, six, seven years or even 10 years out. And so I might have put up some new broiler barns and um my depreciation runs out after 10 years. We'll talk more about depreciation in a little while. And so I might be preparing now on my tax management strategies for, you know, maybe choosing a different depreciation method or with me having that knowledge, wanting to keep it where it's at. How am I going to deal with my cash flow in year 11? And so all of those types of things are things that we need to consider and we need to stop looking at everything taking place on the farm within a 12-month period of time. And sometimes if we've got multiple family members involved with the farming activities, we may want to take a look at what's the total tax liability to everybody, the entire family on the farm, and begin to deal with uh t other additional tax liability strategies to help spread that out, you know. So, you know, my son with two children may be able to handle higher revenue at a lower tax rate than I might be, you know, as a married with no kids or a single individual, not married, no kids. So, all of those things need to be thought about and we need to have these discussions with our tax professional and it needs to happen before the end of my tax year. And for most of us, that's a calendar. All right. Now, this chart is really looking at three different things. For those that have uh already watched and reviewed the first part or the first video, which is the review on some basic uh farm taxes, including income tax, self-employment tax, um capital gain tax, and the like. I talk about ordinary income tax and I talk about self-employment tax. Self-employment tax is actually made up of two major components for a total 15.3% uh tax rate that's being applied to all of your ordinary income tax. Now a good the largest portion is just over 12% that goes to social security. the other portion that is approximately a two point just under 3% about 2.9 if I remember correctly of that goes to Medicare and so when I add take 15.3% and I add that on top of my marginal income tax rate that's my total tax liability uh without considering state income tax without considering capital gain stuff but the reason why that's very very important is that helps begin to set a base for tax management agement strategies and that's what we're looking at here. So this orange solid line that you see that's pretty much in the middle of the road here is my marginal income tax rates and you can see down here dollar values. Now these increase from one year to the next with a rate of inflation. You see the marginal tax rates here on the left hand side. Now, this blue I'm sorry about that. This blue line, blue dotted line is actually showing my self-employment tax. And as a reminder, the um self-employment tax, the social security portion of that, which is the larger of the two, I only have to pay social security on up to and onto a certain amount. And that amount changes from one year to the next based on a rate of inflation. And so, you know, it's just under $190,000 this year. So, about $18687,000 thereabouts. Um, any dollar after that, I don't have to pay social security on. Okay? [clears throat] And that's why we see at this point in time, you know, right over here, a significant drop. And of course, I'm using numbers from a few years ago because again, it's not the exact dollar amount here, but it is the concept that I want you to really get. All right. So, when I take the information from this orange line, add it to this blue dotted line, that should add up to a percentage total of on here on this red line. So you can see here towards the middle, it's a little bit off to the left a hair of middle. We've got this giant kind of head. So off to the left is my left shoulder. To the right is my right shoulder. Every farm, every individual, every family is unique in their situation. We may have off farm income coming from one spouse or we may have off farm income coming from two spouses. Um, we may have a really large high dollar value farm that is doing quite well and is consistently on the, you know, over in the right shoulder. We may have a new farm or a small farm or a farm that is just constantly struggling and so they're on the left shoulder or we may have a farm that's always hanging out in the head. And so depending on the situation, where we're at in that head part, and all these other circumstances and other variables, we may be working to try to figure out, oh man, where can we go ahead and decrease my revenue a hair um or my taxable income, I should say, by doing prepays or doing this or doing that to essentially offset that income so I don't have as high as as a tax liability or taxable income. But I might be so far over to the right, excuse me, on that head. So, we may be so far to the right on that head that we might be trying to find a way to actually decrease my deductible expenses and or I need to find some more income before the end of the year so I can drop in and get that income to be down on the right shoulder. All right. I much rather pay 12 point some odd percent or almost 13% lower than staying up on the top of the head. Okay? Especially for those farms that are normally always on the head and may be towards the right portion of the head or on the right shoulder. So we might be looking for more income to move there so that income doesn't come in next year at a higher rate and not be able to utilize some other type of mechanism. Okay, so that's why this is a good way to explain some of those concepts and what we're trying to do. Okay, prepaids. This is actually used pretty frequently by many farms and in short what a prepaid is is a purchase of a consumable product in one year and it will not be cons i.e. consumed or utilized used up until next year. Now under normal circumstances just to evade taxes i.e. pad my expenses for this year to lower my taxable income. You're not allowed to do that. But if we may believe for various circumstances. So let's say we're having a war with Iran and the straight of Horamuz closes down where a significant amount of sulfur I believe it is runs through or some major component utilizing the development of fertilizer actually runs through that straight that sets a base for the um global supply and price for fertilizer. And so we may believe that one we may not be able to access fertilizer when we need it or if we can it may be a higher price. And so those are both reasons why we might be able to be allowed to use prepaids. And so we strongly encourage that you print off a few things, drop it into the file or keep it electronically that proves or shows some likelihood of difficulties in the availability or having access to that product at the time of need and so I want to lock it in now. or we believe that there's going to be a much lower price and I'm going to pay on now versus at the time I actually need it. And this is going to be on things like fertilizer, fuel, seed, mineral blocks, salt, all sorts of things. But I cannot prepay labor. I can't pay there's a lot of things I cannot pay uh prepay for. So, um I might have a insurance bill that comes due um that might be paying for the next 6 months. That part's okay, but I can't prepay like the next, you know, the bill that I would be receiving in 6 months that falls into the next year. I can't prepay for that. The other thing I cannot do, I cannot go down to the local co-op and give them a $15,000 check and say, "That's going to be for whatever chemicals, whatever fertilizer, whatever seed, or or anything else that I may need next year." That does not suffice. You must receive a receipt that specifically states, "All right, I just spent $15,000. that $15,000 went to X amount of quantity of URA, X amount of count of of quantity, you know, like X bins of or whatever it is or tons or gallons or whatever it happens to be of glyphosate of lime of whatever it happens to be. It needs to be detailed and specific and you need to hold on to it in case the IRS comes ringing and going we want to see proof of why you did the prepaids. Okay, there are some limitations with regards to that. You are limited to 50% of the total normal deductible farm expenses when you don't consider the prepaids as part of that. You cannot go above that. So, if I've got a total uh deductible cash expenses of my operating uh items like those that I previously mentioned, um if if that's $30,000 in a year, you can only prepay up to $15,000. Now, I can go beyond that for certain circumstances. You have to meet certain definitions of a farmer. That's number one. Number two, when I do that, I can also go ahead and take a look at my average out my previous three taxable years and see what I spent there. Um, and see if that has any effect versus just taking a look at where I'm at today. Um or I may have some other extenduating circumstances like I've doubled the acreage um or even just increased it by 40 acres, you know, out of my, you know, 250 or 300 or whatever happens to be or I've I've doubled my coward. And so based on that, I very well may have doubled the normal expenses in this year because of that. And so because of that, I should be able to increase the amount of prepaids I'm allowed to utilize. And so you can do that. There's section code that allows that. And you need to make sure you've got proper documentation to be able to show that up. Now, depreciation um many farms are um have an understanding of depreciation. And in fact under law under and I should repeat I should rephrase that under internal revenue code if you are a trader business and you purchase a capital asset that capital asset must be added to the depreciation schedule and must be depreciated out. And if you don't do that and you sell that asset, you may actually have to pay depreciation recapture on that asset even though you may not have uh taken the benefit of that depreciation. And if you sell that particular asset, let's say five years down the road after um I am allowed to amend returns. I can only amend returns for up to three previous tax years. And so when I take a look out, I'm saying, all right, I've got a 5year depreciable life. I'm selling that asset at, you know, after that point. I've also held on to this asset for longer than that. So, I've held on to it, let's say, for eight years, depreciated that out over a fiveyear span, and then um I've passed the three-year allowed limit of the first three years of ownership when I had that depreciable asset on hand. Um, and so I've held on to it for a total of eight years. So I cannot amend a return to change those returns to take advantage of uh that depreciable asset. And so I may not be able to reap any of that benefit, but I may have to pay back u essentially the benefit that I was not able to access. So um so we need to be careful in some situations with regards to that stuff. And so always work with your tax professional, see where they're at, what their understandings are, and make sure that things are are being done the appropriate way the first time. So that being said, there are different types of depreciation. And the top two that we usually fall into is going to be um tax depreciation, economic depreciation. Economic depreciation is not tax and vice versa. Economic depreciation refers to you buy a Ford truck, you paid $50,000 for it, you run it around the block and you go, I really don't like it. You run it back in and they only give you 80% of what you paid for it. That 20% is economic depreciation, right? We see this with all sorts of things, fence line, pumps, uh tractors, you know, the higher the hours, the less the value. plus then how what its age is, the condition it's in. That's economic depreciation. Tax depreciation is the IRS has has >> [clears throat] >> um a number of publications out there that looks and considers just about every type of capital asset that you can think of. for the most part and it has developed based on how it categorizes things and its equations. What should be the useful life of all these different types of depreciable assets? land when I purchase is a capital asset but it's not a u asset classification that allows it to be depreciable and in fact it is under nor from an economic standpoint is typically an appreciable asset. All right. So, all that being said, we get to now tax depreciable uh capital assets under Internal Revenue Code. We immediately fall into two major categories. Most of the all of this falls under makers. And then we've got GDS and ADS. Okay. Most farms are using GDS, but there are some farms that used to be required to use ADS. We're not going to get into that today. Um, but it typically keeps all of the assets in the same class types, but it slows down the um number of years that you depreciate the value of that asset out over. And so we may have a 10-year uh singlepurpose building like a greenhouse or a broiler house that under GDS has 10year uh depreciable life, but under ADS is 15 year. And there's a lot of reasons why we actually want to use ADS instead of GDS. GDS is oftent times overused and so we use that. And on a broiler house, I might have a 15year, 20 year or even 25 year loan out. But then I lose depreciation in year 10. And because of how everything works, year 11, I, you know, I I may have actually a profitable farm, but I may not be able to make cash flow. Why? because [clears throat] the depreciation that I was using was helping to offset some of my taxable income because that depreciation dollar value actually acts similar to a deduction. So it ends up lowering my tax liability and so which means it's lower and you know theoretically it's lowering my taxable income and so because of that it lowers the amount of tax I have to pay. When that's no longer there for an item that was quite expensive, then what ends up happening is um I have now potentially a higher taxable income. It's going to increase my taxes. And so those dollars that were hanging out there that allowed me to do other things like pay the principal portion of the um loan that I have from the bank, buy groceries and the like. And so now it is possible depending on every on all the other circumstances surrounding an individual in this particular scenario. It's possible that I may not have the cash because I had to pay taxes to be able to pay the bank or I might be able to pay the bank but not the tax bill and I may not even have enough money left over to be able to take a draw to buy groceries. So all of those things need to be taken in consideration. That's why tax management, you need to look way off into the future, what's happening, what's going on, and you really need to run numbers just not do things off your off the top of your head. You need to run formal financial acrruel adjusted analyses with this. So, you get an acrruel adjusted income statement, not a profit loss statement out of QuickBooks. You need to use the right software to be able to do the right things. And that's going to help play a role hopefully in the decisions you make for a tax management strategy purpose. And again, in many cases, what we end up finding out is using proper tax management strategies over the long haul, you'll end up paying less in tax liability versus trying to get out of paying taxes in general in any one year. Now all that being said, there is another category of depreciation that a lot of people will utilize and again it is significantly overused creating problems with not having carryover depreciation to be able to use in future years. And that's section 179 and or bonus or sometimes referred to as special depreciation. People will also call it rapid depreciation or accelerated depreciation. And so this allows me for section 179 um I can use I can take an asset value and I can take 100% of that asset value that I purchased this year and depreciate all of it in one year instead of carrying it over. Or I can take 50% of it or 25% or whatever you want. Okay? And that's how it works. And then next year I can do a little bit more if I wish that way as well while still having carryover from that as well until it runs out. Bonus depreciation will take all assets in a particular asset class 5 year, 7year, whatever it is that I purchase in that particular year and it will depreciate 100% of the value for all assets purchased in that particular tax year in that asset class. All right. Very restrictive, but allow but allows you to do that. You can actually work in both of these between each other. But technically, bonus depreciation is automatically turned on and set in the IRS's forms. And so you actually have to opt out not to use bonus depreciation [snorts] and be able to allow it to throw flow through using a straight line method or DB 2000, DB250. And what that means is I'm changing the equation that's used to determine how much value of an of that asset is going to be depreciated in year 1 versus year two versus three, four, five, and so on. All right, that's kind of what that refers to. All right, so a few more pieces of information with regards to depreciation is that section 179 does have limitations. All right. Once I purchase um $2,560,000 worth of um assets in the 2026 year, um you cannot use section 179 above that. So, if I buy $3 million worth of assets, I can't 179 all of it. I can only 179 up to 2,560,000. Well, what happens if I buy assets more than that? Well, let's talk about that. There's a phase out. So, if I buy 4 million 90,1 worth of assets, that $1 gets subtracted from 2,560,000. And so, if you wanted to section 179 100%, you can't because you're $1 over. So, what that means is I can go ahead and I get to go ahead and take [clears throat] $2,560,000 and I get almost all of that to depreciate out in one year. But since I went over in the purchases of equipment by $1 over that $4,90,000 with a I cut a check for $4,90,0001 that means I can only section 1792 $2,559,999 worth all right so the time that you get to spending if you spend on assets capital assets assets that are appreciable. 6 million $600,000 $650,000. You can no longer use any of section 179, but I can use bonus depreciation on 100% of the values. All right. Now, of course, there may be some slight differences of dealing with classifications. We need to make sure that all assets meet the appropriate classifications to be used with bonus depreciation and section 179 etc. All right. And so uh there are some special rules as it relates to short bed crew cab halfton trucks because most of the time most of those fall into um an S SUV category instead of a truck. So, you're going to be limited on section 179 on that particular truck and what you can do in the first year and then you're going to be allowed to amateurize the rest of it in future years or utilize it in section 179 in future years. And so, and a lot of that the first thing that really kicks in is the size of the bed. If you've got less than a sixft bed, you're immediately knocked out. You are not a truck, you're an SUV. And then if I've got a six-foot bed, it's got to fall in. They've got these slots dealing with weight classes. And so that can get a little bit tricky. And so that's something you need to work on with your tax professional if you have purchase that. Okay. So again, be careful on how much you use of this. Um be judicious. Typically, when I find people spending and trying to really push and use accelerated or rapid depreciation, usually somewhere between year five and year eight, we end up with some major cash flow issues. Um, and if it's not cash flow issues, we end up actually having to pay higher tax liabilities because we don't have similar or uh an appropriate amount of depreciation to help offset that. Okay. Income deferment. Income deferment is going to look different for everybody. And really what this means is I've got income coming into one year. Can I take it this year to be able to use for cash purposes but then defer it from being considered into taxable income? Or can I actually defer that actual income from even coming into my check? And there's lots of things that we might be able to do with this. So if I have a rowcrop farmer that actually markets their crop not in the year of harvest, but if I if a significant proportion of it, a majority of it falls into the next taxable year, but I had a bad year and so it triggered a crop insurance payment. And so if that crop insurance payment is coming from a certain category or type of insurance, I may be able to I may be able to uh defer the value of some of that from coming into me as income until the next year. And it's not going to be 100% of it. It's going to be a proportion of that. And that is something that we usually see when I've got a yieldbased crop insurance versus an incomebased income based you may not be able to do this. Okay. The other thing is with dairies during some circumstances, uh, we may work with the dairy co-op that's buying my milk and under certain circumstances, we may work with them to say, "Listen, um, let's redo these contracts of these last couple of months. Uh, um, each of the payments coming in for each of those months or just one and um, we need those to be deferred. You can go ahead and come and pick up the milk. Um but u within the contract I don't have access to that cash until I want those you know the last four payments to not come until January into that year and and that can be worked out and be made you know under [clears throat] as far as I know we're still allowed to do that. So those are some things to do with regards to deferment. There's a lot of other options and availability. You just need to work with the right people to make sure that hits. Next is retirement and college type accounts. And there's a whole slew. I've talked about IAS and 401ks, but there's a lot more than that that is out there. And I strongly encourage everybody to have a certified financial planner to be able to work with um to help you through some of these things to see where I can invest in and be able to receive a tax benefit. And so these are pretty common. And so when I put something into a 401k, when I put something into a traditional IRA or into a child or grandchild's college fund, I get to do that with money before I have to pay tax on that money. And so, for instance, as long as that child uses all of that, the dollar value within that account for colleges for college and education, nobody's ever going to pay taxes on that money. If I put it into a 401k, I don't pay taxes on it now. I am deferring that income. All right? really what's happening is I'm deferring the tax liability of that income because when I remove it out of the 401k that's when I'm going to pay it and the same for traditional. So, typically what we end up seeing is farms in good years to help offset some liability will max out uh traditional IAS and then when I've got a net loss or I'm in lower income tax brackets, I'm going to take the traditional IRA, I'm going to pay the taxes on that and roll it into a Roth account so that when I have to take money out of that Roth account at age of retirement or at maximum age where you are now required to take minimum distrib contributions, it's taxfree. Okay? And so I'm not going to be paying any income taxes on it at that time because I've already frontloaded it. And so those are a couple of things to consider. And there are many other options as well with regards to that. I strongly encourage you to do that. Now, many farms and others um will give money to the church at the end of the year and sometimes that could be relatively sizable. Um, however, if you're not itemizing, um, and even if you are itemizing, you're you may not be making or taking advantage of 100% of the cash value of what you've donated for it to reduce your taxes. And so, in many cases, if you do things the correct way, what we would do is donate to this group or organization the actual farm product that I raise. All right. And a couple of the key things here, again, we're not getting in the nitty-gritty, but these are the big ones. Um, you have to give them the commodity so that the risk of ownership and marketing is no longer on you. The risk of ownership and marketing must be on the organization you are donating it to. When do they want to market? How are they going to get it to there? Where, when, and where, and how is all up to them. And so you may call up the local church and say, "Hey, I've got a load of of of your corn here. Where would you like me to take it?" And they may ask you, "Well, where do you normally market it?" Well, I'd market my grain over here. Would you like me, you know, what would you like me to do? Well, you know what? Can you take that over there for me? Yes, I will donate my time and the value of what I've got into, you know, my repairs, maintenance, fuel cost, all that other stuff, and to be able to take it there. What I would like you to do to the organization that um you're donating this to, the commodity, you're gifting it to them, is you want them to make a phone call to where they would like it to be dropped off. and you tell them, "Listen, here's what it is." And they'll talk you through on what you would like to do. Do you want to keep this? Uh, do you want to do this or that, but it's up to you. And if you want to sell it, you're able to sell it right there. You're going to have to provide them with the necessary information so they can get the proper tax documentation sent to you and they will mail you a check or electronically deposited. You know, again, that's all dependent upon where it's being taken and and everything else. But the risk is on them. you drop it off, it's not yours. You're going to tell them there, hey, this is this is, you know, the the such and such Presbyterian church or Baptist church or this is for, you know, the Auburn University Agra business team. Okay? And then they're the ones that have to drive the directions of what to do with it and then the check goes to them. Okay? Now, what does that mean? that entire dollar value worth of product does not run through your checkbook. And if it doesn't run through your checkbook, it's not being counted as taxable income. And if it's not being counted as taxable income, you are not paying income tax or self-employment tax on it or any other tax on. Okay? And this is allowed through internal revenue code. But things have to be very detailed with regards to that. So please work with a tax professional on that. All right, two more major categories to talk about. We're going to talk about income averaging and then when we get done with that, we're going to talk about very briefly um estate gift tax. So, income averaging was started now um 30 years ago. Can't believe it's been that long ago. It is extremely underutilized. um a study about 23 years ago looked at almost 51,000 farms and said, "Listen, these folks, if they would have used this or do use this, um they would have averaged a savings of $4,434 per farm if they utilize income averaging." All right, that's about a 23% savings of what their tax liability was. To me, that's pretty substantial for me personally. So, I've done a couple of back of the napkin type things. Um, without having access to certain records, it becomes difficult to do a study on your own. But just doing some back of the napkins, you know, just even a few years ago, we were already in the $6 to $7,000 range for some of these folks. And again, it kind of depends on really groupings and a lot of these things, but it could be relatively significant. But regardless, if I can do something and save even a couple of thousand dollars, why would you not want to do that? And the only reason would be is for a tax professional to do income averaging requires um tax form schedule J. And that's what uh income averaging um gets filled out on. And of course, some tax professionals or many really will charge you by the form. And so, um, you want to know how much that cost is because if it costs $500 to do the form to to figure out the income averaging and the savings is only going to be estimated at $250, it doesn't make sense. Okay? But you've got to have some idea of some of those types of things up front. Um, so again, what this does is you're not amending a return. It has no effect on your self-employment tax. It doesn't change the amount of taxable income you have. All this income averaging does is it may be able to change the tax rates on some of the income for this year. That's all it does. It's going to look back year. It's going to look [clears throat] backwards to the three previous tax years and it's going to look at where the top ordinary income tax dollar fell into what marginal income tax bracket and if we've got a lot of space in lower income tax brackets. So, let's say I was in the lower to mid 12% income tax brackets for a number of years, and this year was a good year, and I'm in the 22% tax bracket. I'm going to take some of this year's cash and use some of the previous year's worth of those lower income tax brackets and save 10% money on that. Okay? Again, you're not amending a return. So, you're not hitting reset on what I'm opening up for audit or anything like that. I am just simply allowing myself to utilize some unused lower hopefully marginal income tax rates. That's all it is. All right? [clears throat] It's filed on schedule J. It allows taxpayers to utilize um unused tax brackets from the previous three years. If you have or you are a landlord, if you're a cash rent landlord, you are ineligible to use income averaging. Only farmers, commercial fishermen are allowed to use income averaging. However, if you're a crop share landlord, um you are allowed to use income averaging because typically your revenue or should be your revenue is going to be based off of the production of what comes out and you are sharing the risk of either expenses or marketing and all weather and all these other things which is what gives you the right to be able to utilize that income averaging. But you need to have a written agreement uh that is out there before farming the ground takes place um and definitely before the year of tax um or at early on. But regardless, it must take place. That agreement has to take place before plants go in the ground or or the animals are out on that ground uh utilizing it. Okay, so that's the biggest thing. And again that particular cash crop share landlord does not necessarily need to materially participate uh by offering driving the the the the tractor or doing any type of physical labor or even managerial labor for that matter. But it cannot be cash rent. If it's just cash rent that's being received, they're not allowed to get that. So now let's start diving a little bit more into income averaging and how it works. First, let's cover some very necessary definitions. All right. First is the election year. So, in 2026, we do our 2025 taxes. Okay? And so, um, what that would mean is I'm going to use my election year is going to be 2025 because that's the tax year I am wanting to income average out. My base years are the immediate preceding three years to my election year. So for a 2025 tax year and I'm using that as my election year, my base years are going to be 2024, 2023, and 2022. Then we have electable farm income. So electable farm income is refers to the income that is allowed to be income average. So if you've got income coming in off the farm, that does not count. You're not allowed to income average that. If you have a wedding venue and you rent that out, that is not considered farming activities. Therefore, it should not even be on your farm taxation. That should be on schedule C. That is not income that counts. That is electable. Okay. So, my farm income is going to be things like when I sell corn, feeder, feeder livestock, feeder pigs, um, and the like. It's not going to be capital assets, but some capital assets upon sale, if there's profit and there's gain, capital gains can also be income averaged as long as it's con appropriate um, farming considered farm income. And so again, that's why it's very important to work with a tax professional. Now, I might have electable farm income of $100,000, but given the situation, um, I really need to knock it down only by 30. So, I'm going to elect that $30,000 out of what? A total of a h 100,000 that is electable. And so my elected farm income in this case is going to be $30,000. Now that being said, I can't just take, well, I want 20,000 here and I want 1,000 there for that year and 5,000 in that last year. That's not that's not allowed. That $30,000. What then has to happen is you have to divide that by three. 30,000 divided by three is 10. So, I take $10,000 and I apply that to 2024, $10,000 to 2023, and $10,000 to 2022. You're not allowed to do a mix and match. All right? And again, you must be a farming business and you must refer to Internal Revenue Code section 263 big A little E number four to see what that means. Okay? So only farm income qualifies that's taxable income uh subject to self-employment um or the amount of self-employment tax itself. I'm a visual person. So let's take a look at this chart and um again concept is what is important versus what years I am referring to. So here I developed this you can tell in 2022 and we are in the election year of 2022 and in the election year of 2022 um I have an upper limit of my top the top of my 12% tax bracket 2022 married filing joint is $83,550. So, when I go to 110,000, that puts me approximately $26,450 into the 22% tax bracket. Okay, that's very important to understand. $26,450 is what would be taxed at 22%. All right, whereas of the remainder, $83,550 is taxed at 12%. All right. [clears throat] When I take a look at my base years, which are going to be 21, 20, and 19, the top of the 12% is a little bit less because those marginal tax rates um and the dollar values that they represent, the dollar values change from year to year based on a rate of inflation. So, you've got to be cognizant, understand that. And I talk about that a little bit in the first video. Now, so when I take a look at 2020, the top of the 12% is 80,250. When I look at 19, it's 78,950. All right? And so I decide to elect $30,000 to income average. So based on Internal Revenue Code and how income averaging works, I have to take that 30,000, I divide it by three, that's 10,000, and I have to apply $10,000 to 2021, 10,000 to 2020, and 10,000 to 2019. So when I add 10,000 to 2021 where I had $70,000, I add 10,000 to it, that gives me $80,000. That's still below the $81,050. So 100% of that I am now saving 10% money on that $10,000. So 10% of $10,000 is $1,000. So I've just saved $1,000 in tax liability by doing that right off the bat. Next 2020, I add $10,000. And that year I only had $65,000. So I add $10,000 there. and um that goes to 75,000. And so I still have a $5,250 hold back there that I can still use if I so wish. And so I've got another $10,000 that I just saved 10% on. And so that's $1,000. When I take a look at 2019, I'm at 72,000. The top is 78. When I add $72,000 to that, I quickly go to 82,000. So, I'm going to have some money that is going to be counted at a 10 at a 12% rate, and I'm going to have some money that falls into 22% rate. So, I'm going to have approximately um $6,000 plus some or just under some uh that's going to get treated at the um at 12%. So, I'm saving 10% on that value, while the remnant is going to be taxed the same dollar value that or percentage that it would have been in 22. So, there's no loss and there's no gain. And so, between this, I'm going to save about $2,600 in tax liability by doing this. And so this is one of those things that even if it doesn't save me money, I'm typically attempting and working with farms to do income averaging to create holes so that in future years if I end up in higher tax brackets, I hopefully have the three previous years, those three pre base years that are going to be lower, that allows me to move money in. Okay, so that is income averaging. So we are almost done. We're going to do two slides real quickly on federal estate taxes, which is really estate and gift taxes because they they have a symbiotic relationship with themselves. So, in 2026, um we have a upward limit of per person that I can gift up to during my lifetime or pass through my estate up to $15 million. Now, if you're married, essentially that's 15 and 15. So theoretically, a married couple can push through through their lives up to $30 million tax-free. And that means nobody's paying taxes on it, whether I gift it while we're alive or I wait until I'm dead and it passes through the estate. Okay, really basic types of things there. Um, pretty neat, but you know, we need to be careful. All it takes is one tax law to change and this could be reduced. If I was to cut this from 15 million to 7.5 million dollars, it's only going to affect less than 10% of uh of farms across the country, and I believe it's probably in that four to 6%. Um, I'd have to go back and take a look at that. I can cut this down by 60 70% and still affect very few farms out there. So, I'm not saying it's it's bad, but it's going to be have very difficult consequences to deal with for those farms that are in fact affected by that uh change and they don't have a proper estate plan to help prevent that from occurring. All right. Number two, we have spouses that can elect portability. So, if I was to pass away and I don't use any of my $15 million, um my wife um is able to essentially fill out a tax form or have the tax professional do it and say, "I'd like to use my deceased husband's unused portion of his." It's actually a um um exemption out there. Sometimes you'll hear me use the term exclusion. it's really an exemption um of what is happening. And so he didn't use his any of his exemption. So now my wife gets all $30 million, her 15 plus my 15. But her 15 since she's still alive, that $15 million will increase with a rate of inflation every year. So by the time she passes, she may have 18 million or 20 million or what have you. Or if there's a piece of legislation change, guess what? it may go down. So, she may have only seven and a half million, but she will still maintain my $15 million. Okay? Now, we don't have to worry about a black widow effect. She can't just keep knocking husbands off and marrying a new husband and then get portability from them. It doesn't work that way. And of course an important piece to remember um if I pass away with the estate with with assets in my estate and it gets passed through the estate there's a step up in tax basis to those that receive it and those that receive my assets. If my assets were used in a trader business like a tractor and on the date of death that tractor is worth $25 million and of course you need to go through and have everything appraised. the person that receives that through the estate will be able to depreciate that tractor out based on the fair market value of that. Okay. Now, I said that there's a symbiotic relationship with gifts and the estate tax. And so what this is what I mean by that. So in 2025 and in 2026, we have the same annual exemption for gift tax purposes. And so what that means is if I was to gift 10 different people, they don't have to be related. $19,000 each. That's $190,000 that I have just passed off as gifts. Nobody is going to pay taxes on that. Nobody. Okay. And it doesn't affect my lifetime limit today of exemption amount of 15 million. What happens if I give one person? I only give one person a gift of cash. Okay. And what happens if I gift them $20,000? Oh my goodness. So, here's what happens. That $20,000. The first $19,000 is free and clear. That extra $1,000. Um, since I went over the $19,000 exemption limit, we have to file a gift tax forms about one page. Not that big of a deal. and you have to work with your tax professional to do it. And the first $19,000 is free and clear. That other $1,000 I still don't have. Nobody has to pay taxes on it. But I no longer have $15 million left of my lifetime ex exemption amount. What do I have? I really have now 14 million 999,000 n Yeah. $99,000. Okay? So, you're taking 15 million, you're subtracting $1,000, whatever that remains, that's what you have left, all right, to use for the rest of your life. Once you reach to zero, any money that gets passed through as a gift while you're alive or passed through uh your estate is at death, you as the giver or you as the deceased who um has the estate, it is the estate that has to pay the estate tax on that. And in a very short period of time, it does not take much to quickly get up to 40% cost um for a tax. And so that can be relatively expensive. So you really want to make sure you are working on a good estate succession transition plan as early as humanly possible to make sure we know how we're going to be dealing with things. Okay. Some quick good practices. Find a tax preparer early. Don't do it during tax season. Once January rolls around, it's going to become difficult and increasingly difficult. Do it June, July, August. And then you want to meet with them. You I will usually say somewhere to before the last somewhere from about the last weekend of October um to I find it best midweek of december, no later than the second week of December. That gives you an opportune time to come up with some possibilities for some tax management strategies and for you to work those out before the end of the year. January, make sure you work with your tax person or if you do them on your own to get your 1099s and W2s out. And by January, February, you need to start providing records to your tax professional and so that an appropriate uh file tax return can be filed for March. There are some cases where we may have to wait, maybe eat a penalty, which is relatively minimal for most cases, and file in April or file an extension so that we have until October in most years to be able to do that. Don't overutilize special depreciation. And in fact, consider not even the regular depreciation, but slowing it out in some circumstances. Don't overuse prepays. Work with a team annually. Update your balance sheet. do a farm analysis every year. Here are some tax publications to review. Um as well as um utilize a tax estimator tool. Go to rural tax.org. Here are some additional links. Um Auburn also has some wonderful documents out there. So let's seek those out. And here is my contact information. And with that, I appreciate everybody's time. Thank you.