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Farm management specialist says complex taxes for farmers are a 'mess'

Charles Brown

Iowa State University Farm Management Specialist
Charles Brown Iowa State University Farm Management Specialist

Farmers have to worry about the price of seed, fertilizer, herbicides, pesticides and all manner of other inputs when planning their year, hoping their revenue exceeds their expenses.

Another expense they have to consider is taxes. Iowa State University Extension and Outreach Farm Management Specialist Charles Brown, who oversees 12 counties in southeast Iowa, said that there is at least one tax Iowans don’t have to worry about, and that is a sales tax on farm equipment. That’s not true for other states such as Nebraska, which has a sales tax on farm equipment.

The Iowa Department of Revenue’s website has a long list of the sort of things farmers must pay taxes on and which things are exempt. Brown said that figuring taxes for farmers is pretty complicated, and he remarked that a lot of tax preparers won’t do farming tax returns because of their complexity.

He said that one of the issues is how depreciation is calculated. Depreciation refers to the decrease in value of an asset over time. For instance, farming is an endeavor that requires significant capital investments in things like machinery and grain bins. After purchasing those items, they depreciate in value, which in turn affects net farm income, and that’s what farmers are required to pay taxes on.

“Farmers have some choice in how machinery is depreciated,” Brown said. “Buildings, grain bins, breeding livestock, field tile, all of that can be depreciated. Farm land cannot be depreciated. It doesn’t wear out if you take care of it.”

Unfortunately for farmers, there are myriad laws about how much value they can write off when depreciating an asset. The state of Iowa and the federal government have not matched their regulations, so farmers have to use one set of rules when doing state taxes and another set of rules when calculating federal taxes.

“It makes a mess of things,” Brown said. “It gets to be an obstacle.”

The Iowa Department of Revenue states that self-propelled implements are generally exempt from taxes, as are any auxiliary attachments that improve the efficiency of the farm machinery or equipment. Even non-self-propelled machinery or equipment can be exempt from Iowa sales tax if it is used primarily for dairy or livestock production.

Farmers do have to pay a one-time registration fee of 5 percent on vehicles such as camping or livestock trailers, but vehicles used primarily for agricultural production (such as tractors or combines) are exempt from this fee.

This past legislative session, the Iowa Legislature made changes to taxes that impact farmers. One of those was enhancing the Beginning Farmer Tax Credit Program. The new law strengthened a program that faced significant cuts in 2018. Under the new law, the Iowa Finance Authority may issue up to $12 million in tax credit certificates each tax year, an increase of $6 million under the 2018 law. The program provides tax credits to eligible Iowa taxpayers who lease agricultural land to qualified beginning farmers.

The Legislature also passed House File 778, which protects and enhances capital gains deductions for the sale of farmland into the future and removes disincentives to sell farmland. The Iowa Farm Bureau Federation wrote on its website that the measure is a welcome change to tax law.

“Transitioning the family farm to the next generation is a challenge, but it’s a common goal of Iowa’s farm families,” said IFBF President Craig Hill. “Easing the burden on farm succession and transitioning to the next generation ensures opportunities critical to the sustainability of Iowa agriculture and rural communities. We are grateful the Legislature recognized and took important steps this session for our beginning farmers to remove some hurdles to farm transition, while protecting taxpayers.”