Recent developments in farm taxation.

• Author: Phillips, Martin

Farm and ranch income can fluctuate widely due to market prices, the weather, change in supply and demand and a host of other factors. To protect agricultural producers from the corresponding wide swings in tax liability, the Taxpayer Relief Act of 1997 (TRA '97) enacted farm income averaging, which allows individuals engaged in the business of farming to compute their current tax liability by averaging farm income over the prior three years. While the TRA '97 initially allowed only farm income averaging for tax years 1998-2000, the Tax and Trade Relief Extension Act of 1998 (TTKEA '98) permanently extended this treatment.

Beginning in 1998, an individual engaged in a farming business can elect to treat all or a portion of his taxable income attributable to farming as "elected farm income." One third of this elected farm income is carried back to each of the three previous years, and the income tax is recalculated for those years. The current-year tax liability is determined by combining the producer's current-year tax liability (excluding the elected farm income) and the increase in tax liability for each of the three prior tax years (taking into account one-third of elected farm income for each year).

"Farm business" includes a trade or business involving the cultivation of the land or the raising and harvesting of any agricultural or horticultural commodity (such as the raising or harvesting of crops and trees bearing fruit) and the raising, shearing, feeding, caring, training and management of animals. "Elected farm income" means the amount of taxable income attributable to any farming business and includes gains from the sale or other disposition of property (other than land) used for a substantial period in the trade or business of farming. Income averaging is not available for estates and trusts and does not apply to the self-employment (SE) or alternative minimum tax.

NOL

The TTREA '98 provides for a five-year net operating loss (NOL) carryback period for farming losses. Previously, the carryback period was two years; the carryforward period remains at 20 years. The five-year carryback applies regardless of whether an area is declared a Presidential disaster area or the loss is attributable to a casualty or a theft. A farming loss is the amount by which farming business deductions exceed attributable income. (A farming business has the same definition as for farm income averaging.) A farming loss cannot exceed a taxpayer's total NOL...