Farm Tax Q&A: Net Operating Loss

In this brief column we answer a burning question on our clients’ minds concerning farm tax issues.

Question: When is it advantageous for me to realize a net operating loss in my farming operation?

Answer: With much of agriculture expected to experience a drop in income in 2016, the current situation offers some planning opportunities. The last several years have provided for some of the best years to date for many farmers, which means the increase in deferred income and in the amount of prepaid expenses has typically grown as well. It could be a good time to smooth earnings and recognize some of that income that has been deferred year after year.

Typically it’s best not to create a loss by prepaying and buying additional equipment. It’s better to utilize the lower tax brackets and any itemized deductions or tax credits available to you. If you do find yourself in a loss position, there are some advantages for farmers.

A farming net operating loss (NOL) is eligible to be carried back five years rather than two. If it is more advantageous to carry the NOL two years instead of five, you can elect to forgo the five-year carryback and use the two-year carryback instead. This gives you the opportunity to maximize the benefit of the NOL and increase the amount of cash flow to help offset the loss.

For more information contact Tommy Irvine at tommy.irvine@kcoe.com.


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