Let’s explore some Tax Tips for Farmers. Podge is a good friend of mine and a client too. Back in my hurling days, I used to mark him in training and he in turn marked me too. Still have the scars on my back. War wounds he calls them. Young Podge is in employment and farms too. A beef farmer, he sells the animals after a year and reinvests some of the proceeds in new stock.
The issue for Podge is that his tax bills are a-risin’. Like the Bad Moon. We’ll look at ways we helped him minimise his tax bills over the years.
- Why tax bills are rising
- Income Averaging
- Letting Farm land
- Capital allowances
- Site sales
Why tax bills are rising
Podge’s tax bills are rising for a few reasons.
- All his tax credits and lower rate band are with his employment
- His capital allowances and farm building allowance have reduced
- Profits increased in 2022 compared to 2021
|Profits increase by||€12,000|
|Capital allowances reduce by||€4,000|
|Extra Taxable income||€16,000|
|Tax rate 50%||€8,000|
A call comes in from Podge. “Well, how are the taxes looking this year?”
Not good comes the reply. You owe €10,400. Silence on the other end of the phone. When he regathers consciousness, he manages to mutter the words. “Sure, I’ve never had a tax bill like that before”. I reply by saying that we need to sit down and have a look at it. We agree and young Podge finished the call with a classic quote.
“See what you can do about it. Sure, isn’t that why I am paying you those big fees for” We both laugh at that one.
Podge has put the challenge to me to see what we can do. Farmers have some tax advantages and some of these will help Podge reduce his tax liability.
Income Averaging helps farmers smooth out the volatility when taxing farming profits. A farmer can elect to have his/her profits taxed under income averaging rules. The first step is to check if Podge qualifies for this.
Averaging now applies for 5 years so did Podge have profits in the 4 tax years 2018 to 2021? Looking at the numbers while saying Novena’s at the same time, the man is in luck. The profits are
|31 December 2018||€8,000|
|31 December 2019||€17,000|
|31 December 2020||€20,000|
|31 December 2021||€18,000|
|31 December 2022||€32,000|
There are a couple of points to note here. In 2018 the profits were low at €8,000. That year Capital allowances reduced those profits to nil. Despite this 2018 is a year that qualifies as there were profits. If the profits reduce to nil, because of capital allowances or losses forward, it is ok to include that year. But if there was a loss it isn’t, and he couldn’t qualify for Income Averaging in 2022.
The second point is that profits must be on the “normal basis” for 5 years. In a commencement situation, Revenue assess profits in line with commencement rules. This applies for the first two tax years. So, those two years are not on the “normal basis”. As a result, it would be year 7 when a farmer could first apply averaging in a start-up case. If Podge started farming in 2018, then the first year he could get averaging would be 2024. And he had profits in all years 2020 to 2024.
Averaging is a result for Podge. His taxable profits go from €32,000 to €19,000.
Letting farm land
A few years ago, another farmer approached Podge about letting farm land. At that time, it suited him as he was busy with his job, the farm, and a young family. Plus, this land was away from the main farm, and he was aware of some potential tax relief too. The farmer looking to rent was trading in a company.
We made him aware of a few issues to look out for
- How long was the farmer looking to rent for?
- Were Podge and the farmer related or connected in any way?
- He would lose out on some Single Farm Payment as that would go to the farmer.
- What rent would he get? This would help decide how long the lease would be.
The rent would be set at the market rate of €200 per acre for 75 acres. So, €15,000 in total. We advised Podge to include the Single Farm Payment [now Basic Payment] in the letting agreement as he’d get an extra €2,000 for that.
How the relief works
You calculate your rental profit from the land letting as normal. Look at the income and deduct allowable expenses. From that you can get a deduction, up to a maximum limit, depending on the length of the lease.
|5 years or more but less than 7 years||€18,000|
|7 years or more but less than 10 years||€22,500|
|10 years or more but less than 15 years||€30,000|
|15 years or more||€40,000|
Based on the amounts Podge was happy to enter into a 5-year lease. Having a lease with a company was all good once they were in no way connected and the company is farming. For Podge the numbers look like this
|Tax saving 44%||€7,128|
|Tax cost – USC 8%||€1,296|
You are liable to USC on the rental profit and the tax relief applies to Income Tax & PRSI. The USC rate you pay will depend on your other income.
Podge has an old tractor that he bought back in 2008 for €40,000. He would have got Capital allowances of €5,000 per year for 8 years from 2008 to 2015. The capital allowances on the tractor reduced his taxable profits each year. In 2018 Podge wanted to replace the tractor. The new tractor would cost €70,000 but he’d get €30,000 as a trade in for his old tractor.
The bad news bit! This is a charge that increases your profits. Think 50% of the charge in extra tax. Where the sale proceeds exceed the tax written down value [twdv] there is a balancing charge.
|Sales proceeds of old tractor||€30,000|
|Tax written down value||€0|
Podge would get capital allowances of €8,750 on the new tractor [€70,000 x 12.5%] but a charge of €30,000 is a negative of €21,250. An additional tax cost of €10,600.
The good news bit. With the replacement option, he can reduce the cost of the new tractor by the balancing charge on the old one.
|Cost of new tractor||€70,000|
|Less balancing charge||€30,000|
|Capital allowances 12.5%||€5,000|
The effect of this is to spread the balancing charge out over 8 years.
Reduction in capital allowances is €3,750 per annum [€8,750 to €5,000] €3,750 x 8 is €30,000.
It was 2020 and Podge was on the phone enquiring about a site sale. Someone looking to move from Dublin back to an area where they grew up. The figure mentioned was about €70,000. The query was if any tax reliefs are available and what tax would he pay.
A farmer selling a site is disposing of an asset. The main concern for the seller is Capital Gains Tax [CGT]. Often, the question asked is how much will be left over after paying the tax.
For CGT the main reliefs are Entrepreneurs Relief [ER] and Retirement Relief [RR]. To get Retirement Relief you must be over 55 and that rules young Podge out as he’s mid 40’s. Thought he was older as he seems to be around forever! That brings us to Entrepreneurs Relief. This is 10% CGT where you qualify and not 33% CGT
ER doesn’t apply to disposals of development land. That begs the question. Is a site development land? The answer is yes if the value you get for it is greater than its current use value. Current use value is a value as farming land, assuming it isn’t used for anything other than farming. While the value of land is increasing, Looking at average land prices, you’ll find that an acre is about €10,000 to €15,000. Given the value of €70,000 for less than an acre there is no doubt the site is development land. The CGT costs would be
|Less costs legal, auctioneer||€5,000|
|Net Sales proceeds||€65,000|
|Less cost of an acre||€12,500|
|Net proceeds after tax & costs||€47,675|
While ER didn’t work for him Retirement Relief could work down the line. Provided he meets the conditions. It’s important to explore if he or his wife has any CGT losses. Or could they sell an asset at a loss in the same tax year as the site sale? Losses can move from one spouse to another once they are jointly assessed.
In Podge’s case, many of the tax reliefs available to farmers worked for him over the years. As Government policy changes the tax landscape mirrors those changes. For example, extra capital allowances are available for farm safety equipment and slurry storage. The use of limited companies is becoming more popular. Before going down that route it’s vital to ensure you maximise all the tax reliefs available. More money for you and less for Revenue. Or else in the words of Creedence Clearwater Revival
“I see trouble on the way
I see earthquakes and lightnin’
I see bad times today”
Do you want help to keep your taxes as low as possible? If so, Start here