Steamboat Springs A new tax code allows agricultural producers to average three years of income on years of high profits to avoid being included in a higher tax rate.
The Farmers Tax Code was passed by Congress in 1997, but took three years to interpret by the Internal Revenue Service.
It was finally ratified last week.
The code allows agricultural producers to average their income gains and losses over a three-year period, shielding them from paying a higher tax rate.
The change is a "nice surprise for producers," said Pat Wolff, an American Farm Bureau Federation senior director of governmental relations, "especially since farmers can amend their 1998 and 1999 tax returns to take advantage of the new rules."
Doug Monger, newly elected to the Routt County Commission and a tax accountant, said having the ability to average income gains over a three-year period better reflects the type of living agricultural producers make.
He explained that earnings recorded annually don't always accurately show how much an agricultural producer is making in the long run.
Depending on the market, ranchers and farmers can show large amounts of income during a one-year period, which pushes them into a higher tax bracket.
However, the money made in those years is usually the bulk of the income over a two-year period.
Because of a hay shortage from the 2000 fall harvest, some local ranchers may be facing this type of situation and would benefit from the new tax code, Monger said.
For example, an agricultural producer who sold livestock at the National Western Stock Show last January shows that income in 2000. That same rancher may have to sell his livestock before the 2001 Stock Show because of the high cost of hay to feed the cattle through the winter and the good price for livestock right now. Monger believes that's the position several local ranchers are in
"They had to sell because of the market conditions," he said.
That means the rancher sold large numbers of livestock in 2000, which shows a higher-than-normal annual profit.
But the following year the income of the operation will be lower than normal.
Without the new tax code, that higher profit in 2000 could push the agricultural producer into a higher tax bracket, where a larger percentage of the extra income would be taxed, Monger said. That hurts the rancher, because essentially the business could be making less money over a two-year period because of selling early, Monger said.
With the new tax rules, ranchers will be able to average the incomes together, to get an accurate figure on their income and to make sure they are not getting over taxed.
But there's more that could be done, Monger said.
For example, if the tax code covered Social Security fees, agricultural producers would be close to being properly taxed all around, he said. The new law doesn't address Social Security taxes, however.
"It's specifically for farm income taxes," said Karen Salaz, director of information and media services for the Colorado Farm Bureau.
Ranchers preparing taxes for the 2000 season can use the new tax code.
Monger, who does tax returns for numerous agricultural producers in Routt County, said he hasn't been approached from a client interested in taking advantage of the tax code yet, but expects it to come into play after the first of the year.