Tax tips for Farmers

Farming has been one of the oldest trades to survive in Ireland, and with minimal profits to be made from this industry today; most farmers are in it for pleasure more than gain. However, there is potential to reduce gains made on your farm income by following these steps.

1. Employing family members.

You can employ a son or daughter to work part time on your farm. They can earn €9,150 in 2008 without paying tax. This saves you, the farmer €3,751 in tax if you’re in the 41% bracket or €1,830 if you’re in the 20 % tax bracket. You need to register as an employer, have evidence of payments and pay reasonable rate for the work involved. A young person between 14 and 15 years of age can be employed for light work whereas those 15 – 16 can work up to 37.5 hours per week.

2. Stock Relief

2008 is the last year farmers can avail of such relief. It can be used where the value of your closing stock is higher than the opening stock.

Take a farmer whose cattle stock went from €15,000 in January 07 to €22,000 in Dec ’07.

The difference in €7,000 causes the profit to rise by €7,000.

Stock relief can be applied at 25% on this difference (€7,000 x 25% = €1,750). This €1,750 can be used to reduce the farm profit and therefore the resulting tax liability.

3. Averaging Farming Profits.

The IFA negotiated the introduction of this system to help farmers cash flow in times where profits where high.

To qualify, the farmer must be trading for at least 3 years. He must also stay in the averaging system for 3 years.

The way it works is best explained with an example:

Profit year ended 31/12/07 €55,000

Profit year ended 31/12/06 €36,000

Profit year ended 31/12/05 €29,000

Total profit for the 3 years = €120,000

The average for the 3 years is €40,000.

The taxable profit for 2007 can be set at €40,000 which helps the farmer’s cash flow considerably.

Tax benefits will arise where profits are increasing but these benefits will be clawed back when profits are falling.

4. Young Trained Farmer Stock Relief

This is available to young qualifying farmers for the tax year in which the individual begins farming, and then for the next 3 tax years.

The relief is similar to that outlined in 2 above on stock relief except the young farmer can get 100% relief or €7,000 if you were to use the figures above.

Certain conditions as set by the dept of agriculture must be met to qualify.

5. Land Leasing Incentives.

Intense lobbying from the IFA has resulted in vastly improved incentives for farmers who no longer have the time/resources to farm their land can rent it out and receive big tax breaks. Here is a quick overview:

Landowners who lease out their land for a period of 10 years or more qualify for an income tax exemption of €20,000 per annum.

Leases of 5-7 years get €12,000 exempt and 7-10 years get €15,000.There is also Capital Gains Tax retirement relief provided certain conditions are met.

6. Limited company versus Sole Trader – income tax.

This is quite a complex area but a brief view of both options is as follows.

The rate of tax on trading profits is 12.5% for limited companies and you could pay tax up to 46% as a sole trader (higher rate including levies).

However, monies left in the company and not distributed (investment income), are taxed at 25% and after 18 months get a surcharge giving rise to a total tax rate within the company of 40%.

An article comparing both in greater detail will follow in this series.

7. Forestry.

Income made from forestry by individuals or companies are exempt from income tax.

Also, grant assistance for the establishment, management and re construction of woodlands is exempt from income taxes as is the premium.

However, income from commercial woodlands is reckoned for the purposes of PRSI.

NB The finance act 2003 provides from 1 Jan 2004 all profits or gains from items which are exempt from income tax must be included a tax return.

8. Capital Allowances on Motor Cars.

The new measures brought in this July to improve the carbon footprint of all of us, don’t just effect how much we pay for our cars and the road tax on them.

Depending on the category they fall into, a farmer buying a new car for his business may or may not be able to write off its full value.

Example 1.

Joe buys a new car for his farming business on 1st September 2008 at a cost of €22,500. It is a category B car. He is allowed write off €24,000 as this is the rate set for any category A B and C car regardless of its new cost.

Example 2

Mary buys a new car for her farming business on 1st September 2008 at a cost of €28,500. It is a category D car. She is only allowed write off €12,000 as this is the rate set for any category D car regardless of its new cost.

Cars falling into category F and G have zero allowances available.

9. Available investment grants

Don’t forget about the various grants available to farmers, aimed at improving farming techniques and ultimately making their business more profitable and self sufficient.

These include the 2006 Farm waste management scheme (finishing Dec 08) and the 2007 Farm improvement Scheme which re opened this year.

Contact the IFA for further investment grants which may become available.