Farmers' Income Averaging Regs Need to Be Clarified

February 8, 2000

[1] In 1997, Congress enacted temporary three-year averaging for farm and ranch income to protect agriculture producers from excessive tax rates in profitable years. In 1998, the provision was made permanent. Congress acted to insert fairness into the tax code to insure that disproportionate taxation of farm income didn't further stress farmers and ranchers already under economic distress.

[2] Farm and ranch income can vary greatly from year to year. Without the ability to average income over a period of time, farmers and ranchers can end up paying a higher effective tax rate than taxpayers with stable incomes with the same aggregate earnings. In years when agriculture production turns a profit, government over- collection of taxes reduces funds farmers need to weather the next economic downturn.

[3] On October 8, 1999, the Internal Revenue Service proposed regulations (REG-21063-97) for averaging farm income under section 1301 of the Internal Revenue Code. The proposed rules fail to make clear that "taxable income" in the farm income averaging formula may be a negative number. While no record of congressional intent exists on the issue of negativity, the purpose of this letter is to inform you that it was the intent of Congress to allow producers to average income for tax purposes over profitable and unprofitable years.

[4] Taxable income is defined in Section 63 of the Internal Revenue Code as adjusted gross income minus allowable deductions. When calculating using this definition taxable income may be a negative number. However, current instructions for income averaging that accompany Schedule J of Form 1040 require that taxable income cannot be less than zero.

[5] We view this interpretation as inconsistent with the intent of Congress and therefore recommend that the proposed IRS regulations be amended to clarify that "taxable income" may be a negative for the purpose of farm income averaging. Thank you for your consideration.

Burns/Kohl Income Averaging,