As the end of the year approaches, income taxes and income tax planning come to mind. Income tax planning is a tool that should be used to adjust your taxable income and your deductions in order to make your income tax liability more manageable.

Farmers should start with a good set of farm records that will accurately reflect the income and expenses of the farm enterprise. From these numbers and the deduction for the depreciation of capital assets, a preliminary net farm income for the year can be estimated. Comparisons should probably be made between the current year income and expenses and those of previous years. If the income is higher, determine the reason for the increase. Has more than one year's crop sale income been collected in the current year? Were government farm program payments higher than previous years? Was crop insurance income collected during the tax year? These questions might explain a higher gross income on the farm.

If more than one year's crop was sold during the year and it has increased income, a farmer might determine that he should pay more expenses to offset the additional income. Farmers are allowed to "prepay" expenses for the following crop year as long as the product is actually used or delivered. There are limits to be observed in the prepayment of operating expenses. Farmers commonly prepay seed, fertilizer, and pesticides before the end of the year in order to manage income.

If crop insurance payments were received, some of these may be deferred to the next tax year. If the income was received for damage to a crop that typically would have been sold in the following year, the crop insurance income can be deferred to the next year. An election is required to be attached to the tax return that describes the specifics of the crop insurance claim and payments.

Are the expenses to date similar to the previous year? If you typically pay for seed, fertilizer, or chemicals in the fall of the year, have you done so yet for the current year? Once this practice has been started it is difficult to shift those expenses back into the year of production unless one experiences a crop year with lower yields or lower prices that translates into a lower gross farm income. Opportunities to lower income might exist for farmers that have rented more land for the next year, by paying for some these expenses now but not receiving any of the income until the next year.

With the new tax bill of 2003, opportunities for depreciating capital purchases have been expanded. The limit for "expensing" of equipment using the Section 179 election has increased from $25000 to $100,000, for 2003. If a farmer purchases $100,000 or less in 2003, it is possible to use the entire amount of the purchases as a current deduction. For purchases of new equipment after May 5, 2003, a 50 percent accelerated depreciation deduction is allowed. This means that for a purchase of $20,000., a deduction could be taken for $10,000 and then the regular depreciation rates would be in effect for the remainder of the purchase cost. This 50 percent accelerated depreciation comes into play after the Section 179 election amount is used. The 50 percent rate is not required but does require an election on the tax return to elect out of the option. These depreciation changes offer several planning opportunities for farmers. Caution should be exercised in the use of extra depreciation if the farmer wants to maintain some depreciation for use in future years.

After the farm income has been determined and adjusted for the year, one should take a look at the remainder of "non-farm" income that might show up on the tax return. Will wage income, interest earned, dividends be similar this year? Will you have additional income this year that you have not had in the past? Did you sell a piece of farm equipment this year? Did you have more seed sale income? These income types might be quite variable from year to year and need to be determined for tax planning.

Farmers should be aware that their health insurance costs are 100 percent deductible for the 2003 tax year. This includes the health insurance costs of those individuals that are not eligible for a group plan offered through an employer. The amount that may be contributed to qualified retirement plans has been increased for 2003. Typically these contributions are subtracted from income as well save funds to be used during retirement. Check your plan and consult with your tax advisor to determine how much you can put into your plan for this year.

Some benefit will be seen by most taxpayers this year from the changes in the tax rates and the dollar amounts that fall into each tax bracket. The tax brackets for 2003 are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 38 percent. With the lowering of some of these percentages and the increasing dollars included in each bracket, some savings can be realized. The standard deduction and the personal exemption amounts are also larger this year for additional savings.

Tax planning is time well spent and could very well be one of your best returns of the year. Please visit with your tax preparer to determine the best strategy for your situation.

- Bob Daggett, FBFM Fieldman

Extension Marketing Specialist Darrel Good recently issued an outlook report entitled "The Tale of Two Crops," that certainly highlighted the differences in the 2003 corn and soybean crops. USDA projects the corn crop to be 10.2 billion bushels, which would be the largest U.S. corn crop on record. On the soybean side the U.S may be looking at a crop of 2.4 billion bushels, which would be the smallest crop in 7 years.

On the supply/demand balance sheet, world supplies of feed grains are down substantially from previous years. Although the United States has good supplies of corn, wheat and rice, world stocks are down approximately 90 million metric tons from last year. This would indicate a demand for grain, but there are questions about the ability of needy countries to pay for the grain. Soybeans, on the other hand, have a different supply scenario. South America has large stocks, farmers there are planting more acres, and their devalued currencies are more attractive to buyers. Worldwide, there does not appear to be a shortage of palm oil, canola oil, or soybean oil.

The one factor that could make a large difference in corn and soybean exports is the value of the US Dollar in relationship to the currencies of foreign governments. The Euro and the Yen have been strong since August of 2003. The stronger foreign a currency is, the more US grain that can be purchased.

Your question is, how does this affect my selling. FIRST, MAKE A MARKETING PLAN! Each farm operation is different in storage availability, income needs, and production costs. Begin by calculating your own cost of production. Then determine the price where profits begin. Finally, develop your marketing plan.

Historically, short crops reach their contract high during or shortly after harvest. Whether soybeans will follow history this year is unknown, but you should be aware of the tendency. For large crops the tendency varies for prices to peak during the year, so be ready to take advantage of them. When the price exceeds the price you identified in your marketing plan, be prepared to sell the grain or at least check the prices a minimum of four times a day. If the market is going in your favor hold on, and if it starts to fall off, sell. Don't hesitate to register a variety of sell orders with your elevator manager, if you cannot keep tabs on the market during trading hours.

- Paul Mariman, Farm Management and Marketing Educat

In November Small Farms Magazine held the annual Small Farms Conference in Columbia, Missouri. The conference brings together a wide range of agricultural entrepreneurs, equipment venders and trainers under one roof. This year's conference had exhibits on dairy goats, alpacas, small fruit farms, aquaculture, pasture chickens, low-line cattle breeds and specialty vegetable production just to name a few. Each seminar stressed that you must know your product, you have to know your market, you are always selling yourself to your customer, and you always have to continue to do it better.

Small farms rely on small slices of the populations or niches. These are the groups the large food chains either find to costly to serve or the population is too small to justify mass marketing to win them over as customers. Sometimes special niches come out of special dietary need of an individual, for example a child that is allergic to cow milk but can drink goat's milk. Some individuals are concerned about pesticides and will only eat organic food. Some farms work on the idea of getting people to come out for a day of fun and then sell products before the visitors depart.

All these ideas work around the idea of "value-added" to fill the niche. Value-added means providing more so you are increasing the perceived value of the product to the consumer. A good example of this is the individuals that raise the alpacas. They take the alpaca wool and either spin it into yarn themselves or have the yard spun for them. Then the yarn is made into scarves or gloves or other garments for sale. In this case, value- added also means a lot of extra work.

It's like the old saying, "If someone tells you it is a free lunch it means you are paying for it." Small farming for the most part is a life style. A very small percentage of small farms make large profits, however, the good manager makes a fair living and generally enjoys what he or she is doing. To that end, Extension in Macon County will be developing a Small Farms Center, designed to assist operators of small acreage enterprises, as well as farmers investigating alternative sources of farm income.

There is going to be a new service provided by Extension to those that request "Electronic News Clips." The "Electronic News Clips" are going to be items of agricultural interest that are late breaking, such as USDA Reports; Extension Announcements; dramatic swings in agricultural markets; and insect alerts. They will be sent via email on a non-scheduled basis.

The Extension Update and the Resource Review are also available in an electronic format and will continue to be published. The Extension Update is a weekly newsletter created by Extension in Macon County and The Resource Review is a monthly publication jointly produced by Macon County FSA, Macon County SWCD/NRCS and University of Illinois Extension. If you would like to get the "Electronic News Clips," Extension Update or The Resource Review in an electronic format, send an email to Pmariman@uiuc.edu. University of Illinois Extension will not sell your e-mail address, or use it in any way other than to provide information to you.

Many times the solution to an improving an issue is to educate and inform. Extension has been providing education and information since Abraham Lincoln signed legislation establishing Land Grant colleges. Most issues of concern are apparent and the need for more information on a subject is obvious. However, there may be issues or concerns that we are not addressing.

Please contact Paul Mariman by phone at 877-6042, letter at 2535 Millikin Parkway, Decatur 62526, or email at pmariman@uiuc.edu, if there is an agricultural issue or problem that you would like more information on. If you would like a noon or evening speaker, we will be happy to work with you. Extension is here to serve the people in Macon County.