Farm incomes fell off a cliff last year and things have not improved in 2024

The back end of 2023 saw a day of reckoning when the income tax liabilities for 2022 became due, writes agricultural accountant and farmer Kieran Coughlan.

We are fast approaching this year’s tax return deadline, and the downside of having elected into income averaging is that those farmers will once again face an ‘average’ tax bill, even though 2023 was a shockingly bad year by any yardstick.

The news was out this past week that farm incomes fell off a cliff in 2023. For farmers and the accountants who deal with farmers, this is not a surprise. Fast forward to the present and farmers' incomes are still very much under pressure, seven months into 2024.

Although farm prices have stabilised and improved a little in some quarters in 2024, and equally on the farm inputs side there is relative stability, the extended Spring and poor growing season is causing a significant drag.

Anecdotally merchant credit is running at around 15% higher than normal and spare cashflow for expenditure on assets and farm improvements is scant.

All of the main farm sectors saw profits drop, notably tillage farm income dropped by 71%, dairy farm profits reduced by 69%, sheep farming by 22% and cattle farming by 15%-19%. Whilst 2022 profits were exceptional, many farmers used the opportunity presented in that bumper year to upgrade farm buildings and machinery and in many cases to reduce farm debt, clear overdrafts and stocking loans and merchant credit.

The National Farm Survey highlighted that of the farms with debt, debt levels across all different farm debts had dropped from 2021 levels and this is also acknowledged within the banking sector.

For many farmers, having used the bumper year to shore up their farms, the day of reckoning came when the income tax liabilities for 2022 became due for payment at the back end of 2023. 

Higher than normal tax bills and lower than normal profits as are now clearly understood from the National Farm Survey soaked up much of the spare cashflow left over from 2022 and in some cases left farmers facing back into debt in order to settle their tax liability in October 2023.

For some farmers, the option to enter income averaging was the only show in town as the explosion in farm profits in 2022 caused many farmers to be exposed to income tax at rates of up to 52% on a significant portion of their income.

Opting into income averaging, if not already in averaging, threw these farmers a lifeline by giving them the capacity to pay tax on average profits rather than the exceptional profits earned in 2022.

We are fast approaching this year’s tax return deadline, and the downside of having elected into income averaging is that those farmers will once again face an ‘average’ tax bill, even though 2023 was a shockingly bad year by any yardstick. One of the permanently good outcomes that can be achieved by averaging though is where profits get shifted from years where a farmer would otherwise be exposed to tax at the top rate of income tax to years where their income falls into the lower income tax bracket.

One option that is available to farmers who have signed up for averaging is to step out on a temporary basis for just one year.

By way of example say a dairy farmer has average profits of €80,000 each year, and in 2022 farm profits rise to €130,000 dropping to €50,000 in 2023.

Under averaging, the farmer will have paid tax based on average profits of €90,000 for 2022, with that tax being taken in October 2023. For a top-rate taxpayer, the savings from averaging in this instance would be more than €20,000 for the year 2022.

Taking this example further, for year 2023 the farmer's average profits will €84,000. Absent of averaging the taxable profits would be based on what is actually achieved in that year of €50,000. Marking a reversal of fortunes, for a top rate tax payer the extra ‘cost’ of having has one's farm profits assessed under averaging for year 2023 will be north of €16,000 in this example.

The overall saving from being in averaging is still positive but the problem is that farmers now mid-way through their second poor year are suffering and can’t really stomach an average tax bill for the second poor year in a row.

The step out provisions give a breather and a farmer could save more than €16,000 by stepping out of averaging for year 2023, but the catch is that any tax savings achieved by stepping out become payable over the next 4 consecutive years.

Farmers who are under pressure should consider all options when it comes to addressing cashflow issues. Whilst stepping out of averaging is one such item for consideration, on a wider context pausing repayments, tackling costs aggressively, selling unused machinery and farm cashing in pensions and investments are other options that should be explored.