Cattle Journal 2023: Timely record keeping, tax planning contribute to less stressful tax season
There are a couple of guarantees when the new year rolls around.
It’ll be cold out. Old Man Winter is digging in. Spring calving is around the corner.
And tax time is looming.
Tax preparation doesn’t have to be something to dread. A little prep time, some record keeping, and a bit of knowledge will make the process less painful and easier, according to area tax preparers.
One of the main focuses when preparing for your tax accountant is record keeping, says Jamie Thybo, owner of Northern Hills Business and Tax in Sturgis, South Dakota.
No matter what style of record keeping, she likes to see documentation. “I just like to see a set of records, whether it’s paper or pencil, Excel, Quickbooks, Quicken, or anything like that,” she said. “I just need to see a set of numbers put together.”
There are different options for keeping books, she said. Some computer programs allow a person to take a cell phone picture of a receipt; the program automatically enters the expense.
For Thybo, it doesn’t matter how records are kept, as long as they are recorded. “If you send me a pile of receipts, it’s hard to tell how much money is in there.”
Procrastinators beware: keeping up with the record keeping is important, too. “Whether it’s twice a year, or once a month, don’t leave it in a pile for the middle of February,” she said. “Maybe you catch up on a rainy day in the summer or a miserable cold day in December. “
Chris Fryzek, a partner with Dana F. Cole and Company in the Ogallala, Neb., office, likes “excess detail” on things, especially “anytime you’re selling capital assets, or when you’re buying and selling equipment.” Purchase contracts and sale barn sheets are helpful, too. “Make a copy when you get them and put them in the tax file.”
He stresses that the “one-sheeters” –the people who have summarized their information on one piece of paper – may not be helping themselves. “I’m not sure we’re giving people the best service in that situation.”
Repairs Versus Maintenance
One thing people may not understand with tax preparation concerns major repairs and maintenance of machinery and equipment.
The IRS has changed its regulations on capitalizing repairs.
Thybo said the IRS considers between $500 and $2,500 a “major” repair. Above that, the expense is “supposed to go on the depreciation schedule and be expensed out, over the useful life of the machine, versus taking the expense in the current year,” she said.
For a while, the IRS dictated that every repair over $500 should be on the depreciation schedule, “which was not reasonable,” she said. Since then, they’ve changed the regulation again, “letting us make an election to fit the individual operation a little better.”
In her clients’ paperwork, Thybo would like to see repairs split out. “If you spent $15,000 on a combine repair, and got parts at three different places, that’s different to me than taking a pickup to the dealership and spending $10,000 on it.”
Wearable parts, such as tires, can be written off in the year they are purchased, she said. “Oil filters, fuses, they are all wearable maintenance.” As for other things, like a new transmission, a new auger on the combine, “those things are repairing it to its previous, working state,” which would go on the depreciation schedule.
Fryzek has an easy way to differentiate between maintenance versus major repairs.
“Put or keep. If you’re putting something into shape, like a new transmission, it is capitalized. If you’re keeping it in shape, then that repair can be deducted.”
He gives the example, for a row crop farmer, of adding precision guidance to a planter. “That’s putting something into shape, not keeping it in shape,” and it would have to be capitalized as opposed to expensed.
Regarding major repairs, Thybo said a common error is immediate expense deductions versus capitalization.
The IRS has two avenues for deductions: Section 179, an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time, and bonus depreciations, an accelerated business tax deduction that lowers a company’s taxable net income and reduces its tax liability.
She uses the combine repair as an example. “If we put a new transmission in the combine, we can put it on the depreciation schedule, but we can take that whole expense this year as a bonus depreciation.
“Major repairs go on the depreciation schedule, to be expensed out over five to seven years. Section 179 or the bonus depreciation (two different strategies which can be used in the same way) allows us to have another option to take that in the current year.”
A common situation Fryzek sees is the “mailbox rule” –if one party wants to be paid in the current year, for a deduction, and the other party doesn’t want to make the payment till the new year, for income, they imply the payment was sent in the current year, but not received until the following year. “There are situations when people get creative in using the mailbox rule,” he said. If it happens between people who aren’t related, he and his tax office don’t question it. If it happens between family relations, “the IRS frowns on it.”
“We think there are better ways to do things,” he said. “It’s an easy audit area so we stay away from it.”
One change in the 2022 tax law is the child tax credit, Thybo said. The American Rescue Plan of 2021 increased the tax credit from $2,000 to $3,600 for qualifying children under age six, and $3,000 for qualifying children ages 7 to 18. The plan also made 50 percent of what was paid in daycare refundable, with income limits. Those credits will return to their original rate, Thybo said.
Fryzek noted that former president Trump’s Tax Cuts and Jobs Act will sunset in 2025, and ag producers should be aware of that. In two years, taxes may very well revert back to the standing tax policy with inflation adjustments, he said, which is a significant increase in income tax.
“The Trump tax rates are an excellent time to make money and pay down debt,” Fryzek said. If and when tax rates go up, “your check to Uncle Sam will be bigger, which means less money to pay down debt.” He suggested minimizing pre-paids and deferrals, to increase income. “You’ll pay more income tax, but we like the tax rates today. While tax rates are low, build some wealth now as opposed to continuing the deferrals during low tax bracket years.”
Both tax experts recommend having a retirement plan.
“I think it’s more and more important to look at retirement,” Thybo said. “For our parents and grandparents, the ranch was their retirement. They were going to live on it till they died, or sell it, or pass it on to their kids. The reality in this world is, that’s not always such a great opportunity.”
She suggests having an IRA. “There are also tax benefits for putting money away for later. It allows you to put it in as a tax deduction now. It will be taxed when you take it out (in retirement), but in theory you’ll be in a lower tax bracket then.”
Fryzek pointed out that retirement plans depend on the different types of ag operations. For the tenant-based rancher, who owns the cattle and equipment but not the land, they need to be investing in IRAs and have a retirement plan, “because there’s no way you’ll sell off a cow herd and the last calf crop and have enough money to retire on.”
For the generational ranchers, “the biggest flaw we see is that people aren’t aggressive enough in making and communicating the plan, for how we get the next generation involved, if they want to be involved.”
Be proactive, not reactive, Fryzek said. “Too often people let perfect get in the way of good when it comes to retirement and estate planning. If you want your ranch to expand generationally, those folks need to have an idea of what they’re putting their sweat equity into.” The world has changed, he noted, and the younger generation needs to be included in the conversation earlier.
Tax preparation doesn’t have to be painful, both experts agree.
“The longer you wait, the harder it is,” Thybo said. “And then you’re behind the eight-ball.”
“I can’t stress enough,” Fryzek said, “for being proactive as opposed to reactive. You’re in the driver’s seat when you’re proactive.”