Don’t forget year-end tax planning
November 16, 2014
In 2014, yearend tax planning is going to be more important than it has been in previous years. When you throw into the mix high cattle prices, two years of disaster payments being received in 2014 from the 2012 drought disaster and the 2013 atlas blizzard, then tax law significantly dropping Section 179 accelerated depreciation from $500,000 in 2013 to $25,000 in 2014 and removing 50 percent bonus depreciation on new asset purchases it creates more of a challenge in tax planning. The following are some ideas to keep in mind when planning for 2014 taxes at year's end.
1. A farmer or rancher can prepay expenses such as feed, supplies, fuel, fertilizer as long as the prepayment does not exceed 50 percent of the total non-prepaid farm or ranch related expenses.
2. Income can potentially be deferred to the next year.
a. If your county was declared a disaster area due to drought or due to the atlas blizzard, you may elect to defer the excess income of calves or cows by means of a one year deferral (451(e) election) or a four year replacement deferral (1033(e) election) for breeding livestock. The excess that can be deferred is the amount that is in excess of the average number of cow or calf sales of the prior three years.
b. Defer income by not selling a portion of cattle until the next year.
c. You need to beware that merely not receiving the check until the following year does not defer income. Due to constructive receipt rules, if you have the sale barn hold the check to the next year it is still considered income in the current year of when the sale took place. If there is a contract in place for an installment sale then potentially the income is deferrable unless you have taken depreciation on any of the cattle sold then the depreciation portion is captured as income in the actual year of sale.
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d. LIP disaster payments are treated as if you sold the cattle, therefore, they may be deferrable. Whether or not the LIP payment is deferrable depends upon the three year average of cattle sold. Only the excess cattle sold would be deferrable.
3. The 1099 that you will receive for LIP payments received will not distinguish between dollars received for cows versus what you received for calves. Cows and calves are both taxed differently. Calves are subject to the Self Employment tax, where the cows held for breeding are not. So it is important for you to bring a copy of your FSA disaster payment application to your accountant when preparing your taxes, as it will have the breakdown.
4. Section 179 Accelerated depreciation has drastically been reduced from $500,000 down to $25,000. You can take advantage of the extra depreciation up to the $25,000 on capital assets purchased. Hopefully after the elections in November, congress will make a decision on whether or not the Section 179 accelerated depreciation allowance will be reinstated and if it will be made retroactive, however at this point in time we can't count on it actually happening.
5. Make sure you are taking advantage of the income averaging election. If you have income related to farm and ranch, you can elect income averaging. Income averaging is quite beneficial when there are low years and then a high year. By averaging the last three years of income in arriving at an "averaged tax," the actual tax may be taxed in a lower tax bracket than if you did not make an election. Also if you have income subject to capital gains, income averaging can help you leverage the 15 percent tax bracket depending upon the prior three years taxable income level. Individuals who are in the 10 percent and 15 percent tax brackets, capital gains are taxed at 0 percent. If you have capital gains and elect income averaging you can essentially have capital gains taxed at 0 percent if the average taxable income is in the 15 percent tax bracket. Income averaging does not work for land sales.
6. Make sure you are taking the gas tax credit for off road use of fuel or gas. You will need the number of gallons used for taxed fuel (un-dyed diesel or gas) that was used for off road purposes only, such as in tractors, four-wheelers and pickups.
7. If you have college age kids make sure you're taking advantage of the tuition credits.
8. If you are a sole proprietor reporting on a schedule F you can pay your kids under 18 a wage and not have to pay the FICA tax which is equal to 15.3 percent. Also if the child's wage is under the standard deduction the wages won't be subject to income tax. Keep in mind that the wages paid to your kids need to be for actual work done, it needs to be reasonable and age appropriate for the type of work the child is capable of doing.
9. If you pay wages subject to FICA tax through your ranch and you have a profit you are eligible for the Domestic Production Deduction which is nine percent of the gross production activities net income from the ranch but is limited to 50 percent of the FICA taxable wages.
10. If you have self employment income or eligible wages from work where there is no retirement plan you may be able to contribute to a deductible IRA (you can contribute up to $5,500 if under age 50 and can contribute up to $6,500 if age 50 or over and the deductible portion is limited to compensation such as wages or self employment income). There are also other plans such as a sole 401(k) that can also be beneficial in tax savings.