Tax tips: What and when to depreciate, and more, from the experts
Death and taxes are the two certainties in the world, and even though there’s no way to avoid them, there are some things a person can do to make paying taxes more bearable.
Michelle Patten, owner of Patten Bookkeeping and Consulting in Broadus, Mont., has a few hints and tips that might be helpful to ranchers.
She says there aren’t any major tax changes this year. “There are changes every year, but this year’s are minimal, so that is nice.”
She does have some advice for producers involving depreciations and doing paperwork.
“My number one tip is to ensure that you aren’t depreciating to the point where you have to maintain purchasing a large amount of assets every year to reduce your income,” she said. “If, one year, you have extra profit and purchase $150,000 in machinery when you wouldn’t normally, I wouldn’t recommend depreciating all of that, if you normally purchase $50,000 of machinery” in a year.
For an asset to qualify as depreciable, Patten said, it needs to meet the following requirements: it must be a property you own; it must be used in your business or income-producing activity; it must have a determinable, useful life, and it must be expected to last for more than one year.
There is no minimum price set on depreciable items, but most businesses will set a standard for accounting purposes, which can be anywhere from $500 to $2,500. Technically, any asset costing $2,500 and less can be expensed rather than depreciated per IRS regulations, Patten said.
President Donald Trump’s tax cuts in 2017 were welcome, but hidden in that law was a yearly increase in personal taxes, Patten said, affecting entities like sole proprietorships and LLCs, who pay taxes at the personal tax rate.
In 2017, the corporate tax rate was 35 percent. The next year, it was 21 percent, due to the cut. Trump’s tax cut “decreased (the corporate) tax rate substantially. Personal tax rates decreased as well, but will start to slowly increase again throughout the years. For that reason, you’ll pay less taxes now than you will at any time in the foreseeable future, she said.
For pass-through entities, “if you’re depreciating all your assets, that depreciation is better saved for future years when you’ll have a higher tax rate,” she said. “If you get in the habit of reducing your income with depreciations, you’re almost setting yourself up to need to depreciate every year, and you keep buying because you get used to not paying any income tax.” Pass-through entities don’t pay income tax at the corporate level. Corporate income is allocated among the owners, and income taxes are paid at the individual owners’ level.
Another way to save money in taxes is to establish a health savings account. Known as HSAs, the common misconception is that they can only be set up if a person has health insurance with a high deductible. The deductible isn’t that high, Patten said, noting it is $1,350 for an individual and $2,700 for families.
HSAs, unlike IRAs, have a “triple tax benefit,” Patten said. “You don’t pay taxes on the money you put in your HSA, and you can invest it in stocks or bonds or put it in an interest-bearing account, with tax-free growth,” she said. “You can also withdraw money at any time to pay for qualified medical expenses without having to pay taxes.”
Most banks, including small ones, are able to offer HSA accounts, Patten said. “I always recommend them to my clients.” For the tax year 2019, individuals can contribute up to $3,500 in an HSA; for a family, it is $7,000.
HSAs can be used for non-medical purposes, with a twenty percent penalty and a lid on how much can be withdrawn, depending on age. For those forty years and younger, $420 can be deducted. For ages 41-50, $780 can be withdrawn. For ages 51-60, $1,560 can be withdrawn, and for ages 61-70, it is $4,160. For those 71 and older, $5,200 can be deducted for non-medical purposes. Any additional withdrawals are taxed. The twenty percent penalty does not apply for those ages 65 and older.
Rusty Knuths, a Montana rancher and CPA, grew up on the family farm and ranch, went to college, then worked at a CPA firm in Miles City. When the opportunity came to buy a neighboring place, he came home to ranch. He takes care of his family’s finances.
Planning is one thing Knuths wishes producers would do more of. “The main thing I stress is that it’s very important for people to plan, not only at year end but year round,” he said. “That way we can help them in making the timing of when you receive your income and when you pay certain expenses work to their benefit, as far as taxes go.
“Every operation is unique, but if I could stress one thing, it’s planning throughout the year with their CPA or accountant so there aren’t any surprises when tax time comes around.”
Patten says her biggest piece of advice is something that benefits all producers. “Bookkeeping best serves your business when it is completed on a monthly basis,” she said. “Please don’t wait till April to do your bookkeeping.”
Some people put off bookkeeping and finances, which isn’t heathy for the ranch or farm. “It is so important to have that (financial) information,” she said. “Reviewing your monthly financial statements will give you the information you need to make business decisions.” Having the financial data is important. “If you’re putting it off, it won’t get done as well and as often as it should be. You’re doing your business a disfavor by not getting it done.”
She realizes that not everyone enjoys doing bookwork. “If bookkeeping is not your deal and you don’t look forward to doing it, it’s best to do it right away in the morning. Pick one day a week, when your mind is fresh and you can give it your full attention. What really causes stress is when people have been working for twelve hours, and they come in, and say, ‘I have to sit down at the computer and work.’”
Not knowing where the finances stand till tax time is one of the biggest problems Patten sees with her clients, the majority of whom are in the agricultural world. “The biggest problem I see is that they are overextended on their loans and they don’t have a plan for how they will get that debt paid off and how they will pay taxes. It’s been a few hard years for the ag business and people are suffering. It’s just nice to get those numbers out. Those numbers can be scary to realize how much money you owe. Knowing those numbers gives you the power in the business and helps you make a plan to get out of that hole.”
She also advises that people turn to professionals. “Don’t be afraid to ask for help. I know farmers and ranchers are so independent, they think they need to do it all.”
Patten speaks the truth to her clients. “I won’t lie,” she said. “They get a lot of tough love from me. I’m not afraid to tell them like it is, or say, ‘what the heck were you thinking?’ I’m a professional and I’m nice about it, but they’re used to getting the God’s honest truth from me.”