Year-end tax planning
December 13, 2014
"You only have a few weeks to make a difference in how you're taxed for 2014," began Richard Reimann, partner at Lenhart, Mason & Associates LLC of Casper, Wyo. at the 2014 Wyoming Stockgrowers Association (WSGA) meeting in Casper on Dec. 2
He continued with a variety of short term tax planning ideas producers should discuss amongst themselves and with their accountant by year-end in order to offset the potential tax situation many are facing.
"A lot of people had huge years in 2014 with calf prices and drought money coming in. Even in this situation we don't want to create expenses, but rather accelerate expenses. Don't feel the need to spend a buck you don't need to in order to save 35 cents. There is nothing wrong with paying a little tax when the bulk is still in your pocket at the end of the day," said Reimann.
In regard to the drought money that came in this year, Reimann said it becomes taxable the year it's received, without strings attached, meaning it can be used to buy anything from feed to equipment.
"Back when the drought was bad this money was really needed, but they got to it this year, so you will need to spend some of that down to buffer the tax on it," he said.
Additional considerations should be made on federal grant funds, for example those received through a soil conservation district for a specific project.
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"That money is restricted to do that specific improvement, but it also reduces the cost of that improvement for depreciation. If the project cost $100,000, and the soil conservation paid $60,000, you only have $40,000 in a depreciable asset. The key is reporting that correctly to your tax preparer so you don't get love letters from the IRS in a year or two," said Reimann.
Considering the option to average income over the past three years that is available under IRS Schedule J for farmers, which ranchers are defined as, and fisherman, is another potentially meaningful option worth considering.
"This enables you to average all or part of your 2014 income over the last three years, and could make a meaningful difference in tax liability if your 2014 income was high, or one of your previous three years was low," said Reimann.
He listed solar credits as a more obscure provision that could also provide a tax benefit to any producers who utilized solar power in 2014.
"If you drill a new well or re-equip a well with solar power, that qualifies you for a tax credit of 30 percent of the cost of the solar equipment. It's a good provision, and if you've done such a project in the last year, be sure your tax preparer is aware of that provision and what you've done," said Reimann.
For producers who used a previous provision to defer taxation on gains from breeding livestock sold during the drought, Reimann suggested ensuring they are still within the two or four year window allowed to replace those animals.
Anyone dealing with an energy company and potential easement should be aware that permanent easements do qualify for capital gains tax, something Reimann said many people are not aware of.
"You have to look closely at the language in your paperwork and contract. If it is a permanent easement, those qualify under Section 1221, and typically capital gains will be at half the ordinary rate. Look at any easement closely and make sure you're treated properly," said Reimann.
Fairly considering what constitutes a contract laborer is another taxation area that should be treated with care according to Reimann.
"You'll need extra help when branding or shearing, and will pay some kids around $200 for the day – that's probably safe. But, be very careful about treating regular employees as contract laborers. The payroll taxes are a big risk, plus there is workers compensation. If you have someone working on contract and they get hurt and file a workers compensation claim, you will probably be wrong. If there is any doubt, of if you're not sure, that person is an employee," said Reimann.
Then there is the big question of what Congress will do in terms of the extenders bill, something that could make a notable taxation difference for farm and livestock producers.
"The latest and greatest is they haven't done anything yet, but both the House and Senate have bills ready, and in the last week the President has threatened to veto, so we have no idea where it will be," said Reimann.
Without a clear direction from Congress, Reimann said producers need to be prepared for some potentially serious changes in the event an extender is not passed.
"One is Section 179, where we can take an immediate write-off of new, fixed assets. In 2013 that limit was $500,000, today it is $25,000, and that is where it will remain if Congress does not act," he said.
Another potential change is the provision for bonus depreciation allowing the immediate write-off of half of a new asset. As it stands now, that is not on the table without the passage of the extender bill.
As for the general mindset he recommends, Reimann said producers should really look short term, meaning this and next year, as they make their year-end financial decisions.
"Consider both years – project next year as you run figures on this year. Sometimes if we defer that income or accelerate expenses, all we accomplish is making the next year worse. Consider your specific circumstances, get in touch with your accountant now, and do some planning. It will save yourself some money to know where you're going to be when tax season comes along," he concluded.