tax incentives for farm businesses - university of...
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Tax Incentives
For Farm Businesses
Parman R. Green UM Extension Ag Business Mgmt. Specialist
111 N. Mason
Carrollton, MO 64633
(660) 542-1792
[email protected] http://agebb.missouri.edu/agtax/index.htm
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Business – Tax Strategies
Section 179 - “expense capital expenditures”
First-year Bonus Depreciation - “economic stimulus”
Domestic Production Deduction - “must pay wages”
Long-term Capital Gains - “can’t beat free”
Medical Expenses - “hire your spouse”
Home Office - “a business should have an office”
Travel - “make it a business trip”
Education - “put your child to work”
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Business of Farming - Not Schedule F Instructions
File Schedule C (Form 1040) instead of
Schedule F if :
(a) Your principal source of income is from
providing agricultural services such as
soil preparation, veterinary, farm labor,
horticultural, or management for a fee
or on a contract basis,
or
(b) you are engaged in the business of
breeding, raising, and caring for dogs,
cats, or other pet animals.
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Hobby or Business? factors IRS will look for:
business-like
time and effort
depend on the revenue
circumstances beyond the taxpayer’s control (losses)
operation changed over time
knowledge
profit in similar activities
appreciation of the assets
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Presumption of “For Profit”
General Rule:
Report profit at least 3 of last 5 tax years
Breeding, Training, Showing, or Racing Horses:
Report profit at least 2 of last 7 tax years
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Section 179
Maximum Section 179 is indexed:
$500,000 for 2011
$139,000 for 2012
Limits amount for SUVs (between 6,000 to 14,000 lbs)
$25,000
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Section 179
2011:
Section 179 limited for investments over $1,000,000
$1 for every $1 over $1,000,000
2012:
Section 179 limited for investments over $560,000
$1 for every $1 over $560,000
First-year Bonus Depreciation
Percentage: 50% for 2012 (100% for 2011)
Qualifying Property:
MACRS property with recovery period of 20 years
or less
Acquired during 2012
Original use commences with taxpayer
Dollar Limit: None
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Domestic Production Deduction
Provides for a deduction to help offset the
repeal of the Extra-Territorial Income
Exclusion
Deduction is 9 percent for 2012
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Domestic Production Deduction
Acronyms to Know
DPAD - Domestic Production Activities Deduction
DPGR - Domestic Production Gross Receipts
MPGE – Manufactured, Produced, Grown, Extracted
(qualifying domestic activities)
QPAI - Qualified Production Activities Income
QPAI = DPGR - COGS - Expenses
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Domestic Production Deduction
Limited to lesser of :
9% Qualified Production Activities Income (QPAI)
9% of Taxable Income (entity) or AGI (individuals)
50% of W-2 Wages
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Domestic Production Deduction
QPAI :
For most farmers the QPAI will be the sum of
their Schedule F net income and the gain
from the sale of raised breeding, dairy, or
draft livestock reported on Form 4797.
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Domestic Production Deduction
Excluded Income:
Sales of purchased draft, breeding, or dairy livestock
Sales of land, machinery, or equipment
Patronage dividend if coop allocates DPAD
Contract animal production (animals not owned by taxpayer)*
Custom hire income*
Direct Payments (CCC)*
Transportation activities*
* 5% Safe Harbor Rule
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Domestic Production Deduction
Wages paid do not include:
Wage paid in commodities
Wages paid to your child under age 18
Compensation paid in non-taxable fringe benefits
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Long-Term Capital Gains Tax
Federal rates: generally, 15% or 0%
Exceptions:
Gain on collectibles 28%
Unrecaptured Section 1250 gain 25%
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Long-Term Capital Gains Tax
15% or 0% ?
15% - if the regular tax rate that would apply is
greater than 15%
0% - if the regular tax rate that would apply is
15% or less
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Medical Expenses - Business
Requirements:
Employ your spouse
Establish health reimbursement plan (Sec. 105 Plan)
Advantages:
Deductible as Sch F business expense
Avoids any Sch A itemized deduction limitation
Reduces self-employment taxes
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Health Savings Account
(HSA)
Tax Benefit:
Tax deduction for contribution
Tax-free earnings
Tax-free withdrawals for qualified medical
expenses
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Who Can Have an HSA
Any adult if they:
Have coverage under a “high deductible health plan” (HDHP)
Have no other first-dollar medical coverage
Do not participate in FSA or HRA that reimburses expenses before deductible amount of HSA is reached
Limited-purpose FSA or HRA
can pay for “other health coverage”, except L-T care
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High Deductible Health Plans 2012
Does not cover first-dollar expenses
Deductible must be at least:
$1,200 – self-only coverage
$2,400 – family coverage
Annual out-of-pocket expenses cannot exceed:
$ 6,050 – self-only coverage
$12,100 – family coverage
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High Deductible Health Plan
Example - George
Self-only coverage
$2,000 deductible (DED)
$6,050 out of pocket (OOP)
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High Deductible Health Plan
Example - George
Hospitalized for seven days:
$15,000 total cost
- 2,000 deductible (HSA or OOP)
= 13,000
- 1,950 15% co-pay (OOP)
= $11,050 paid by HDHP
George has now paid $3,950 of his annual $6,050
maximum out-of-pocket expenses.
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Who Can Have an HSA
Any adult if they:
Are not enrolled in Medicare
Cannot be claimed as dependent on
someone else’s tax return
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Health Savings Account
No earned income requirement
No maximum income limitation
No required distribution at age 70½
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HSA Contributions - 2009
Up to the amount of your HDHP deductible, but
not more than:
$3,100 – self-only coverage
$6,250 – family coverage
Age 55 or older “catch-up” -- $1,000
Thus, maximum for a couple both 55 or older is
$8,250.
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HSA Contributions
Can be made up to April 15th of following
year
Account holder gets deduction for
contributions to their HSA, even if someone
else makes the contribution
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Home Business Office
Must be used “Exclusively and Regularly”
As the “Principal Place of Business
Place to meet or deal with clients or customers
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Principal Place of Business
Must meet both:
Used exclusively & regularly for administrative or
management activities
Have no other fixed location where you conduct
substantial administrative or management activities
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Home Business Office Deduction
The following office expenses are limited if
business expenses are greater than business
gross income
Utilities
Insurance
Depreciation
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Travel and Meals
100% Deductible
Air, rail, auto
Lodging
Telephone
Dry cleaning
Tipping for any of the above
50% Deductible
Meals while traveling
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Travel
Outside United States:
Entirely for business – deduct all your expenses
Primarily for business – allocation between business
and personal activities
On Cruise Ships:
Deductible if:
Bonda fide business-related program on board
Majority of days are spent in program attendance
Ship is registered in the U.S.
Ship stops only at U.S. ports (or possessions)
Trip costs are less than $2,000
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Education Costs - Child
“Put them to work”
If farmer – gift them last year’s raised grain
Be aware of “kiddie tax”
Gift them appreciated stock
Be aware of “kiddie tax”
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Resources - Online
Farmer’s Tax Guide – IRS Publication 225 http://www.irs.gov/pub/irs-pdf/p225.pdf
Ag Tax Tidbits http://agebb.missouri.edu/agtax/
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Entertainment
Directly-Related Test:
Main purpose was the active conduct of business
You did engage in business
More than general expectation of getting income or some specific business benefit
Associated Test:
Associated with active conduct of business
Entertainment was directly before or after substantial business discussion
Deduction generally only 50%
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Wages Paid In-Kind
Fundamental Principles:
Payment not in form readily converted to cash
Employee must exercise dominion and control
over the payment
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IRS Guidelines – Wages Paid In-Kind
Commodity Identified
Documentation of Transfer
Not Intended to be Substitute for Cash
Employee - Negotiates Sale
Employee - Risk of Gain or Loss
Time Interval Between Receipt and Sale
Employee – Bears Cost of Ownership
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Observations –– In-Kind Wages
are considered compensation for purposes of
IRA contributions.
are not considered “wages” for the earnings test
in retirement.
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Reporting –– In-Kind Wages
Employer:
FMV included on Sch F as income
FMV included on Sch F as “Labor Hired”
FMV included on employees W-2 as federal and state wages,
but not as Social Security wages.
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Reporting –– In-Kind Wages
Employee:
FMV included on Form 1040 as W-2 income
Non-Farmer:
Gain or Loss from Sale included on Sch D
Farmer:
Sale Proceeds & FMV Included on Sch F as Income and COGS,
respectively
If fed: FMV Included on Sch F as “Feed Purchased”
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Wages – FICA Paid by Employer
Employees share of FICA taxes :
counts as wages subject to income tax
not counted as wages subject to Social Security
& Medicare taxes
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Wages – FICA Paid by Employer
Example : Employer pays employee’s share of FICA taxes on wages of $10,000. W-2 Box 1 Wages, tips, etc. $10,765
$10,000 x 1.0765
Pub. 225 – Social Security & Medicare Taxes
W-2 Box 3 Soc. Security Wages $10,000
W-2 Box 5 Medicare Wages $10,000 (this example assumes the employee withholding is 7.65%)