2014 Income Tax Webinar

Transcription

1 2014 Income Tax Webinar Charles Brown ISU Farm Management Specialist Expired Tax Provisions Above the line deduction for certain expenses of school teachers Above the line deduction for qualified tuition and related expenses Exclusion of discharge of principal residence indebtedness 50% bonus depreciation Reduction of Sec. 179 to $25,000 Tax free distributions(up to $100,000 for qualified account holders) from an IRA to a charity 1

2 Federal Depreciation 2014 Section 179 Expense election $25,000 maximum New & used equipment Tax years beginning in 2014 Only on cash boot paid 15 yr. property or less Only business assets(>50%), not rental Offsets business income & Section 1231 gain Can t be used on inherited assets or related party assets except between siblings Federal Depreciation 2014 Section 179 Expense election Phaseout starts at $200,000 of qualifying assets $1 for $1 $500,000 extended for 2014(Maybe) 2

3 Federal Depreciation % bonus depreciation Gone for 2014 unless Congress changes law Only available on new assets placed in service by 12/31/14 20 yr. life property or less Includes shops, machine sheds, pole barns Available for business and rental assets Cash boot and traded basis qualifies Can depreciate 50% of cash paid plus traded basis in first year Must elect out by class if not used Federal Depreciation % bonus depreciation Not available for business assets purchased from related parties Not available for qualified leasehold assets to related parties if 80% ownership test is met New grain bins or machine sheds leased to a related party would qualify Can create net operating loss (NOL) 3

4 Iowa Coupling 2014 In previous years Iowa Coupled with Federal Sec. 179 Did not couple with Federal bonus depreciation Deferring Crop Insurance Proceeds Can only defer income related to yield loss Must normally sell more than 50% of crop the year following harvest Revenue insurance is calculated on both price and yield Must allocate income between yield loss and price 4

5 Crop Insurance Allocation Deferral Table If Harvest Price Is: Lower Than Base Price If Actual Yield Is: Lower Than Guaranteed Yield How much can be deferred? Partial Lower Than Base Price Greater Than Base Price Greater Than Base Price Greater Than Guaranteed Yield Greater Than Guaranteed Yield Lower Than Guaranteed Yield None None There is no crop insurance claim in this situation All Crop Insurance Allocation Corn Soybeans Yield loss Spring Price Approved yield (bushels per acre) Corn $ 4.62 Production to count (bushels per acre) (-) Soybeans $ Damage loss (bushels per acre) (20) 0 Harvest price (x) $3.49 $9.65 Harvest Price Acres covered by insurance (x) Corn $ 3.49 Revenue loss from damage $0 $0 Soybeans $ 9.65 Price loss Greater of base price or harvest price $4.62 $11.36 Coverage Level Harvest price (-) $3.49 $9.65 Corn 85% Price loss $1.13 $1.71 Soybeans 85% Production to count (bushels per acre) (x) Acres covered by insurance (x) Guarantee Revenue loss from reduced price (+) $22,600 $9,405 Corn $70,686 Total Revenue Loss $22,600 $9,405 Soybeans $53,108 Insurance proceeds $886 $33 Harvest $ Counted % allocable to yield loss corn $0 / $22, % Corn $69,800 % allocable to yield loss beans $0 / $9, % Soybeans $53,075 Amount eligible for deferment $0 $0 5

6 Losses Due to Fire, Wind, Hail, etc. Reportable income if they are business assets Insurance income can be offset by cost of replacements Have 2 years from the end of the year in which the loss occurred to replace assets Deferred Payment Contracts Have multiple contracts Cash basis taxpayers can use for tax planning Can elect to pull back a contract into current year Has to be full contract 6

7 Gifting to Charity Donor gifts commodity to charity Charity sells commodity Donor reports no income Save SE tax and income tax if not able to itemize Corporations can also gift to charities No tax forms to file Can gift commodities raised in current year Charitable Contributions Must have canceled checks or receipts for all contributions If you normally can t itemize then double up every other year Same is true for property taxes and state income taxes 7

8 Sale or Trade? Will you pay less tax if you sell a piece of equipment or trade it? Joe and Mary Farmer MFJ with 2 dependents(children) Cost of new tractor is $135,000 Will allow $40,000 for old tractor if traded Can sell old tractor for $35,000 Income tax basis of old tractor is $0 Sale/Purchase Trade Net farm income before depreciation $ 100,000 $ 100,000 Sec. 179 $ (25,000) $ (25,000) Depreciation $ (11,770) $ (7,490) Net farm income $ 88,230 $ 92,510 Wage income $ - $ - Form 4797 gains $ 35,000 $ - Total income $ 123,230 $ 92,510 Adjusted gross income $ 116,480 $ 85,433 Income tax $ 13,782 $ 7,677 SE tax $ 13,499 $ 14,154 Total federal tax $ 27,281 $ 21,831 8

9 Sale or Trade? If sale treatment is desired, must structure sale properly to avoid like kind exchange Sell to different dealer than new purchase If selling to same dealer, do it weeks ahead of new purchase Purchase different type of machinery than machinery sold Paying with Commodities Saves SE tax Doesn t count as wages for FUTA Report as income and wage expense on Schedule F Issue W2 Employee reports wage income and additional gain or loss from sale of commodity Employee must have control and dominion over commodity before it is sold Follow the rules! 9

10 Wages Paid In Kind Documentation on employment relationship, compensation practices and transfer of commodities. Marketing of commodity must be done by employee, not employer. Employee must stand the risk of gain of loss Use quantity, or % of production Spouse must have separate checking acct. Wages Paid In Kind Employee holding period must be as long as possible Cost of ownership must be born by employee Identify noncash payment, use documents to show quantity, quality, grade, etc. 10

11 Wages Paid in Kind Cash advances will be counted as cash wages Immediate conversion will be counted as cash wages Sole source of income will add to the question of immediate conversion. A farmer receiving PIK and then selling the commodity could generate earned income on the additional income earned. Reducing Taxable Income(cash basis tax payers) Prepay expenses Use deferred payment contracts Pay all accrued interest Pay all accrued property taxes Defer crop insurance(if applicable) Accelerate depreciation Sec. 179 Fund retirement plans Double up on itemized deductions 11

12 Reducing Taxable Income(cash basis tax payers) Treat sealed grain as loans not income Average farm income over previous 3 years Prepaid Expense or Deposit? The absence of specific quantity terms. The right to a refund of any unapplied payment credit at the end of the contract. The seller s treatment as a deposit on their books (e.g., payment of interest). The right to substitute other goods or products for those specified in the contract. 12

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20 Thank you! 20