Form 4797 Chapter 3 pp Agricultural Tax Issues

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1 Form 4797 Chapter 3 pp Agricultural Tax Issues

2 Form 4797 Page 85 Reporting of gains and losses on the disposition of business property. The collection point for gains and losses reported elsewhere.

3 Overview of Key Terms Page 85 Boot Deferred Gain I.R.C Property I.R.C Property I.R.C Property Listed Property Realized Gain Recognized Gain Relinquished Property Replacement Property

4 I.R.C Property Page 86 Net gain taxed as capital gain Net loss as ordinary loss List of 8 items Generally, sales & exchanges of business property Includes livestock if held for dairy, breeding, sport or draft

5 Holding Periods and Reporting Page 87 Cross-Reference between Forms 4797 and Form 4684, Section B (See Chapter 4) I.R.C requires a holding period for business assets Generally held for more than one year 24 months for cattle and horses 12 months for other livestock G/L reported on Form 4797, Part 1 Example 3.1

6 Example 3.1 Form 4797 reporting

7 Form 4797, Part II Part II is the collection point for transaction which do not qualify under I.R.C Ordinary Income and losses Example 3.2 Sale of Joseph s land before Practitioner Note: De Minimis Election

8 Other I.R.C Issues to consider Page 89 Excluded Property List of 4 items inventory, self-created capital assets Excluded Gain I.R.C Sale of property to related party who can depreciate it Know your relatives only 3 in this case Practitioner Note: I.R.C. 197 Intangibles

9 Nonrecaptured I.R.C Losses Page 90 Losses and gains in the same year are netted on Form Any net I.R.C gain in any of 5 years following a net I.R.C loss is treated as ordinary income to the extent of any of that prior nonrecaptured I.R.C loss.

10 Example 3.3 Recapture of I.R.C Losses Page 90 Year Gain Loss Capital Gain Ordinary Income Ordinary Loss Nonrecaptured 1231 Loss Carryover 2012 $16, $16, $ 7, $ 7, $15, $15,000 $15, $ 5, $ 5, $10, $ 4, $ 4, $ 6, $ 2, $ 2, $ 4, $ 6, $ 2,000 $ 4, $0

11 Example 3.3 Form 4797

12 Planning Pointers p. 92 If possible, generate 1231 gains first, then losses in subsequent tax year If 1231 gains, are infrequent, accelerate any loss to start the 5-year recapture period

13 Depreciation Recapture Page 92 This section focuses on I.R.C or 1250 property dispositions at a gain All gain is taxed as ordinary income up to the total allowed or allowable depreciation All gain is taxed as ordinary income up to the excess of depreciation in excess of S/L Similar ordinary income may arise due to I.R.C. 1252, 1254, and 1255

14 Form 4797, Part III Part III is the initial entry for those transaction which are subject to recapture rules. Held the required holding period Sold at a gain Each property disposed of has a unique column for reporting the transaction. and a unique row depending on recapture rule

15 I.R.C Depreciation Recapture Page 93 Ordinary income to the extent that the lower of 1. Recomputed basis, or 2. Amount realized Exceeds adjusted tax basis Or, gain is ordinary to the extent of depreciation (and other deducts see list of 18)

16 I.R.C Depreciation Recapture Page 93 Definition of I.R.C Property List of applicable property depreciable personal property, SP livestock/hort. bldgs, grain bins, silos, etc.

17 I.R.C Depreciation Recapture Page 93 Recomputed Basis Recomputed Basis is adjusted basis plus the adjustments made for depreciation, amortization and other deductions Generally, original cost

18 Example 3.4 Recapture Page 94 Sandy Pitt purchased a $120,000 loader in 2016 Elected out of Bonus Chose $10,000 for I.R.C 179 Remaining $110,000 MACRS, 5 year Sold in 2018 for $65,000

19 Realized Gain Calculation Selling price $65,000 Cost $120,000 I.R.C. 179 election (10,000) Depreciable amount $110,000 Depreciation 2016 $ 22,000 $110, % = 2017 $110, % = 35, ,560 $110, % ½ = Accumulated depreciation (67,760) Adjusted basis (42,240) Realized I.R.C gain $22,760

20 Form 4797 Reporting of $22,760 Gain

21 I.R.C Depreciation Recapture Page 95 Similar Rules as previously discussed, applies to depreciable real property However, single-purpose ag and hort structures, etc are I.R.C 1245 property by definition Gain in excess of straight-line depreciation is taxed as ordinary. The gain equivalent to straight-line is unrecaptured I.R.C gain and is taxed at a maximum of 25% (could be less).

22 Example 3.5 Sale of MACRS Farm Building Page 96 Red bought a farm building 7/1/2008 $100,000 basis to the building $20,000 basis to the land MACRS, 150% DB, 20-year property SOLD for $138,000 7/2/2018

23 Depreciation Recapture Calculation MACRS SL Depreciation Depreciation Amount 150% DB 20-Year Amount Year MACRS Rate % $ 3,750 $ 2, % 7,219 5, % 6,677 5, % 6,177 5, % 5,713 5, % 5,285 5, % 4,888 5, % 4,522 5, % 4,462 5, % 4,461 5, % ½ 2,231 2,500 Total depreciation $ 55,385 $ 50,000

24 Realized Gain Calculation Selling price of the building $110,000 Adjusted basis of the building ($100,000 $55,385) (44,615) Realized gain on the sale of the building $ 65,385 Selling price of the land $28,000 Adjusted basis of the land (20,000) Realized gain on the sale of the land 8,000 Total realized gain on sale $73,385 I.R.C recapture as ordinary income $ 5,385 Unrecaptured I.R.C gain (maximum 50,000 25% rate) I.R.C gain (maximum 20% rate) 10,000 Total realized gain on the sale of the building $ 65,385 I.R.C gain (maximum 20% rate) $ 8,000 Total realized gain on the sale of the land $ 8,000

25 Page 1, 4797 Reporting of the Sale

26 Page 2, 4797 Reporting of Sale

27 Like-kind Exchanges Page 99 Recapture Rules: apply if there is an exchange of property that is not subject to the same recapture rules. cause recapture income to be recognized at the time of the exchange.

28 Additional Information Page 100 Observation Real property with different recapture rules Practitioner Note Involuntary Conversion Law Change TCJA removed personal property from the like-kind exchange rules.

29 Property Subject to the Same Recapture Rules Page 100 Example 3.6 Exchange of I.R.C prop. Able Skeever traded land, each parcel had a bunk silo which was I.R.C property See Example fact pattern for details

30 Realized and Recognized Gains Fig. 3.9 FMV of silo #2 $ 85,000 Cash received 5,000 Amount realized $ 90,000 Cost of silo #1 $ 100,000 Depreciation 2016 $100, % = $ 10, $100, % = 19, $100, % ½ = 7,515 Accumulated depreciation ( 37,355) Adjusted basis of silo #1 ( 62,645) Realized I.R.C gain on exchange $ 27,355 Gain recognized (boot) ( 5,000) Deferred I.R.C recapture $ 22,355

31 Form 8824 for Example 3.6 Fig. 3.10

32 Form 8824 for Example 3.6 Fig. 3.10

33 Form 8824 for Example 3.6 Fig. 3.11

34 Recognized Gain Calculation of Silo #2 Sale price of silo #2 $ 90,000 Basis of silo #2 $ 62,645 Depreciation* 2018 $100, % ½ = 7, $100, % = 12, $100, % ½ = 6,125 Accumulated depreciation (25,890) Adjusted basis of silo #2 ( 36,755) Gain realized and recognized $ 53,245 Depreciation on silo #2 I.R.C ordinary income ( 25,890) Deferred recapture on silo #1 I.R.C ordinary income ( 22,355) I.R.C gain $ 5,000

35 Property Not Subject to Same Recapture Rules Page 104 Most buildings are I.R.C property However, sometimes gain is realized See list of non real property Example 3.7 I.R.C Real Property Facts illustrate building differences due to choices made relative to office bldg.

36 Summary of Like-Kind Exchange

37 Allocation of Relinquished Property to Acquired Property Fig Property Relinquished Property Acquired I.R.C I.R.C $100,000 of I.R.C property $75,000 $25,000 $400,000 of I.R.C property 400,000 $50,000 cash 50,000 Total $75,000 $475,000

38 Basis in Acquired Property See Observation: Exchanges of single purpose livestock structures for other type buildings.

39 Installment Sales Page 107 The installment sale method applies to gains from nondealer sales of property where at least one payment is received in the tax year after the year of sale. Taxpayers must meet four criteria to qualify. Easy to elect out (Practitioner Note)

40 Installment Sales Page 107 Taxable Gain Calculation Use IRS Form 6252 Must report depreciation recapture in year of sale Otherwise, gain or ordinary or capital depending on type of asset and holding period Contract must charge adequate interest

41 Example 3.8 Seller financing Page 108 Machinery Sale on installment Sold machinery line for $320,000 $100,000 down $44,000 annually for 5 years Plus interest Orig. cost: $290K, $200K Adj. basis

42 Gross Profit % with Depreciation Recapture Addback Page 108 Selling price $ 320,000 Adjusted basis ( 200,000) Gain $ 120,000 Selling price $ 320,000 Adjusted basis $ 200,000 Depreciation recapture 90,000 Adjusted basis for gross profit calculation ( 290,000) Gross profit $ 30,000 Gross profit $ 30,000 Selling price 320,000 Gross profit percentage 9.375%

43 Form 4797 Reporting Page 111

44 Form 4797 Reporting Page 110

45 Form 4797 Reporting Page 111

46 Form 6252 Result

47 Form 4797 Reporting Page 110

48 I.R.C. 179 Recapture Page 113 If use drops below 50% for business, taxpayer must recapture the excess depreciation as compared to MACRS without using the expense election. Example 3.11 Winnie has 40% business use, $5,058 recapture as ordinary and SE tax too.

49 I.R.C. 179 Recapture Calculation

50 I.R.C. 280 Listed Property Recapture Page 115 If listed business property use drops below 50%, then ADS straight-line depreciation is the depreciation allowable. Recapture of excess depreciation is required from prior years.

51 Example 3.12 Depreciation Recapture under I.R.C. 280F Rita bought a car for $34,000 in Business use was 70%, basis $23,800 $10,000 expensed under 179 In 2018 use drops to 20% for business. Recapture of 179 amount and MACRS depreciation

52 I.R.C. 280F Recapture Calculation Actual depreciation: Depreciable Basis MACRS Rate Depreciation Amount Total Depreciation I.R.C. 179 $ 10, MACRS $13, % = 2, MACRS $13, % = 4,416 Total actual depreciation $ 17,176 Allowable depreciation: 2016 ADS/SL $23, % = $ 2, ADS/SL $23, % = 4,760 Total allowable depreciation ( 7,140) I.R.C. 280F recapture amount $ 10,036

53 Form 4797 Reporting

54 Questions?

TRANSFER OF FARM ASSETS

TRANSFER OF FARM ASSETS Issue 1: Buying and Selling Farmland pp. 87-89 Cost Basis Purchase [IRC 1012] Paid in: cash, debt or other Gift [IRC 1015] Generally donor s basis Issue 1: Buying and Selling Farmland