Presentation Transcript

1. Taxes

   Ag Management Chapter 9
2. The Purpose of Income Tax Management Farmers and ranchers are not tax exempt Knowledge and awareness of tax regulations can assist in decision making processes
3. A Manager & Taxes Not experts Basic knowledge is helpful Most popular publication for farmers and ranchers is Publication 225 Can be obtained from any tax office
4. Special Laws for Specialization Because agriculture includes many specialized areas, tax laws for agriculture are also specialized
5. 3 Examples of Special Tax Laws Special accounting methods despite high year-end inventories Special capital expenditure deductions Treatment of livestock as a capital asset is unique.
6. Those That Can Tax Advantage of Special Tax Law Must be a farmer or rancher & materially involved Must cultivate, operate or manage a farm or ranch for gain of profit Farming or ranching does not include timber or forestry production Does not include people who receive a fixed rent in cash or produce from a farm operation
7. Income Tax Management Attempts to maximize after tax profits Includes completion and filing of the correct tax forms Tax accountants are used for this task
8. Choosing the Best Accounting System Adopt the system that is best suited to your situation Remember the two types of accounting used by farm and rancher managers are Cash Accrual
9. Cash Accounting Method Income and expenses are recorded in the period in which they are actually received or paid Inventory plays no major role Income is taxed when it is received and expenses are deducted when they are paid.
10. Cash Accounting Method Advantages Disadvantages Easier Flexible Simpler than the accrual method Inaccurate measure of profitability for the time period Income variations
11. Accrual Method Records income when it is earned Records expenses when they occur Used as an inventory in addition to the record of receipts and expenses An increases in the year end inventory is treated as taxable income A decrease in the inventory reduces taxable income
12. Accrual Method Advantages Disadvantages Accurate measure of profitability during the period Reduces variations in income Requires more record keeping Can create tax liability from items not yet sold
13. Income & Expenses Summarized on Form 1040 1040 is divided into 2 parts Farm Income Farm Expense See p. 9-5
14. Farm Income Lines 1-10 on form 1040 Includes Sales of livestock and other items purchased for resale Sales of livestock and crops raised Government payment programs Patronage Refunds Crop Insurance Proceeds Custom Hire
15. Farm Expenses Lines 12-34 on Form 1040 Includes Feed, seed, fertilizer, fuel & labor Depreciation, rent and interest Repairs, taxes, utilities, storage
16. Net Farm Profit Gross income (line 11)-Total Expenses(line 37) If there is a net farm profit it is included in taxable income If there is a net farm loss it can be used to offset other income
17. Depreciation Spreads out the value of assets over the period they are used Depreciation of assets allows for the loss in the assets value Losses in value are caused by Wear and Tear Obsolescence due to new technology Deterioration due to the elements of nature
18. Depreciation The proportion of the original cost to be depreciated in any one year is largely a matter of judgment and financial management Aspects that influence financial management Influence deprecation has on income taxes Desire to have the undepreciated value of an asset reflect the resale value of the asset Depreciation allowance taken in any year reflects the actual decline in the value of the asset Therefore net worth statements show the ACTUAL value of depreciable assets
19. Guidelines for Determining Property Subject to Depreciation Depreciable farm property includes all assets used in the business of farming that have a useful life of more than 1 year. Only assets which have a limited and determined useful life may be depreciated. Capital expenditures for assets which do not have a determined life, such as land or leasehold interests which are continuously renewed are not deductible. Tax benefits of these assets are not realized until they are sold or lost,
20. Factors to Know Before Figuring Depreciation Basis- What is the basis in the property? This includes the cash paid or the cash difference paid plus the depreciable balance of their trade-in. When is the property put into service. Which method of depreciation is used.
21. Methods of Depreciation Modified Accelerated Cost Recovery System (MACRS) General Depreciation System (GDS) In IRS publications depreciation is referred to as recovery cost Farm assets fall into 4 categories 3 year 5 year 7 year 20 year
22. Regular MACRS for Personal Property Determined by multiplying the statutory percentages for that class of property by the cost basis of the item. See p. 9-7
23. Section 179 Expense Deduction Read p. 9-8-9-9
24. Other Characteristics of Depreciation Income tax benefits arise because the cost of capital asset is recovered over the useful life of the asset. The shorter the life assigned to the asset, the quicker the income tax benefit is received. Raised livestock may not be depreciated when the cash accounting method is used because all costs have been deducted as cash expenses. Nonbreeding livestock in inventory may not be depreciated using the cash accounting method Expensing will affect cost recovery by reducing the cost basis of the property.
25. Strategies to Increase Taxable Income Postpone expenditures and investments until after the beginning of the next tax year Sell marketable grain and livestock before the end of the tax year Work with suppliers to pay bills after the beginning of the next tax year Do not use section 179 expensing for depreciable property Do some off-farm or custom work
26. Strategies to Reduce Taxable Income Postpone some sales to next year Use deferred sales contracts Buy NEEDED machinery, equipment, and other supplies BEFORE the end of the tax year to get depreciation. Use section 179 expensing for the maximum on depreciable property. Make advanced purchases of feed and fertilizer.
27. Special Tax Situations See table D p. 9-11
28. Income Tax Differences Between Types of Farms

29. Social Security Taxes and Benefits

30. Agricultural Coverage Generally covered by Social Security Earnings must come from employment or self employment
31. Agricultural Labor Farm employees have SS deducted Farm employer pays into employees SS account
32. Farm Employers and Employees Must Pay SS tax when The employee receives cash wages of at least $150 from any one farm employer during the calendar year The employee works for any one farm employer on 20 or more days for cash wages computed on a time basis The employer pays wages of $2500 or more during the year to all employees
33. Family Labor Certain family situations allow for no tax being due and no benefits resulting A spouse working for a spouse A parent working for a child unless the parent works in the child’s trade or business A child under 21 works for his or her parent
34. Defining Ag Labor All the work that is performed on the farm or ranch in employ of any person
35. What is an Employee?? As defined by Social Security Law: An employee performs services for another, and is subject to the control of the employer.
36. Independent Contractors One who agrees to perform certain services for a fixed price Contractor must meet the specifications of the employer Manner of doing the job and details is retained by the contractor Independent contractor is the employer of his own employees Must also pay self-employment taxes and employer taxes for employees Example: professional electrician that is hired for a fee to repair an irrigation well pump
37. Self-Employed Farmers Must pay self employment tax Self employment tax is based on the net earnings from the farm business This is shown on schedule F (Form 1040) It is computed on schedule SE (Form 1040) and paid when the farmer files his income tax return Children may also have to pay self-employment tax is they carry on an activity of their own such as 4-H or FFA and have a net earning of $400 or more
38. Employers of Agricultural Labor Employers of agricultural labor are responsible for several administrative task. They must… Have an Employer’s Identification Number which is used on all forms that report the employer’s Social Security tax payments Keep Records of each employees name, social security number, cash wages, daily records of time worked, basis of payment and the amount deducted as the employees share of the social security tad Withhold tax from the employees wages. Make reports to the IRS by Jan. 1 each year and send a W-2 for showing that employees wages and taxes withheld to the employee Pay Social Security taxes levied upon employer and employee Pay Social Security taxes on a periodic basis, depending on the amount collected.
39. Social Security Benefits and Medicare Old Old Age Social Security Benefits Hospital And Medical Disability Types of benefits Old age and survivor Survivor Disability Hospital & medical (Medicare)
40. Estate Taxes Also called inheritance tax Federal Govt. levies a gift tax on transfers during life and estate tax at death Inheritance tax is generally collected by state govt.
41. Estate Planning Planning the acquisition, enjoyment, and distribution of property for the benefit of the family Wills are a form of estate planning A will or some form of formal estate planning is needed by everyone Without the state will distribute property as it sees fit
42. Estate Transfer Death forces an estate transfer Always problems with this due to Inheritance rights and interests of children in parents property Problem is frequently complicated by having to provide for a widow and children and the desire to treat all children equally Parents also need the farm to provide income and support in old age Due to these problems families often delay planning until it is to late
43. Unified Federal Estate & Gift Tax Federal government levies a gift tax on transfers during life and an estate tax on transfers after death Rate schedule is the same for both
44. Income Taxes Affect Estate Planning Also a concern in tax planning Income tax savings during life may create additional capital to be used or passed on The way wills or trust are drawn up will also determine how much the beneficiaries will have to pay in income tax
45. Assignment Look up South Dakota’s Law in regard to inheritance tax and print the information off for class discussion.