Tax Incentives For Farm Businesses

Transcription

1 Tax Incentives For Farm Businesses Parman R. Green UM Extension Ag Business Mgmt. Specialist 111 N. Mason Carrollton, MO (660)

2 Business Tax Strategies Section 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 2

3 Business of Farming - Not Schedule F Instructions File Schedule C (Form 1040) instead of Schedule F if : (a) (b) 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 you are engaged in the business of breeding, raising, and caring for dogs, cats, or other pet animals. 3

4 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 4

5 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 5

6 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 6

7 Section : Section 179 limited for investments over $1,000,000 $1 for every $1 over $1,000, : Section 179 limited for investments over $560,000 $1 for every $1 over $560,000 7

8 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 8

9 Domestic Production Deduction Provides for a deduction to help offset the repeal of the Extra-Territorial Income Exclusion Deduction is 9 percent for

10 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 10

11 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 11

12 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

13 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 13

14 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 14

15 Long-Term Capital Gains Tax Federal rates: generally, 15% or 0% Exceptions: Gain on collectibles 28% Unrecaptured Section 1250 gain 25% 15

16 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 16

17 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 17

18 Health Savings Account (HSA) Tax Benefit: Tax deduction for contribution Tax-free earnings Tax-free withdrawals for qualified medical expenses 18

19 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 19

20 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 20

21 High Deductible Health Plan Example - George Self-only coverage $2,000 deductible (DED) $6,050 out of pocket (OOP) 21

22 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. 22

23 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 23

24 Health Savings Account No earned income requirement No maximum income limitation No required distribution at age 70½ 24

25 HSA Contributions 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,

26 HSA Contributions Can be made up to April 15 th of following year Account holder gets deduction for contributions to their HSA, even if someone else makes the contribution 26

27 Home Business Office Must be used Exclusively and Regularly As the Principal Place of Business Place to meet or deal with clients or customers 27

28 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 28

29 Home Business Office Deduction The following office expenses are limited if business expenses are greater than business gross income Utilities Insurance Depreciation 29

30 Travel and Meals 100% Deductible Air, rail, auto Lodging Telephone Dry cleaning Tipping for any of the above 50% Deductible Meals while traveling 30

31 Outside United States: Travel 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 31

32 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 32

33 Resources - Online Farmer s Tax Guide IRS Publication Ag Tax Tidbits 33

34 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% 34

35 Wages Paid In-Kind Fundamental Principles: Payment not in form readily converted to cash Employee must exercise dominion and control over the payment 35

36 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 36

37 Observations In-Kind Wages are considered compensation for purposes of IRA contributions. are not considered wages for the earnings test in retirement. 37

38 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. 38

39 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 39

40 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 40

41 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 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%) 41