Tax Update. Rod Mauszycki, CliftonLarsonAllen

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1 Tax Update Rod Mauszycki, CliftonLarsonAllen

2 Government s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subside it. Ronald Reagan

3 Recap Tax Review

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5 2013 Tax Brackets

6 Capital Gains Higher income individuals experience increased capital gains and dividend rates Income below top of the 15% bracket (for 2013 $36,250 single, $72,500 MFJ): 0% Above 15% bracket: 15% Incomes above $400K single, $450 MFJ: 20% Collectable and Sect recapture remain the same (28/25 respectively) Qualified Dividends taxed at capital gain rates Certain Dividends taxed as ordinary income (credit unions, mutual insurance companies, farmers coops)

7 Capital Gains For Gross Income over $200K/$250K: Regular rate of 15% Add NIIT of 3.8% Add I/D phase-out of about 1% Add Exemption phase-out of up to 4% or more Top Capital gains tax rate can be almost 25% or more For Gross income under $200K/$250K: Most likely 15% capital gains rate Amount in 15% or lower bracket taxed at zero

8 Net Investment Income Tax Net Investment Income Tax (NIIT) Begins at $200K/$250K Extra 3.8% on the lesser of: Net Investment Income Amounts in excess of threshold Almost all rents will be subject to 3.8% tax Cash rents - NIIT will apply Non-material crop shares NIIT will apply May be able to use manager managed LLC to avoid part or all of this tax

9 Net Investment Income Defined as the sum of: 1. Gross income from interest, dividends, annuities, royalties, and rents, unless derived in the ordinary course of a business; 2. Income from a business in which the taxpayer does not personally materially participate; 3. Capital gains and other net gains from the disposition of property.

10 Phase-Out Starting at: $250K for singles $275K for head of household $300K for married filing joint Sch A Itemized Deduction 3% of certain itemized deductions are phased-out Still allowed standard deduction Maximum 80% phase-out Does not affect itemized deductions based on other rules Investment interest, medical costs, gambling losses, etc.

11 Phase-Out Personal Exemptions For Every $2,500 of additional AGI (or portion thereof), 2% of your total exemptions are phased-out The more exemptions you have, the greater the marginal tax increase. For example, assuming 35% bracket: One exemption 1.09% marginal tax increase Two exemptions 2.18% marginal tax increase Five exemptions 5.45% marginal tax increase Ten Exemptions 10.90% marginal tax increase

12 Bonus Depreciation Acquired & Placed in Service Bonus % 1/1/08 9/8/10 50% 9/9/10 12/31/11 100% 1/1/12 12/31/12 50% 1/1/13 12/31/13 (2012 ATRA) 50% 2014 and after 0%

13 Section 179 Sec. 179 Asset Addn. Tax yr. beginning in Limit Phase-out Range 2009 $250,000 $800K - $1.05M 2010 $500,000 $2M - $2.5M 2011 $500,000 $2M - $2.5M prior $139,000 $560K - $699K 2012 & ATRA $500,000 $2M - $2.5M 2014 $25,000 $200K-225K

14 Year End Tax Planning Ideas

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16 Crop Insurance Proceeds In general, crop insurance proceeds are taxable in the year of receipt. Under certain circumstances, farmers can defer crop insurance proceeds to the following year. 3 requirements for deferral Crop insurance proceeds relate to damage or destruction caused by drought, flood or other weather disaster. It is the famer s normal practice to report more than 50% of current crop income in subsequent years. Crop insurance proceeds must be collected in year of damage.

17 Crop Insurance Proceeds Yield/Revenue Coverage Yield coverage - insurance on yield only Revenue coverage insurance on revenue and yield Insurance payment related to revenue guarantees due to low prices can t be deferred.

18 Crop Insurance Proceeds Normally farmers would choose to defer crop insurance proceeds until the following year. However, with new tax rates, implementation of the Affordable Care Act (ObamaCare), Section 179 limitations, and the expiration of bonus deprecation, it may be to the farmers advantage to recognize crop insurance proceeds in 2013 than to defer to 2014.

19 Deferred Payment Contract Use of the installment method cash basis farmers recognize income associated with the sale of inventory in a subsequent year. IRS allows cash basis farmers to elect out of the installment method and recognize income in the current year. Why is this appealing? Unknowns Depreciation? Farmers have until 6 months after the due date of the tax return to elect out. Provides farmers the ability to look ahead 8-9 months and see if recognizing income in 2013 or 2014 provides better tax savings.

20 Deferred Payment Contract Recommendation The election out of installment method is done on a contract-by-contract basis. Farmers interested in utilizing this technique should enter into multiple deferred payment contracts.

21 S-Corp, Built In Gains Built in Gains retroactively applies the 5 year built in gains period for 2012 and extends through If installment sale originates within an S Corp for a tax year after 2011, all payment collected are either exempt from BIG (if entity was S corp for 5 or more years) or subject to BIG. PLANNING TIP: for entities that have met the 5 year rule, a disposition in 2013 via installment sale will avoid BIG tax even if Congress restores the 10 year period.

22 Entity/Spousal Land Rent Annual SE tax savings Favorable Courts and rulings: Cox case (TC and CA-8) Attorney deducts wife s 1/2 Rev. Rul : H&W Joint Tenants (1/2 okay) Rev. Rul : Rent paid to partnership OK Adverse Ruling: TAM : Circular payment and no lease = disallowance (wife owned farmland)

23 Entity/Spousal Rent Criteria Entity/spouse ownership of land Written lease (clarify no labor as landlord) Reasonable rents Actual payment of rent Debt paid by entity/spouse Issue 1099-MISC (put it in the right box) Retention of funds by landlord

24 What To Expect Next Year Tax Update

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26 Transition/Succession Planning

27 Assets & Liabilities Savings Farm Operation Land Equipment Life Insurance Debt o Equipment o Land o Operating Land (and Debt) Farm Operation (and Debt) Equipment (and Debt) Homestead (not farm buildings) Other assets -Savings -IRAs -Other Life Insurance Trust (pay taxes) Land To Farm Kids To Farm Kids To Farm or Perhaps To Farm Kids Partnership Sell or Gift Sell or Gift All Kids? Nonfarm Kids to Buy Out Nonfarm Kids or To Nonfarm kids To Balance Estate

28 General Thoughts Get qualified professional assistance Understand what your exposure is to estate tax today Estimate exposure in future to estate tax What are your goals for succession of operation and equipment What are your goals for land Review strategies to reduce potential estate tax exposure and implement if appropriate Monitor your plan Don t assume the problem will go away on its own Not inexpensive but benefits will far outweigh the upfront costs

29 Cash Balance Plan Age-based funding ($100K - $200K input per year) 5 year funding commitment Low overhead arrangement for defined benefit features Long term deferral (2 generations) Creditor protection Source of liquidity to off-farm heirs?

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31 Cash Balance Plan Example Components of the Funding Age 60, $250,000 earned income 401(k) with profit sharing plus cash balance plan Plan Component Funding and Deduction Employee deferral (401k) $ 23,000 Employer safe harbor (401k -3%) 7,500 Employer profit sharing 7,500 Employer cash balance (90%) 225,000 Total Funding/Deduction $263,000

32 Cash Balance Plan Coverage Can exclude family employees Unrelated employees: Must be over 21 and meet the 1,000 hour test May use 3 year cliff vesting Counted from first day of the plan

33 Charitable Remainder Trust (No Tax On Asset Sale) Donor Asset Term Income Char. Rmdr. Trust Rmdr. After Term Charity

34 Charitable Remainder Trust Advantages Defer income up to a 20-year term Lower federal income tax rates No SE Soc. Sec. Tax Commodity can be sold by Trust with no tax Less federal tax; trades off with residual to charity 10% minimum net present value to charity

35 Example: 10 yr. term, annual payout $500,000 funding Annual yr. end IRS Interest Rate 2.0% 4.0% Payout amount $50,095 $55,400 Charitable remainder 10.01% 10.13% [Current IRS rate: 1.0%!]

36 Watch for the AgStar Edge & CliftonLarsonAllen webinar on Succession/Transition Planning coming in January!

37 Finally Where are you on the continuum of accounting?

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39 Thank You! Rod Mauszycki