When it comes to 2010 tax deductions, what’s eligible and what’s not? All the uncertainty for 2011 makes 2010 tax planning a challenge
Tax planning’s about as fun as a root canal. They both cost money and the pain is often more than you expected. But both are usually necessary and, left undone, can create even more misery.
While most ranchers, farmers and feeders are concerned that the so-called Death Tax will ooze up from the grave beginning Jan. 1, they should still perform some end-of-year tax planning for 2010, says Mikal Willimon, a CPA who specializes in agricultural accounting for Brown, Graham & Co. in Spearman, TX.
This will ensure that every legal deduction is taken and income is managed in the best interest of their operation, says Willimon, who sees 2010 as a tax planning challenge due to the uncertainty concerning 2011.
The reason 2011 creates a problem is because Congress is still debating whether to extend the so-called Bush tax cuts. Chris Hurt, Purdue University Extension economist in West Lafayette, IN, says it’s likely Congress will extend some of those tax cuts. But how many and how much is still the question.
“If there aren’t changes, capital gains taxes will go from 15% to 20%,” Hurt says.
Willimon says there were major concerns that eligible deductions for purchases of equipment and other high expenditure items would be cut by Congress. However, in late September, the Small Business Jobs Act of 2010 was signed into law that actually increased amounts that could be deducted, he says.
“Instead of seeing deduction limits go down from $250,000 to $25,000, the new law increases deductions to $500,000 for 2010 and 2011,” says Willimon, who works with rancher and farmer clients and whose family has been in the cattle business for decades.
The Internal Revenue Service (IRS) Section 179 provides a deduction on equipment purchases for business owners. Prior to 2003, the maximum amount that could be expensed, or deducted from taxable income immediately, was $25,000. For 2003, 2004 and 2005, the limit was raised to $100,000. That was increased to $250,000 the past few years and had been scheduled to be rolled back to $135,000 for 2010.
“But in March, it was pushed back to $250,000 for 2010,” Willimon says. “That’s what we were working with before the new law increased it to $500,000.”
The 179 deduction refers to almost all machinery and equipment, such as tractors, balers or combines. “Also, single-purpose buildings usually qualify,” he says. “Grain bins or feed mills likely qualify.
“But a new building or barn built generally to store equipment won’t. Neither will fencing partially funded with Natural Resource Conservation Service (NRCS) or Environmental Quality Incentives Program (EQIP) help. Deductions can also be reduced based off of higher-value assets. If you purchase more than $2 million in machinery or equipment, your deductions start to be phased out.”
He adds that the new law also extended the first-year bonus depreciation on new assets for 2010 to 50% of the original cost. For example, if you buy a baler for $50,000, you can take $25,000 in depreciation the first year, then depreciate the remaining $25,000 using normal Modified Accelerated Cost Recovery System (MACRS) depreciation schedules.
“In actuality, producers will probably get to take 60-65% of new assets where they don’t use the Section 179 deduction for the asset,” he says.
Purchase this year?
With the increase in eligible tax deduction to $500,000, producers targeting new combines or other equipment that may surpass $250,000 in cost may see an advantage in making purchases this year or next, Willimon says.
It may come down to whether deductions are needed to reduce a tax burden for a higher income. “I don’t counsel customers to buy equipment just to save on their taxes,” Willimon says. “But if you need to adjust your tax requirements and plan on buying equipment anyway, you may want to go ahead and buy it.”
He says producers can take the normal MACRS deduction over the traditional seven-year period. “That’s for all machinery and equipment,” he says.
Where to park income is always a question for many producers, perhaps even more this year with the potential for shifts in tax laws, Willimon says. Not knowing what 2011 tax laws will be makes it difficult to plan for 2010 or 2011, he says.
Given the uncertainty of the tax situation going into 2011 and an administration looking to have higher taxes for higher-income individuals, producers may want to take in income in 2010 that they would have traditionally pushed to 2011.
Willimon says failure to conduct year-end tax planning often hurts producers financially. “Farmers and ranchers have a lot of flexibility in rearranging their income,” he says. “But many don’t properly plan for the end of the year, where they can help manage their taxable income and expenses.
“They can prepay expenses, such as fertilizer or feed and can execute the purchase of equipment. If they’re in a loss situation, they can determine if they want to sell their calf crop or grain before the end of the year.”
And he says if you have crop insurance payments coming in, you can defer that to the next year or take it for 2010.
Hurt says producers can likely improve their tax burden by making late-year transactions. “For cattlemen, who are most likely on a cash-accounting system, some feed management may be needed if they expect some good income from cattle sales,” he says.
“Again, they might want to buy some corn. Producers might want to buy pieces of equipment for cropping or cattle operations.”
Hurt says that with strong cattle markets seen much of the year, “there are probably some good incomes in cattle business, unlike in ’09. So there probably won’t be any averaging of income.”
Larry Stalcup is an Amarillo, TX-based freelance writer.
Death Tax fever
Death Tax fever remains high among many members of Congress, with some wanting ranch, farm and other estates worth $1 million or more taxed at a whopping 55%.
Thus, the reason for one of the beef industry’s biggest lobbying campaigns is to prevent what many believe could be a catastrophic economic situation for future generations of cattle producers.
The National Cattlemen’s Beef Association (NCBA) points to statistics that illustrate how the potential tax on estates will be devastating to many families.
“The temporary nature of the Death Tax repeal provisions creates numerous problems for family farms, ranches and businesses,” NCBA says. “The uncertainty surrounding ultimate repeal will require business owners to continue with estate-planning strategies that are costly, cumbersome and time consuming.”
NCBA points out that “in an asset-rich and cash-poor business like ranching, the appraised value of rural land is extremely inflated when compared with its agricultural value.
“If Congress were to permanently repeal the Death Tax, these estate-planning resources would be reinvested directly into these businesses, thus creating new job opportunities and providing a much-needed boost to local economies.”
Dave Scott, a Texas rancher and president of the Texas & Southwestern Cattle Raisers Association, was among many cattlemen who rode into Washington, DC, this fall to present their Death Tax concerns to the Obama administration and Congress.
“The math is simple,” he says. “Penalizing ranchers for passing the ranching tradition on to the next generation will deplete our food supply, which means the consumer will pay much more for their groceries. It could also diminish large portions of the open-range land that we as Americans take such pride in maintaining.
“Ranchers have consistently worked hard to support not only our families, but every American citizen. We deserve better than to be taxed out of business,” he says.
NCBA says 97% of U.S. farms and ranches are owned and operated by families. Scott points out that the estate tax is considered to be one of the leading causes of the breakup of multigenerational farms and ranches.
To learn more about the estate tax question, go to http://www.beefusa.org/goveDeathTaxCattlemen.aspx.