What is in this article?:
- Important Year-End Tax Implications For Ranchers
- Section 179 bonus depreciation
As Dec. 31 approaches, the tax policy debate remains unfinished in Washington. What are the implications for ranchers?
Section 179 bonus depreciation
The bonus depreciation allows writing off 50% of the cost of a depreciable asset this year and the remaining 50% over the prescribed life of the asset. “This is available only on new property (such as machinery) and any taxpayer can take advantage of this,” Gunther says.
Meanwhile, Section 179 applies to taxpayers with smaller businesses. “In general, Section 179 allows smaller companies to expense assets as they purchase them,” he says.
The deduction is basically for equipment and allows you to expense up to $139,000 in 2012 on equipment purchases up to $560,000, with a dollar-to-dollar reduction in the amount that can be expensed for each dollar between $560,000 and $699,000, McEowen says.
Beyond that, McEowen says capital gains taxes, dividend taxes and taxes on ordinary income are set to increase in 2013. Capital gains, which were taxed at a maximum 15% for taxpayers in higher brackets, will increase to 20% for higher-income taxpayers, and increase from 0% to 10% for lower-income taxpayers.
Dividends will be taxed at ordinary rates, which are set to increase. For 2012, income-tax brackets are 10%, 15%, 25%, 28%, 33% and 35%. For 2013, they could increase to 15%, 28%, 31%, 36% and 39.6%. The 10% bracket will go away.
McEowen notes, however, that there is a 3.8% “tack-on” under Obamacare for certain high-income taxpayers starting in 2013. That increases the top end of the capital gains tax to 23.8% and dividend tax to 43.4%.
All of this, of course, depends on what Congress does in January, and that depends on the outcome of the election. Since this was written before election day, predicting next year’s tax policies is impossible. However, McEowen says that if Barack Obama is reelected and the Democrats retain control of the Senate, expect to pay higher taxes across the board – income tax, capital gains tax, rents, dividends, royalties, payroll tax, etc.
So, Gunther says, now’s the time to act. If you haven’t already, sit down with your accountant and take a hard look at what your options are and plan accordingly.
Tax relief for drought-stricken ranchers
The Internal Revenue Code contains two provisions helpful to cattlemen affected by drought. Code Section 451(e) allows you to postpone reporting the taxable gain on the additional sales of any livestock for one year. Code Section 1033(e) allows tax postponement on the gain of breeding animals if they’re replaced within a period of time.
If they’re replaced by like-kind breeding stock, the period is four years, McEowen says. Those animals can also be replaced by non like-kind farm property such as machinery, but only within a two-year window.
Earlier this year, however, the IRS gave a one-year extension to the time producers can replace breeding stock and defer taxes on any gains from forced sales due to drought.
The relief applies to any operation located in a county, parish, city or district listed as suffering exceptional, extreme or severe drought conditions by the National Drought Mitigation Center during any weekly period between Sept. 1, 2011 and Aug. 31, 2012. This includes all or part of 43 states and also applies to any contiguous county.
That also means farmers and ranchers in these areas who suffered losses in 2008 and whose drought sale replacement period was scheduled to expire at the end of the year will now have until the end of 2013.
Planning is critical. “You’ve got to take the initiative, take advantage of what’s out there right now and get something done, or you’re leaving money on the table,” Gunther says.