Tax Issues -PPT - Department of Agricultural Economics

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Tax Update for Weather Related
Sales of Breeding Livestock
and
Tax Management Strategies after
the Tax Year Ends
J C. Hobbs
Oklahoma State University
Department of Agricultural Economics
Assistant Extension Specialist
Farm Management and Taxation
Weather-Related Sales of
Livestock
• Applies to sales of livestock due to weatherrelated conditions: flood, drought, or other
weather-related condition causing a
shortage of water and/or feed.
• Allows taxpayer to postpone recognition of
income from the sale proceeds of animals
sold in excess of normal practices (to avoid
bunching of income).
Involuntary Conversion
• Must plan to purchase replacement
livestock within a 2 year period. (example,
for sales in 2013, must replace livestock by
end of 2015).
• Replacement period can be extended from
2 years to 4 years if the area has been
declared eligible for disaster assistance by
the Federal government or an agency.
Involuntary Conversion
• Livestock (draft, breeding, or dairy) held for
any length of time and a weather-related
condition caused the sale.
• Gain realized from the sale can be postponed
if the sale proceeds are used to purchase
replacement livestock within the time period
previously described.
• Replacement animals must be used for the
same purpose as those sold. (dairy for dairy
and breeding for breeding)
Drought Sales of Livestock
• For the Code Section 1033(e) election.
• When does the replacement period expire
in a continuing drought situation?
• It does not expire until the end of the first
TAX year that ends after the first
DROUGHT-FREE year for an applicable
region (county) taking into consideration
the original replacement period (4 years
due to Oklahoma’s designations).
Drought-Free Year
The first drought-free year for an applicable
region is the first 12-month period ending on
August 31 that meets both of the following:
• It ends in or after the last year of the
taxpayer’s 4-year replacement period.
• It does not include any weekly period for
which exceptional, extreme, or severe
drought is reported for any location in the
applicable region.
Applicable Region
• The applicable region is the county that
experienced the drought conditions
causing the sale or exchange of the
livestock and all counties that are
contiguous to that county.
Oklahoma Counties
• For the period of Sept. 1, 2013 through
Aug. 31, 2014, 9 counties were removed
from the list of Oklahoma Counties
designated as experiencing severe,
exceptional, or extreme drought
conditions.
End of Replacement Period
• When does the replacement period end for
producers who sold breeding livestock in
late 2010 or 2011 and elected to defer the
reporting of income be electing to replace
them?
• If they sold animals in 2010, they received
an automatic 1 year extension last year.
2014
• At the present time, producers in 67 of 77
counties have been given an automatic
one year extension.
• The counties of Adair, Cherokee, Coal,
Haskell, Latimer, LeFlore, Mayes,
McIntosh, Pittsburg, and Sequoyah were
removed from the list.
Drought Free Counties
• The counties of Adair, Cherokee, Coal,
Haskell, Latimer, LeFlore, Mayes,
McIntosh, Pittsburg, and Sequoyah are
still within the 4-year replacement
provision which ends on December 31,
2015 for animals sold in 2011.
Haskell and Sequoyah Counties
• For the period of 9/1/14 through 8/31/15,
watch the designations for Haskell and
Sequoyah counties.
• If these counties are not included in the
2015 list, producers must have their
replacement animals purchased by Dec.
31, 2015 for animals sold in 2011.
• These 2 counties are not contiguous to a
county which was designated in the top 3
drought designations in the 2014 report.
Tax Management
• Some tools work prior to year end.
• Some tools work after the tax year has
passed.
Farm Income Averaging
• Takes advantage of unused lower tax
brackets from 3 prior years.
• Example: 2014 – Due to a sizable
Livestock Forage Disaster Program
payments, taxable income is
$195,000 (25% tax bracket starts at
$148,850).
Farm Income Averaging
• Manage the tax bite by Averaging
• 2011 – $10,000 below beginning of
25% bracket.
• 2012 - $15,000 below beginning of
25% bracket.
• 2013 - $20,000 below beginning of
25% bracket.
Farm Income Averaging
• Move $30,000 from 2014 and put
$10,000 additional income in 2011,
2012, and 2013 and save roughly
$3,000 in total tax.
• Income averaging does not reduce
self-employment tax; net investment
income tax; or phase-out of personal
exemptions and itemized deductions
Farm Income Averaging
• Can use ordinary income as well as capital
gains (all or any part).
• Elected Farm Income is from Schedule F or
capital asset sales but not land.
• Individual, Partner, & S Corp Shareholder
can use this provision (not a C-Corporation).
• Pay the increase in income tax only.
• Does not change self-employment tax.
Crop Insurance & Disaster
Payments
• Generally report the payment income in
the year it is received.
• However can elect to postpone if all 3 of
the following conditions are met.
– Use the cash method of accounting.
– Receive the insurance proceeds in the same
tax year the crops were damaged.
– Show under normal practices the sale would
have occurred in the year after the damage.
Section 179 Expense Deduction
For Section 179 the property must be:
• Qualifying property that is new or used
(not real property or a multi-purpose ag
structure)
• Acquired for use in a trade or business
(actively farming or materially
participating in a rental arrangement)
• Acquired by purchase
Qualifying Property
•
•
•
•
•
•
Tangible personal property
Integral part of production
Research facility
Storage facility
Single purpose agricultural structure
Off-the-shelf computer software
Section 179 Expensing - 2014
• Purchased capital assets that are
depreciable (new or used).
• 2013 was $250,000 with a $500,000
investment limit
• 2014 was to revert back to $25,000 with a
$200,000 investment limit but 2013
amounts were extended.
• 2015 is to revert back to $25,000 with a
$200,000 investment limit.
• Will legislation be enacted to modify this?
Additional First-Year Depreciation
• 2013: 50% Additional First-Year
Depreciation is allowed for qualifying
property placed in service through
12/31/2013.
• 2014: Expired effective January 1, 2014
but extended for 2014.
• 2015: Expires effective January 1, 2015
• NOTE: Will legislation be enacted to keep
this provision?
The End!!
• Thank you!
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