Tax Incentives
For Farm Businesses
Parman R. Green
UM Extension Ag Business Mgmt. Specialist
111 N. Mason
Carrollton, MO 64633
(660) 542-1792
greenp@missouri.edu
http://agebb.missouri.edu/agtax/index.htm
Business – Tax Strategies
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Section 179 - “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”
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Business of Farming - Not
Schedule F Instructions
File Schedule C (Form 1040) instead of
Schedule F if :
(a)
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
(b)
you are engaged in the business of
breeding, raising, and caring for dogs,
cats, or other pet animals.
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Hobby or Business?
factors IRS will look for:
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business-like
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time and effort
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depend on the revenue
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circumstances beyond the taxpayer’s control (losses)
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operation changed over time
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knowledge
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profit in similar activities
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appreciation of the assets
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Presumption of “For Profit”
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General Rule:
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Report profit at least 3 of last 5 tax years
Breeding, Training, Showing, or Racing Horses:
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Report profit at least 2 of last 7 tax years
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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
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Section 179
2011:
Section 179 limited for investments over $1,000,000
$1 for every $1 over $1,000,000
2012:
Section 179 limited for investments over $560,000
$1 for every $1 over $560,000
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First-year Bonus Depreciation
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Percentage: 50% for 2012 (100% for 2011)
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Qualifying Property:
MACRS property with recovery period of 20 years
or less
 Acquired during 2012
 Original use commences with taxpayer
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Dollar Limit: None
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Domestic Production Deduction
 Provides for a deduction to help offset the
repeal of the Extra-Territorial Income
Exclusion
 Deduction is 9 percent for 2012
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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
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Domestic Production Deduction
Limited to lesser of :
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9% Qualified Production Activities Income (QPAI)
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9% of Taxable Income (entity) or AGI (individuals)
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50% of W-2 Wages
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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 4797.
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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*
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* 5% Safe Harbor Rule
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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
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Long-Term Capital Gains Tax
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Federal rates: generally,
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Exceptions:
15% or 0%
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Gain on collectibles
28%
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Unrecaptured Section 1250 gain
25%
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Long-Term Capital Gains Tax
15% or 0% ?
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15% - if the regular tax rate that would apply is
greater than 15%
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0% - if the regular tax rate that would apply is
15% or less
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Medical Expenses - Business
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Requirements:
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Employ your spouse
Establish health reimbursement plan (Sec. 105 Plan)
Advantages:
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Deductible as Sch F business expense
Avoids any Sch A itemized deduction limitation
Reduces self-employment taxes
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Health Savings Account
(HSA)
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Tax Benefit:
Tax deduction for contribution
 Tax-free earnings
 Tax-free withdrawals for qualified medical
expenses
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Who Can Have an HSA
Any adult if they:
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Have coverage under a “high deductible health plan”
(HDHP)
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Have no other first-dollar medical coverage
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Do not participate in FSA or HRA that reimburses
expenses before deductible amount of HSA is reached
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Limited-purpose FSA or HRA
can pay for “other health coverage”, except L-T care
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High Deductible Health Plans
2012
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Does not cover first-dollar expenses
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Deductible must be at least:
 $1,200 – self-only coverage
 $2,400 – family coverage
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Annual out-of-pocket expenses cannot exceed:
 $ 6,050 – self-only coverage
 $12,100 – family coverage
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High Deductible Health Plan
Example - George
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Self-only coverage
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$2,000 deductible (DED)
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$6,050 out of pocket (OOP)
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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.
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Who Can Have an HSA
Any adult if they:
 Are not enrolled in Medicare
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Cannot be claimed as dependent on
someone else’s tax return
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Health Savings Account
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No earned income requirement
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No maximum income limitation
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No required distribution at age 70½
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HSA Contributions - 2009
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Up to the amount of your HDHP deductible, but
not more than:
$3,100 – self-only coverage
$6,250 – family coverage
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Age 55 or older “catch-up” -- $1,000
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Thus, maximum for a couple both 55 or older is
$8,250.
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HSA Contributions
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Can be made up to April 15th of following
year
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Account holder gets deduction for
contributions to their HSA, even if someone
else makes the contribution
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Home Business Office
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Must be used “Exclusively and Regularly”
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As the “Principal Place of Business
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Place to meet or deal with clients or customers
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Principal Place of Business
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Must meet both:
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Used exclusively & regularly for administrative or
management activities
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Have no other fixed location where you conduct
substantial administrative or management activities
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Home Business Office Deduction
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The following office expenses are limited if
business expenses are greater than business
gross income
Utilities
 Insurance
 Depreciation
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Travel and Meals
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100% Deductible
Air, rail, auto
 Lodging
 Telephone
 Dry cleaning
 Tipping for any of the above
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50% Deductible
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Meals while traveling
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Travel
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Outside United States:
Entirely for business – deduct all your expenses
 Primarily for business – allocation between business
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and personal activities
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On Cruise Ships:
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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
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Education Costs - Child
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“Put them to work”
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If farmer – gift them last year’s raised grain
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Be aware of “kiddie tax”
Gift them appreciated stock
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Be aware of “kiddie tax”
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Resources - Online
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Farmer’s Tax Guide – IRS Publication 225
http://www.irs.gov/pub/irs-pdf/p225.pdf
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Ag Tax Tidbits
http://agebb.missouri.edu/agtax/
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Entertainment
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Directly-Related Test:
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Associated Test:
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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 with active conduct of business
Entertainment was directly before or after substantial
business discussion
Deduction generally only 50%
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Wages Paid In-Kind
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Fundamental Principles:
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Payment not in form readily converted to cash
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Employee must exercise dominion and control
over the payment
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IRS Guidelines – Wages Paid In-Kind
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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
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Observations –– In-Kind Wages
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are considered compensation for purposes of
IRA contributions.
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are not considered “wages” for the earnings test
in retirement.
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Reporting –– In-Kind Wages
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Employer:
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FMV included on Sch F as income
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FMV included on Sch F as “Labor Hired”
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FMV included on employees W-2 as federal and state wages,
but not as Social Security wages.
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Reporting –– In-Kind Wages
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Employee:
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FMV included on Form 1040 as W-2 income
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Non-Farmer:
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Gain or Loss from Sale included on Sch D
Farmer:
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Sale Proceeds & FMV Included on Sch F as Income and COGS,
respectively
If fed: FMV Included on Sch F as “Feed Purchased”
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Wages – FICA Paid by Employer
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Employees share of FICA taxes :
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counts as wages subject to income tax
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not counted as wages subject to Social Security
& Medicare taxes
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Wages – FICA Paid by Employer
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Example : Employer pays employee’s share
of FICA taxes on wages of $10,000.
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W-2 Box 1 Wages, tips, etc.
$10,765
$10,000 x 1.0765
Pub. 225 – Social Security & Medicare Taxes
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W-2 Box 3 Soc. Security Wages
$10,000
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W-2 Box 5 Medicare Wages
$10,000
(this example assumes the employee withholding is 7.65%)
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