2016 Farm Income Tax Webinar

Transcription

1 2016 Farm Income Tax Webinar Charles Brown Field Specialist - Farm Management crbrown@iastate.edu Additional Information Tax Bracket Tables Social Security Wage Base Entity Comparison Chart Deferring Crop Insurance Depreciation Recovery Periods Employee or Contract Labor Pension Contribution Limits Retirement Plan Comparison Chart Tax Calendar 1

2 Additional Information Iowa s Anti-Corporate Farming Laws Water Quality Tax Treatment Worker s Compensation and Exemption Amounts New W2, 1099 and Tax Filing Deadlines Family Business Discounts Section 179 PATH Act indexed expense deduction for inflation & made it permanent. 2016: $500,000 deduction ceiling for cost of qualifying property $2,010,000 threshold (dollar-by-dollar reduction for amount of qualifying property placed in service exceeding $2,010,000) Made Permanent rule allowing revocation of election or specification of property expensed without IRS consent 2

3 Federal Depreciation 2016 Section 179 Expense election New & used equipment Tax years beginning in 2016 Only on cash boot paid 15 yr. property or less Only business assets(>50%), not rental Offsets business income & Section 1231 gain Can t be used on inherited assets or related party assets except between siblings Federal Depreciation % bonus depreciation Only available on new assets placed in service by 12/31/16 20 yr. life property or less Includes shops, machine sheds, pole barns Available for business and rental assets Cash boot and traded basis qualifies Can depreciate 50% of cash paid plus traded basis in first year Must elect out by class if not used 3

4 Federal Depreciation % bonus depreciation Not available for business assets purchased from related parties Not available for qualified leasehold assets to related parties if 80% ownership test is met New grain bins or machine sheds leased to a related party would qualify Can create net operating loss (NOL) Bonus Depreciation Additional First-year Depreciation (AFYD) Extended through 2019 & modified 4

5 Bonus Depreciation 280F Passenger Auto $8,000 increase to 1 st year depreciation limit Reduced beginning in 2018: $6,400, 2019: $4,800 Passenger automobiles: Depreciation limit under Sec. 280F(d)(7) is $11,160 for the first year (both 2015 and 2016). Trucks and Vans: $11,460 in 2015 and $11,560 in Iowa Depreciation 2016 Section 179 is $25,000 Phaseout starts at $200,000 No bonus depreciation 5

6 Various Depreciation Stratagies Federal Macrs Iowa Federal Macrs Iowa Federal Macrs Iowa Federal MSL Iowa Cost & Sec 179 Depreciation & Bonus Depreciation Depreciation Depreciation Depreciation Depreciation Combine $400,000 $400,000 $42,800 $221,400 $42,800 $42,800 $42,800 $28,560 $28,560 Divergent Incomes for 2016 Low to no taxable income for 2016 Use up government deductions if at all possible Standard deduction MFJ = $12,600 Personal exemption = $4,050 Married family of 4 $28,800 of Federal tax free income That is about 9600 bu. of corn or 3,100 bu. of soybeans If net operating loss (NOL) is unavoidable Can elect to carry it back either 2 or 5 years or carry forward 6

7 Divergent Incomes for 2016 High income year Lock in grain price, but use deferred payment contract Prepay expenses Can prepay rent, up to 12 months Not between related parties Pay up accrued interest Sec. 179 Expense Election $500,000 Bonus depreciation, 50% Double up on itemized deductions Fund retirement plans Deferred Payment Contracts Have multiple contracts Cash basis taxpayers can use for tax planning Can elect to pull back a contract into current year Has to be full contract 7

8 Commodity Credit Loans Options to declare as income or loan Declare as income by reporting on Schedule F Must continue to declare as income in future years Change back to loan by filing Form 3115 Constructive Receipt of Income Telling someone to hold the check Not depositing income until following year Must have deferred payment contract 8

9 Easement Income May be divided into three parts Destruction of crops Schedule F Temporary easement Rent income Permanent easement Capital gain Reduce basis of land to $0 Soil & Water Conservation Expenses Earthen improvements and land improvements such as building a pond must be added to basis of land Exception - Sec. 175 provides for taxpayers that are in the business of farming to deduct these expenses Deductible soil & water conservation expenses include: Treatment or movement of earth, such as leveling, conditioning, grading, terracing and contour furrowing Construction, control and protection of diversion channels, drainage ditches, irrigation ditches, earthen dams, water courses, outlets and ponds Eradication of brush Planting of windbreaks 9

10 Soil & Water Conservation Expenses Must conform to an NRCS plan or applicable state or local agency plan The deduction can t exceed 25% of gross farm income Any excess can be carried over to the succeeding tax year Ineligible expenses Improvements to land not previously used in farming Land clearing expenses which prepare land for farming Expenses incurred by cash rent landlords Expenses in connection with draining or filling of wetlands Soil & Water Conservation Expenses Expenses claimed on line 12 of Schedule F If taxpayer chooses not to deduct, expenses must be capitalized usually as nondepreciable land costs Recapture of expenses applies if farmland on which the expense has been taken is sold within 10 years of farmland acquisition Recapture is 100% if land is disposed of within 5 years Reduced by 20% for each additional year land is held Recapture is from date of land acquisition not from date of expense 10

11 Beginning Farmer Tax Credit Program Encourages agricultural asset owners to lease land, equipment and/or breeding livestock to qualified beginning farmers Provides owner a credit on Iowa income taxes owed 7% on cash rent 17% on crop share 1% additional first year if beginning farmer is a military veteran 21 Key Requirements Lease must have a term between 2-5 years Tax credit issued annually through lease term Renewable at expiration Must reapply Beginning Farmer must still qualify Flex leases only calculated on base rent No tax credit on bonus/variable factors Lease can be between related parties including immediate family members 22 11

12 Key Requirements If crop share lease, Beginning Farmer must receive at least 33% of crop FSA Form 156 must be submitted with application Confirms farm location, acres, ownership Beginning farmer must be listed as operator All Names MUST be the same: Names on 156 Form Names on lease Names on application 23 Calculating Cash Rent Tax Credit 160 acres cash rented $200 per acre gross lease income: 160 x $200 = $32,000 Iowa income tax credit: $32,000 x 7% = $2,

13 Calculating Crop Share Tax Credit Allocation of acres and yield 50% to corn and 50% to beans Yield determined by USDA data (Historical average of county s T-yield) Price = USDA RMA state fall price County list is on website Crop share is calculated on the asset owners percentage 25 Crop Share Example 160 Acres allocated ½ to corn, ½ to soybeans with 50/50 crop share: 80 acres corn x 167 bu/acre x 50% x $3.83 x 17% = $4, Total corn crop = 13,360 bushels Owner s share = 6,680 bu. 80 acres soybeans x 48 bu/acre x 50% x $8.91 x 17% = $2, Total soybeans crop = 3,840 bushels Owner s share = 1,920 bu. Total Iowa tax credit = $7,

14 Other Provisions and Fees September 1 st application deadline $250 Application fee Service fee $50/year for cash rent lease $100/year for crop share lease 27 Custom Farming Tax Credit Program Encourages agricultural asset owners to custom hire qualifying beginning farmers Provides owner a credit against Iowa income taxes Credit equals 7% of amount paid to beginning farmer 28 14

15 Program Requirements Contracted work must be for the production of crops or livestock Contract must be: in writing for less than 24 months signed by all parties involved Beginning farmer must provide everything needed for contracted work (including labor and machinery) Taxpayer must provide proof of payment Contract cannot be between spouses, children, or siblings 29 Other Requirements and Fees November 1 st application deadline $200 Application fee $50 more after October 1 st If the same person hires the same beginning farmer for multiple jobs, all work can be put on one application 30 15

16 IADD Tax Credit Programs $50,000 maximum tax credit per year per application or taxpayer Unused credits Can be carried forward 10 years Cannot carry back to prior years 31 For applications and additional information: Steve Ferguson Ag Program Specialist Iowa Finance Authority 2015 Grand Ave Des Moines, IA IowaFinanceAuthority.gov/IADD Tammy Nebola Ag Program Specialist

17 Thank you! 17