Presentation on theme: "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."— Presentation transcript:
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 weather- related 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.
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 Section 179 Expense Deduction
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?