Business Management Curriculum - PowerPoint Presentation

1. Business Management CurriculumModule 7: Tax Issues For Farmers and Ranchers

2. Project Team:Ruby Ward, Professor, Utah State UniversityTrent Teegerstrom, Associate Director of Tribal Extension, University of ArizonaKarli Salisbury, Research Associate, Utah State UniversityKynda Curtis, Professor, Utah State UniversityStaci Emm, Extension Educator and Professor, University of Nevada RenoCarol Bishop, Extension Educator and Associate Professor, University of Nevada RenoThis material is based upon work that is supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, under award number 2013-38640-22175 through the Western Sustainable Agriculture Research and Education program under subaward number EW14-017. USDA is an equal opportunity employer and service provider. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture.Each university is an affirmative action/equal opportunity institution Acknowledgments: Vicki Hebb, reviewing content, and Russ Tronstad (University of Arizona) and Stuart T. Nakamoto (University of Hawaii), content.

3. Income Taxes for Farmers and RanchersUS tax code has specific attributes for “farmers”This program is educationalTax code is complexDifferent applications to different situations

4. Advantages to FilingMay be able to claim refund or EICProve you have income to get financingNeeded for FSA programsNeeded for Whole Farm Revenue Protection Insurance Program

5. Basic Tax FormsIRS has forms that you file for personal income taxes (1040, 1040A and 1040ez)There are supporting schedules to these formsSchedule A: Itemized deductionsSchedule B: Interest incomeSchedule C: Business incomeSchedule E: Includes rental incomeSchedule F: Farm income

6. Why is Schedule F Special?Can be filed on a cash basisPlaces for farm categories for income and expenses

7. Accounting Methods-CashUsed by most farmersIncome reported for the year when receivedCannot hold checksExpenses deducted in year when paidSome expenses must be capitalizedSome payments are limitedSpecial casesCattle purchased for resale (e.g. yearlings)Purchase costs carried forward to year of sale

8. YouLenderTax preparerOtherGood Record Keeping Meets the Needs of:

9. Qualified Farmer/RancherGross Income = All incomeFarm Income = Schedule F, line 11 + Form 4835 (gross farm rental income) + Schedule E, Parts II & III (gross farm income) + Form 4797(gains from sale of breeding animals)

10. Website created for farm/ranch federal tax educational Materials will be drawn from the website RuralTax.org

11. Acknowledgment: The valuable advice and assistance given to us each year by the National Farm Income Tax Extension Committee is gratefully acknowledged.

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13. This information is intended for educational purposes only. You are encouraged to seek the advice of your tax or legal advisor, or other authoritative sources, regarding the application of these general tax principles to your individual circumstances. Pursuant to Treasury Department (IRS) Circular 230 Regulations, any federal tax advice contained here is not intended or written to be used, and may not be used, for the purpose of avoiding tax-related penalties or promoting, marketing or recommending to another party any tax-related matters addressed herein.

14. RuralTax.org ContributorsTamara L. Cushing Assistant Professor & Extension Forestry Specialist, Clemson University Tax SchoolLeon GeyerProfessor, Department of Agriculture and Applied Economics, Virginia Polytechnic Institute and State University Phillip E. Harris Professor, Department of Agriculture and Applied Economics, University of Wisconsin-MadisonJ.C. Hobbs Assistant Extension Specialist, Department of Agriculture Economics, Oklahoma State UniversityGuido van der Hoeven Extension Specialist/Senior Lecturer, Department of Agricultural and Resource Economics, North Carolina State UniversityGary Hoff Extension Specialist – Taxation, University of Illinois Tax SchoolBob Holcomb Extension Educator, Agricultural Business Management, University of Minnesota ExtensionDennis Kauppila Regional Specialist: Farm Business Management, University of Vermont ExtensionKeith D. Kightlinger Extension Economist- Farm Financial Management, Rural Development CenterWarren Lee Professor Emeritus, The Ohio State UniversityRoger A McEowen Leonard Dolezal Professor, Agricultural Law, Iowa State UniversityGeorge Patrick Professor and Extension Economist, Purdue Income Tax SchoolJerry Pierce Program Coordinator, Kentucky Farm Business ManagementGlenn Rogers Professor Emeritus – UVM Extension, UVM Extension Income Tax ConsultantTrent Teegerstrom Dept of Ag and Resource Economics, University of ArizonaJeff Tranel Agricultural and Business Management Economist, Department of Agricultural and Resource Economics, Colorado State University ExtensionRuby Ward Professor, Department of Applied Economics, Utah State UniversityAnne Whyte Department of Applied Economics, Utah State University

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17. Material from RuralTax.org being used for the next partSample 1040 formSample Schedule FWe are only using the forms here RuralTax.org also has the explanationsBoth are located under the Sample Tax Returns areaRuralTax.org

18. You file individual income taxes for your business unless…PartnershipCorporationLLCNote: You still need the same information for tax preparerYou file form 1040 withSchedule C – for business incomeSchedule F – For farm incomeWhat does your tax return include and look like?

19. 1040 Form

20. Bottom half front page 1040

21. 2nd Page 1040

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23. Farm IncomeCash basisInclude any income (cash or checks)Cannot hold checksExpensesAny expenses paid for Profit is income minus expenses

24. Filling out Schedule FName, SSN, etc.IncomeExpensesNet Profit (or loss)

25. IncomeIncome from selling livestock (you purchased) less cost (or basis) of livestock (line 1)Cash basis a summary of cash that came to you based on things you sold which you produced (line 2)COOP earnings (line 3)Gov. Program Payments (line 4)Commodity Credit Corporation (CCC) Loans (line 5)Insurance Proceeds (line 6)Custom Hire (line 7)

26. Profit and Loss Form

27. ExpensesChemicals (line 13)Conservation Expenses (line 14)Custom Hire (line 15)Depreciation (line 16)Feed Purchase (line 18)Fertilizer (line 19)Gas, Fuel and Oil (line 21)Interest (line 23)Repairs and Maintenance (line 25)Seed and Plants (line 26)Supplies (line 28)Vet, breeding, medicine (line 31)

28. Profit and Loss Form

29. Specific Issues to be aware ofThere is a fact sheet available for each of these topics at RuralTax.orgSelf-employment taxHobby loss rules1099 informational returnsDepreciation and section 179Estate Taxes

30. Self Employment Tax

31. Salary and wages paid to youEmployer deducts 7.65% for FICA and MedicareEmployer matches 7.65% for a total of 15.3% Self Employed individual pays both sides as self-employment taxDo not need to pay if SE profit less than $40012.4% on the first $110,000 of profit for FICA2.9% on entire profit for MedicareOften more than income tax, because it is paid on every dollar of profitSelf Employment Tax

32. Allows farmer to keep quarters of coverage when profits are lowGross farm income less than $6,540 or net profits less than $4,721Provides credit for four quarters of coverage for the yearThe cost of the coverage will be $667No limit to number of years a farmer can use optional methodFarm Optional Method

33. John and Lucy Farmer are married and have two children (10 and 12). Lucy is not employed during 2010. John grows vegetables and sells them at a local market. During 2010, John’s net profit was $45,000. John did not sell any equipment and John and Lucy had no other source of income. For 2010, the Farmer’s have $1,582 of income tax liability and have a $6,358 SE tax liability. The Making Work Pay credit of $800 and the earned income credit of $747 will reduce this by $1,547 leaving a balance due of $6,393.Example

34. Hobby Loss Rules

35. To be able to deduct expenses greater than receipts (losses) farmers must be engaged in a business for profitProfit = Revenue (receipts) – expensesNot a hobby if profits are made in 3 of 5 consecutive years2 of 7 years for equine operationsIf profit test not met, IRS may look into itIRS does not automatically look, but it allows them toHobby Loss Rules

36. Guidelines the IRS uses to determine if it is a business:Carried out in a business like mannerKeep track of receipts and expenses, separate checking account, etc.If additional knowledge and education is pursued (this course)Expertise of producerTime and effort spent by the producerHobby Loss Rules

37. Form 1099

38. Form 1099-MISC Example

39. Required for payments of $600 or more for rents and services or for payments of at least $10 in royaltiesproceeds from direct sales of consumer products for resalecrop insurance proceedspayments to fishing boat crew membersIndian gaming profits paid to tribal memberspunitive damages awarded in courtForm 1099-MISC Miscellaneous Income

40. Form 1099-INTInterest IncomeMust be filed if $600 or more of business interest is paid to an individual, partnership or LLC.

41. Payments other than medical and healthcare made to a corporationPayments for merchandise, telegrams, telephone, freight, storage and similar itemsPayments of rent to real estate agentsWages and business travel allowances paid to employeesPayments made to tax-exempt organizationsPayments not subject to a 1099

42. SituationForms needed$4,000 herbicide purchasenone$1,200 to Luke Carefully, a certified crop consultant for disease scouting1099-MISC$1,100 for soil testing to Cropmaster, Incnone$500 to neighbor to plownone$750 paid to neighbor’s LLC to haul grainnone$5,000 cash rent to Sally’s sister1099-MISC$2,500 interest payment on installment purchase of land from cousin Jason1099-INT$1,000 paid to Brad Handy for services and supplies to fix shed1099-MISC1099 Reporting Examples

43. Sally receives $600 for performing custom services as a non-employeeReceives a 1099-MISC, reports income on Schedule F Sally receives cash rent of $3,000 from a farmerReceives a 1099-MSIC, report income on Schedule ESally purchased some supplies and marketed some products through her COOP. She received $800 in patronage dividends that consisted of $160 in cash and $640 qualified written notice of allocation Receives a 1099-PATR that showed taxable distributions received of $800 in box 1. Reports $800 in patronage dividends on schedule f.1099 Received by Producer

44. Sally receives Form 1099-G for $24,000 She paid $8,000 to Rich SmithShe reports $24,000 on Schedule F line 6a and $16,000 on line 6bShe issues Form 1099-G to Rich for $8,0001099 Received for Ag program payments

45. Dustin is president of an irrigation associationDustin was listed as the subsidy recipient for an EQIP payment instead of the association The subsidy was actually received by the irrigation association and distributed to its membersDustin receives a 1099-G from USDA for the full amount1099s will have to be issued to each member for their amountNet effect for Dustin will be only the amount he received1099 Received for Ag program payments

46. How do I fill out and submit a 1099?Provide information to your tax professionalName and Address of people and/or entityAmount paidSSN or other tax identification numberCannot fill out or scan and use the Form 1099 from the IRS websiteCan order from IRS website or call 1-800-TAX-FORMA copy is kept for the taxpayer, a copy sent to the recipient, and a copy sent to the IRS

47. Individual Tribal TaxWhat are some of the exceptions to members of federally recognized tribes being subject to taxes as individuals? One of these is income from individually allotted land that remains in trust. The General Allotment (Dawes) Act of 1887 provided for tribal lands to be allotted to individual Indians in trust for a period of years, after which the lands were to be conveyed to the allottees in fee “ free of all charge or encumbrance whatsoever.” (25 U.S.C.A. Par 348) This provision has been interpreted to prevent taxation of income or capital gains “derived directly” from allotted land while it remains in trust. (Squire v. Capoeman, 351 U.S. 1 (1956))

48. Individual Tribal TaxThis exemption applies to rents and royalties as well as income from sale of crops or minerals from the land (Rev. Rul. 56-342, 1956-2 C. B. 20) Gain from the sale of livestock raised and grazed on allotted trust land has also been ruled exempt (Rev. Rul. 62-16, 1962-1 C. B. 7.)

49. What if I am exempt?You still have to file a tax returnOptions from 2010 IAC Tax GuideFile a Federal Form 1040 return report $0 miscellaneous income attach an explanationFile a Federal Form 1040 return with a Schedule FDo not carry the Schedule F net income or loss to the main Form 1040 Write in Marker “For Information Purposes Only, Activity is exempt according to the terms of … (cite treaty or allotment act).”

50. FOR INFORMATION PURPOSES ONLY, ACTIVITY IS EXEMPT ACCORDING TO THE TERMS OF (CITE THE TREATY OR ALLOTMENT ACT.)0.0or0.0

51. FOR INFORMATION PURPOSES ONLY, ACTIVITY IS EXEMPT ACCORDING TO THE TERMS OF (CITE THE TREATY OR ALLOTMENT ACT.)

52. Deferred Taxes, Section 179 Deduction, And Estate Taxes

53. Deferred Tax on Current AssetsCurrent liability to account for timing of payment of tax liability.Tax that is deferred into a future year from:Delaying selling of crops or livestock producedPre-payment of expenses Accelerating depreciation expenseTake value of all current assets that would be taxed if sold/collected and subtract all current liabilities that would be deductions if paid.The net multiplied by tax rate is deferred tax on current assets.

54. Deferred Tax cont.Reasons to do it:Keeps farmer in a lower tax bracketKeeps farmer from paying AMT taxIf the tax is the same dollars, paying it in the future is cheaper (you are using deflated dollars to do so). You could also have made money on the investmentReasons not to do it:Risky, may hit at a time they are financially unable to cover itMay be higher tax rates in the future

55. Section 179 Deduction: Election For Expensing Equipment2016 Deduction Limit = $500,000This deduction is good on new and used equipment, as well as off-the-shelf software. Equipment must be financed/purchased and put into service by the end of the day, 12/31/2016.2016 Spending Cap on equipment purchases = $2,000,000This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. Bonus Depreciation: 50% for 2016Bonus Depreciation is generally taken after the Section 179 Spending Cap is reached. Note: Bonus Depreciation is available for new equipment only. Source: www.section179.org

56. Questions?

57. Thank You!