tax planning tips

Year-end tax planning complicated by inaction in congress

Will Congress increase Section 179 deductions? That’s the question confounding cattle producers.

Eleventh Hour Update--Tuesday evening, Dec. 16, the U.S. Senate voted 76 to 16 to pass a tax extender package that, among other things, extends Section 179 and bonus depreciation for 2014 taxes. A similar bill was passed earlier in the lame duck session by the House of Representatives. The measure now goes to President Obama.

In 2013, producers were able to expense up to $500,000 on capital investments. For 2014, however, that figure fell to $25,000. Pending President Obama's approval, the measure extends the $500,000 figure into the 2014 tax year.

However, the measure is only a one-year extension, not a permanent fix. But it could add the needed pressure to complete a comprehensive tax reform deal in 2015, says Kent Bacus, director of legislative affairs for the National Cattlemen's Beef Association.

 

How much of a gambler are you? That seems to be the question as 2014 draws to a close, and cattle producers consider their tax and money management options. The problem? There’s no real way to bet on 2014.

At the fulcrum of the problem is Section 179, a provision in the tax code that in the past has provided generous deductions for certain capital expenditures, such as equipment, says Larry Gearhardt, Ohio State University assistant professor and field specialist in taxation.

“We’re really in a state of flux right now when it comes to Section 179 expense deductions, and it’s difficult to give anybody advice on what to do exactly,” Gearhardt says. Last year, the Section 179 expense deduction was $500,000, and equipment dealers couldn’t keep up with demand as farmers looked for ways to manage the profits from $6 to $7/bu. corn.

Now it’s the cattle producers’ turn to manage the income from high prices. However, for 2014, the Section 179 deduction dropped to $25,000. “And everybody wonders what Congress is going to do as far as increasing that limit, back to somewhere close to the $500,000 limit,” Gearhardt says.

In that regard, as in many others, elections matter. A lot. With Republicans winning a narrow majority in the Senate, the political landscape in Washington has changed. How much, however, is still up in the air.

There’s still a chance that the Section 179 expense deduction could be addressed in the lame-duck session of Congress at the end of the year. However, as Bob Haag, an Amarillo, TX, CPA, observes, it’s likely that Senate Democrats will use the lame-duck session as a last-ditch opportunity to pass some legislation they want on the books.

The National Cattlemen’s Beef Association (NCBA) will be working Capitol Hill hard to encourage Congress to give cattle producers something concrete by the end of the year, says Chase Adams, NCBA spokesman in Washington. Whether or not that will happen in the flurry of political maneuvering that is certain to take place, however, is unknown.

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“It’s really a crapshoot at this point in time,” Gearhardt says. “But I do know that even if they wait until after the first of the year, past history has shown that they have made that law retroactive to the year before. So let’s say they wait until January 2015 to increase the Section 179 expense deduction; chances are good that they would make that retroactive to 2014.”

There’s also a chance that Congress will do nothing with the Section 179 provision. As this article was written, nobody was willing to skate on the thin ice of speculation and guess what direction Congress might take.

And then there’s this: While the Section 179 expense deduction is an important component in tax planning, Haag advises cattle producers not to base their decisions on that alone. “I’ve never been a proponent of buying equipment for the 179 provision just for tax purposes,” he says. “If it’s something you really need, you might consider it. But making that purchase decision for tax purposes is not a very good one.”

Limited options

So, Gearhardt says, that leaves cattle producers with some limited options. “Like most other farmers in the last several years who have been experiencing higher prices and more income than normal, the major rules are basically to defer income when you can and accelerate expenses whenever you can.”

If you can defer payment until next year on any cattle sold this year, that would defer the tax considerations on that income, Gearhardt says. “And right below that would be the possibility of receiving payments in installments, if possible. Perhaps some this year and some next year.”

However, with prognostications that prices for all classes of cattle will stay high for at least several more years, especially calves and cull cows, simply deferring income for one year may not be all that helpful. So, you and your tax accountant may want to consider income averaging.

“This is unique to farming,” Gearhardt says. “Income averaging allows you to look back over the previous three years and average your income over those three years along with the present year.” Check with your tax adviser whether or not to consider this option.

What’s more, cattle producers in the 30 states that were affected by drought between Sept. 1, 2013, and Aug. 31, 2014, have an additional year to defer the capital gains on any additional livestock sold because of the drought, IRS says.

The original grace period was four years and was set to expire at the end of 2014. However, because of ongoing drought in parts of the country, IRS extended it for another year. Check with your tax accountant to see if this exception applies to you.

Managing expenses

The other side of the formula is expenses. There, Gearhardt says, you have a few more options.

“If you have any opportunity to purchase anything this year that would be deductible as expenses, it would be to your advantage,” he says.

Some things are not deductible expenses, however. Feeder cattle headed for a feedlot are not; breeding stock is. Land is not deductible as an expense because it’s a non-depreciable asset. However, interest paid on the purchase can be deductible.

But that doesn’t mean real estate shouldn’t be considered in your planning, Haag says. “If you’ve got the possibility of a good land investment, I think you should explore that,” he says. Any capital improvements, such as fences, buildings, corrals, etc., will give you a depreciation deduction, Gearhardt says.

But there, the Section 179 debacle looms. “If you buy some additional breeding stock in 2014, there’s the possibility that you can go back and pick up that extra Section 179 deduction,” assuming Congress acts, Gearhardt says. “Whereas if you don’t buy any in 2014, you’ve lost that opportunity.”

So, as Haag suggests, don’t buy any additional breeding stock just because you might get a better tax deduction. However, if you’re thinking of expanding, perhaps you could consider buying those animals now instead of waiting.

Beyond that, Gearhardt suggests that looking more broadly might be advantageous. “Things of a personal nature, such as putting money in IRAs and increasing charitable deductions, or items on your personal Schedule A itemized deductions, would tend to decrease the amount of income you would have.”

Then there’s always the option of simply parking your money in your friendly local bank and paying taxes on it. While you won’t get much, if any, return, it buys you a little time to see how things shake out.

And how things will shake out is the conundrum that confounds cattle producers. “I think it [Section 179] will go back to some larger amount, but the question is when,” Haag says. “There’s no real way to bet on 2014.”

 

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