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Uncle Sam will soon come calling. Are you ready?Uncle Sam will soon come calling. Are you ready?

Slow congressional decisions make year-end tax planning uncertain.

November 2, 2015

6 Min Read
Uncle Sam will soon come calling. Are you ready?

It’s the holiday season. We’re thankful for our many blessings. We’re in the spirit of giving. And, with high calf prices and powerful profits, without some tax planning, that spirit of giving may be tested as Uncle Sam comes calling, looking to collect his share of your hard work.

That’s where the higher bonus depreciation and Section 179 deductions for equipment and some other goods bought before Dec. 31 will come in mighty handy – if they’re available.

As of press time, the full Congress had failed to pass legislation to expand Internal Revenue Service Section 179 maximum deduction of $500,000 for one more year. That leaves little time to get that combine or feed truck bought. Tax planning and finishing up the year financially will come down to the wire.

If the big deduction isn’t passed, the maximum deduction for that new truck, tractor, combine or baler will be $25,000. It was nearly Christmas last year before the Senate finally voted to expand the expired Section 179 tax deduction from $25,000 to $500,000 and extend the break for one year, to the end of 2014.

That didn’t provide much time for producers to dash down to the John Deere, Case or New Holland dealer to take delivery of equipment before Dec. 31. There’s worry that farmers and ranchers will face the same eleventh-hour decision this year, says David Mooney, CPA and tax accounting specialist with Brown, Graham & Company, P.C., headquartered in Amarillo, Texas. 


“The House of Representatives has passed the Section 179 expansion, but the Senate has not,” says Mooney, whose firm has farmers, ranchers and feeders among its clients. “The problem with the overall Congress waiting so late is that producers and feeders must have new equipment in service before the end of the year in order to qualify for the bonus deduction. They can’t be waiting on delivery on Jan. 1.”

Bart Fischer, chief economist for the House Agriculture Committee, says don’t blame the House, because it’s the Senate dragging its feet on passing Section 179. “Last year, it moved through the House in June,” Fischer noted during the recent Oklahoma Cattlemen’s Association meeting.

“This year, it moved through the House, I think, in February. And it’s still sitting there (in the Senate). Also, the bill we put through in the House puts it (the bonus depreciation) in place permanently.”

Livestock Forage Disaster (LFP) program

Many producers received added government insurance payments through the Livestock Forage Disaster Program (LFP). Fischer, who was raised on a farm and ranch in southwestern Oklahoma, says the large Section 179 deduction would help many ranchers who collected on LFP.

“It is important, particularly given the LFP payments that went out last year,” Fischer says. “The deduction is needed.”

U.S. Sen. Pat Roberts, (R-Kan.), chairman of the Senate Agriculture Committee, tells BEEF that he is eager to see Section 179 passed. “I hear farmers and ranchers’ message loud and clear that bonus depreciation is one of the key tools to helping grow the American economy,” Roberts says. “It drives new investment in business assets because it reduces the risk of such investment, which in turn creates jobs and frees up cash that can be reinvested in the company.

“As a member of the Senate Finance Committee, I was proud to vote for tax extenders legislation that passed the committee in July.”

The IRS says a Section 179 deduction is good on new and used equipment, as well as off-the-shelf software. There is a $200,000 maximum amount that can be spent on equipment before the Section 179 deduction begins to be reduced on a dollar-for-dollar basis, IRS says. The deduction is not limited to just equipment, notes Mooney.

cattle_20at_20pasture_20bunk.jpg“If you’ve bought or are buying cows or replacement heifers before year’s end, they may qualify,” he says. “For example, if you bought 150 replacements, sold the calves and kept the cows, you may be able to take Section 179 on the cost of the cows.

“For feedyards, it can be a big item, such as milling equipment, concrete for bunks, front-end loaders, etc.”

Stan Bevers, Texas A&M AgriLife Extension economist, believes Section 179 will see the bonus depreciation expanded once more. “I think it’s going to happen. It just depends on how late it is,” he says. “I wish I had the volume of dollars spent in the last two weeks of 2014 on capital assets (following the expansion to $500,000).”

He says that with the increased income many are seeing, producers should consider how to lower taxable revenue by purchasing equipment or other items that can improve their production efficiency.

“I would hope they have, or would take steps to get better use of their grass,” Bevers says. “Better watering facilities or cross fencing. If an old trailer has a busted floor or other problems that can cause downtime, then a better trailer may be needed.”

Higher ticket items, like ATVs, may help improve calf survivability. “If an ATV can get me out there more conveniently than horseback during calving, it may be a good investment,” Bevers says. “If I can save one more animal facing difficulty in calving, that’s $500.”

Mooney wouldn’t advise producers and feeders to make a late-year purchase just to receive a tax deduction. “If you need the equipment and need to use it now, go get it,” he says. “Don’t just get equipment for a tax deduction. Don’t spend $120,000 to make $25,000. But I still see a lot of people wait until the last minute before they make any equipment purchase decisions.” 

Deferred income

With large dollar amounts involved in cattle transactions, some may choose to defer income. “The old standard is to defer income and accelerate expenses when possible, ” Mooney says.

He adds that with more producers using futures and options to manage financial risk on high-value cattle, “hedging” practices can become deductible. “If you use futures or options for true hedging to protect your pricing, it can be either ordinary income or a loss,” he says. “But if you are speculating, any gains are viewed as capital gains and not ordinary income. There is up to a 23.8% tax rate. Losses from speculating may not be currently deductible.”

Mooney says it’s not likely that new tax legislation will be passed in 2016. “With that being an election year, it will likely be 2017 until changes in tax laws are made,” he says.

He advises producers and feeders to consult closely with their accountant to understand how current and potential tax laws will impact their operations. See more on Section 179 here.

Larry Stalcup in a freelance writer based in Amarillo, Texas.

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