Staying on top of recent tax code changes with your accountant or financial adviser can bring benefits to your operation.
Last year, for example, you may have decided to buy new equipment or invest in grain storage or single-purpose livestock buildings. The 30% bonus depreciation, in addition to expensing up to $24,000 under Section 179, may have been, in part, what encouraged you to do so.
This year, the tax code relating to depreciation is even sweeter. The levels of expense-method depreciation as well as the depreciation bonus have been increased, says Neil Harl, Iowa State University agricultural lawyer and economist.
The recent change in expense-method depreciation has been very dramatic. Last year you could expense up to $24,000. That allowance level was raised to $25,000 at the start of this year, says Harl. However, it's now been raised significantly to $100,000 on eligible property defined under Section 1245 for 2003, 2004 and 2005.
That personal property includes such things as machinery, land improvements (i.e., tile lines, fences), grain bins and breeding stock. Structures and/or buildings are excluded. Harl says it's also important to keep in mind that, if you put into service more than $400,000 worth of property in the year, there is a dollar for dollar phase-out. “It reduces what you can actually claim,” he says.
Unless there is a change in the law, the allowance will return to $25,000 in 2006, Harl adds.
“New property placed into service after May 5, 2003, is now eligible for a 50% bonus depreciation,” he says. “That higher bonus is available for eligible property placed in service before Jan. 1, 2005, if there was no binding contract in effect before May 6, 2003. The bonus depreciation allowance includes up to 20-year property if it's new — the original use must commence with the taxpayer.”
This applies to a host of eligible property, such as machinery, machinery storage sheds, other farm buildings, land improvements such as tile lines and fences, and single-purpose agricultural and horticultural structures, including confinement livestock facilities and breeding stock facilities.
“The good news is that producers can now claim more depreciation — faster,” he says. “But they still can't claim any more than they've invested. It's also important to note that this bonus can be claimed on the entire basis, not just on the cash paid. For example, if you're trading in a tractor that has an undepreciated basis of $30,000 and you pay $100,000 cash for a new one, you can claim the bonus depreciation on the full $130,000.”
Harl urges growers who are tempted to opt out of bonus depreciation to first discuss it with their tax advisers.
The recent boost in the depreciation allowance also increased the depreciation claimable “for the first year only” on new automobiles or light pickups (under 6,000 lbs. gross vehicle weight) used in the business and put into service after May 5, 2003.
This recent change now allows you to claim a total of $10,710 for the first year on each new business vehicle. This represents an increase over the $7,650 allowed previously under the 30% bonus depreciation allowance and a substantial boost over the regular first-year allowance of $3,060. However, Harl underscores the fact that this increase is for the first year only. The level or allowance stays the same for all other succeeding years.
For more information about tax law, the IRS offers its yearly Farmer's Tax Guide, Publication 225, from its Web site, www.irs.gov. In the “Search Forms and Publications” column heading, type in Publication 225.
Other Key Tax Code Changes
Several key tax code changes tied to capital gains, Conservation Reserve Program (CRP) payments and marketing loan benefits should be discussed with your tax adviser this year, says Neil Harl, Iowa State University agricultural lawyer and economist.
Some of the more notable ones include:
Capital Gains/Dividends: The capital gains rate was reduced from 20% to 15% for those in higher tax brackets and from 10% to 5% for those in lower tax brackets (i.e., 10% or 15%).
This affects capital gains from the sale or exchange of capital assets. The rate also applies to the sale or exchange of livestock used in your farm business and qualifies as a Section 1231 if you held, for example, dairy cows or breeding stock for 12 months or more (24 months or more for horses and cattle).
According to Harl, the new tax law also contains a “zero percent capital gains rate” for a one-year period. But that won't go into effect until 2008. He cautions about getting too excited about this because it may be eliminated before then.
For dividends, those in higher tax brackets will be taxed at the 15% level while those in 10% and 15% brackets will be taxed at 5%.
Conservation Reserve Program (CRP) Payments: On June 23, 2003, a Chief Counsel Office Letter Ruling was issued stating that all CRP payments should be subject to the Self-Employment Tax — even for retired taxpayers, Harl says.
It's something to keep your eye on and talk to your tax adviser about to get the latest information before filing any returns, he adds.
According to Harl, the Chief Counsel's office was examining the reporting of CRP payments, especially in relation to retirees or outside investors. “The language in the letter ruling was also broad enough to include other federal conservation programs that involved land idling, such as the wetlands program,” he says.
Marketing Loan Benefits: Marketing loan benefits paid by the Commodity Credit Corporation (CCC) should be examined. Look at what is reportable as a gain and the amount of gains applied toward the payment limitations in conjunction with the four basic ways in which the benefits are collected, Harl explains.
Those four payment methods are: loan deficiency payments, CCC loans repaid in money, CCC loans repaid with commodity certificates and CCC loans followed by forfeiture of the commodity to the CCC.
If you repay CCC loans in real money, Harl says the gain involved is reported to the Internal Revenue Service (IRS), and it counts against the $75,000 payment limitation.
If you elect to repay the CCC loan with Commodity Certificates, the gain doesn't count against the payment limitation. It also isn't reported to the IRS under current USDA practice — although the gain is clearly taxable. Under forfeiture to repay the loan, those gains don't count against the payment limitation, but they are reported to the IRS.