-a reminder from the tax staff at Yankee
I’m sure that tax planning is the
last thing on the minds of most dairy farmers this year, however, while many
farms have struggled with low milk prices recently, it is important to remember
that if you are making regular debt payments those payments are creating
taxable income as the principal portion is not deductible. In addition, if your
payables have increased significantly from 2015 you are going to have less
ordinary expenses available to offset your income in 2016. Even if you haven’t
had a profitable year, tax planning can still be a beneficial exercise. For
example; if you have funds sitting in a traditional IRA account you may be able
to convert some or all of that IRA to a Roth IRA and pay little or no tax. The
benefit to this is that after 5 years the principal and earnings from the Roth
can be withdrawn tax free. Another item to consider is harvesting winners and
losers from your portfolio to take advantage of the 0% Capital Gain rate for
taxpayers in the 15% tax bracket. It’s a good way to free up some tax free
cash.
For 2016 the $500,000 Section 179
deduction and 50% bonus depreciation are both available. Both these items have
limits and phase outs, consult your tax specialist if you are considering using
them.
While both Section 179 and 50%
Bonus Depreciation can be useful tools for managing your Federal tax liability,
most states are not allowing bonus depreciation and not every state’s section
179 limit has been increased to match the Federal limit.
Prepaying expenses is one of the
most common tax management practices that we see; it is also an area that is
receiving increased scrutiny from the IRS during audits. So here is a quick
review of the rules for prepaid expenses. There are three conditions which must
be met in order for a cash basis taxpayer to claim a deduction in the year the
prepayment is made.
- The expenditure must be a payment for a supply and not merely a deposit. (You need to have an invoice clearly stating the quantity purchased and the price, delivery before the end of the year is not required.)
- The prepayment must be made for a valid business purpose and not merely to accelerate a tax deduction. (Some examples of valid business purposes include but are not limited to: ensuring the availability of the supply item or locking in a guaranteed price.)
- The deduction must not result in a material distortion of income.
In addition you need to be aware
that there is a 50% rule that limits the deduction for prepaid expenses to 50%
of deductible farm expenses unless you are a “qualified farm-related taxpayer”.
Please contact your Farm Credit Tax
Specialist if you have any questions or if you wish to schedule a tax planning
meeting.
