Top considerations for 2009 tax planning
CARROLL – As year-end tax planning progresses, there’s still time to take advantage of the Section 179 expense election, but it’s important to understand state and federal tax issues related to this election.
“There’s a huge difference between Iowa taxable income and federal taxable income with this,” said Charles Brown, president of AgriFinancial Services LLC, who spoke during a recent Iowa State University farm tax seminar that was offered across Iowa.
The Section 179 expense election allows the write-off of the first $250,000 in depreciation of assets that were bought in 2009. This means purchases like tractors, combines, most farm equipment and breeding livestock can be written off in the year of purchase.
Some assets that don’t qualify include machine sheds and purchases from related parties, such as buying a tractor from a relative.
The bonus election also still exists for new assets placed into service by Dec. 31. The bonus can be used with the 179 expense election, but the 179 election has to be used first, Brown said. The bonus election could apply only to brand new assets, while the 179 election could be applied to used equipment. The bonus election is available for business and rental assets, such as when a landlord installs field tile in a field that is cash-rented.
The bonus also can be used to accelerate the depreciation of a machine shed, but the building must be put up and in use in 2009 for it to qualify.
“If you’re thinking about buying a big-ticket item, you might as well do it in December rather than January, since you can take the bonus in addition to the Section 179 expense election,” said Roger McEowen, director of the ISU Center for Agricultural Law and Taxation, who also spoke during the farm income tax school.
It’s important to note, however, that Iowa did not couple with the expanded Section 179, nor did Iowa couple with the five-year life assigned to new farm machinery under federal depreciation in 2009.
In Iowa, new machinery is assigned a seven-year life. In addition, Iowa did not couple with the 50 percent bonus depreciation, meaning Iowa has no bonus depreciation for farm assets.
“Iowa is looking for tax revenues,” Brown said. “Because of these factors, there can be a huge discrepancy between your Iowa tax return and your federal tax return.”
Hedging or speculating?
Farmers also need to be aware of tax issues related to hedging and speculating. The Internal Revenue Service has developed rules to help farmers keep better records to prove whether a transaction is a hedge or speculation, said Brown, who noted that the IRS is starting to scrutinize these transactions more carefully.
“The IRS is putting an office in Des Moines and will be hiring 200 extra employees,” he noted. “As a result, I would expect more audits, including farm audits.”
Hedging is defined as a transaction that a taxpayer enters into in the normal course of business to reduce the risk of price change.
The hedge position is offset with the physical commodity. Hedging transactions (profits or losses) are reported on Schedule F. Gains will increase the self-employment tax, while losses will decrease the self-employment tax. Gains and losses are netted against all income.
In addition, gains and losses are only calculated on closed transactions.
With speculation, a farmer sells the commodity and buys a futures position in anticipation of rising prices.
While this saves on storage and interest costs, the producer no longer has the opposite position in the cash market. For tax purposes, speculation is treated as capital gains and losses.
Capital gains offset capital losses. If there are no capital gains, losses are limited to $3,000, said Brown, who added that no self-employment tax is paid on capital gains.
For a hedging tax treatment, the transaction must be identified as such by the taxpayer before the close of the day on which the hedge was created. The item being hedged must be identified no more than 35 days after the hedging transaction.
A statement needs to be placed in the books noting the transaction or ledger account as a hedge. If a hedge is not properly identified, the IRS has the power to treat gains as ordinary income and losses as capital losses.
“This may be just the opposite of what you want,” Brown said. “I recommend using separate commodity accounts if you are both hedging and speculating, because this will make it easier for you to explain to the IRS if you are audited.
“The IRS wants more detail and more records, and it will be up to you to keep track of this information.”
Brown and McEowen recommend working with a farm tax adviser before the end of the year to make sure all advantages are received.
Also, find current tax-related information at ISU’s Center for Agricultural Law and Taxation at www.calt.iastate.edu.
Contact Darcy Dougherty Maulsby by e-mail at email@example.com.
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