I've saved your past column from August. I have heard that the drawback with e-filing for a self-employed person is that it makes it more likely that the Schedule C could be flagged for an audit. I guess the bottom line is they are saying paper filing lowers your chances of an audit. Your thoughts?
Paper filing does change your odds, but all for the worse. First, sending a paper return assumes you will get timely delivery by the U.S. Postal Service and proper logging of receipt by the IRS Service Center. Our clients have seen failures of both. Secondly, you are trusting the IRS keypunchers to properly enter all of your data on the proper line of every schedule. An error by the keypuncher increases the probability of a manual review of the tax return. By contrast, an e-filed return is instantly received by the IRS computer, providing a first-tier check of the basics (e.g. dependent Social Security numbers) and confirmation of timely filing. Most importantly, e-filing assures the IRS has exactly the same data in their computer as you submitted. I know of no reason why a particular schedule, such as a self-employed proprietor reporting on Schedule C, would benefit from paper filing.
In 2015 I purchased two residential rental properties. Will these qualify for either the Section 179 or 50% bonus first-year depreciation you mentioned in your February Taxlink article, "Legislation Surprises?" I set up a Limited Liability Company (LLC) to manage the rentals.
These two front-end depreciation deductions are not available for the building structure. It is only appliances, carpet, mowers and the like that are in the categories that qualify for these deductions. The 50% deduction is the easy one: If the asset is new and the asset is in the shorter depreciable life categories of appliances, carpeting and other equipment, it will qualify.
The Section 179 deduction is more challenging. There is a rule that is difficult to overcome, preventing the Section 179 deduction when the asset is leased for use by another party. But this doesn't apply to assets used by the landlord, so equipment such as lawnmowers and snow blowers can be expensed using the Section 179 deduction.
And there is one more opportunity: Recent IRS regulations allow small asset expenditures or improvements costing less than $2,500 to be expensed as a "de minimis" item. For example, a replacement water heater that otherwise would be part of the building, costing less than $2,500, can be deducted as a de minimis item, assuming an election is made in your tax return. The de minimis expensing policy must be followed in any financial statement that is prepared.
You've written about use a Charitable Remainder Trust (CRT) for disposing of grain, livestock and machinery at retirement. Is there any issue with sale of assets from CRT to a related party (son/daughter)?
Yes, there's a big issue. The Charitable Remainder Trust is a very tax-efficient mechanism for deferring the income from inventory and asset sales at retirement. But the CRT is a charitable tax-exempt entity that is subject to the self-dealing rules. The transaction you describe would trigger a self-dealing excise tax. The CRT strategy is effectively available only to those who are disposing of their inventory or other assets in an open market sale to unrelated parties.
EDITOR'S NOTE: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis with more than 40 years of experience in ag taxation, including 30 years as a trainer for the American Institute of CPAs and other technical seminars. He writes a monthly column for our sister magazine, The Progressive Farmer. To read his past columns, go to https://www.dtnpf.com/….
To pose questions for future tax columns, e-mail AskAndy@dtn.com.
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