As tax preparation season begins, here are a few thoughts that may be of benefit at year-end:
Most ag producers are well aware of the $500,000 Section 179 first-year deduction that's available for 2016, as well as the 50% bonus depreciation available on new (not used) assets. Their tax records will neatly segregate major asset purchases by date and cost, in order to work with their tax professional to determine which front-end deduction incentives should be claimed on which assets. But farmers can help their tax professional by also considering the expanded de minimis expensing rule. The maximum was bumped from $500 to $2,500, effective in 2016. Any number up to that amount can be selected, with a new choice made annually.
The taxpayer must be consistent. Whether it's the purchase of young breeding stock, an expensive tool or an equipment improvement, the de minimis number for the year must be used both in the tax return and in any other books and records or financial statement. Help your tax professional by taking a spin through those repair and supply accounts, as well as considering what you have listed for new depreciable assets. Consider the consistency requirement on where you set that de minimis amount.
IRA TO CHARITY
For those who have attained age 70 1/2, the tax law requires that a minimum annual distribution be taken from retirement plans. To sidestep that forced income inclusion, a taxpayer can direct an IRA transfer directly to charity. For some, this doesn't improve the 1040, as the income is negated but so is the corresponding charitable deduction. For others, there can be substantial savings (reducing income may reduce taxable social security benefits or various deduction phase-outs). This IRA-to-charity rule is now permanent in the law, and should be given a second look by anyone over 70 1/2. Have your tax adviser run the 1040 software with and without this strategy, and see if there is a tax benefit from issuing your larger contributions directly from your IRA. In one example, $5,000 to charity from the IRA of a retiree with about $53,000 of income saved over $1,700 in federal tax!
When presenting tax update lectures before CPA groups, I am constantly reminded of the insane complexity of our federal tax system. My advice to tax professionals is to not give quick "off-the-cuff" answers, but rather check the rules and do the research. Often their rebuttal is "our clients don't want us to take the time; they think we should know the entire tax law." Not possible!
Congress has built a tax system designed to influence economic activity, punish some actions and reward others. And that has grown into a complicated behemoth that challenges the best of us on a daily basis. So when working with your tax professional, recognize that it's in your best interest to have them digging into the code and regulations to nail down the answer on your tax issues.
Editor's note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis with more than 40 years' experience in ag taxation, including decades as a trainer for the American Institute of CPAs and other technical seminars. He will be presenting on "Tax Habits for Built-to-Last Businesses" at the DTN-Progressive Farmer Ag Summit Dec. 5-7 in Chicago www.dtnagsummit.com.
To pose questions for future tax columns, e-mail AskAndy@dtn.com.
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