My question concerns our farm business. We consider ourselves as individuals farming together rather than a formal partnership. If we are a partnership, we are limited to a single $500,000 Section 179 first-year depreciation deduction. As separate proprietors, we each get a full $500,000 limitation. Our crop insurance and government program payments are individual. All of our machinery is identified as purchased by an individual but is paid for out of an account for the group. Is this arrangement OK?
The determination of whether an activity conducted jointly is a partnership for tax purposes is a complex matter, and depends on a number of factors. I can't make that determination based on your short description, but here are a few pointers:
The IRS instructions to the partnership tax form state that "A joint undertaking merely to share expenses is not a partnership. Mere co-ownership of property that is maintained and leased or rented is not a partnership ... The absence of a formal written partnership agreement is not controlling. Rather, the degree of business activity conducted by the co-owners is determinative."
Thus, if you are simply sharing the use of machinery, and use a common checking account to pay for the machinery and perhaps insurance and repairs, you should be fine as non-partners.
On the other hand, if you are operating all land together, selling all grain together and sharing all input expenses, you have a partnership. The fact of a single checking account vs. a common checking account is a factor, but is not determinative if in substance you are conducting one business operation.
Anything in between these two extremes is a closer call. You should have an experienced tax professional look at your situation and advise. If the facts put you into partnership status, recognize that you also have an unlimited 50% bonus depreciation on new (not used) farm assets through 2017, as well as the $500,000 Sec. 179 limit. Bonus depreciation goes into a phase-down to 40% in 2018 and 30% in 2019, before total elimination of bonus depreciation in 2020 and after.
We have a small farm operation. I am considering hiring a 27-year-old who has been in the Marines for five years. He is getting out in a few weeks. Would there be any tax advantage in hiring this guy? He's from out of state and would need housing as well. I could really use him but with low commodity prices I'm struggling with my finances.
Hiring your first employee is a big step, so begin by investigating with a local tax professional the costs of payroll taxes, and with an insurance agent the cost of workers' compensation. The basic Social Security taxes are split between employer and employee, but with unemployment taxes and workers' comp, there is generally a 10%-20% overhead, beyond the gross pay.
In looking for ways to help with the cost of an employee, the first opportunity is at the point of hire. The Work Opportunity Tax Credit subsidizes an employer if the new hire falls into a designated category. There is a qualified veteran category that may apply in your case. The instructions for IRS Form 8850 describe the various categories of workers for which tax credits apply.
Providing housing to an employee can be a tax-free fringe to the worker, while the costs are deductible to the employer. But two key conditions apply: The lodging must be on the business premises, and it must be required by the employer for normal business reasons (e.g., you need the employee on the premises to assist with livestock care that can include extended work hours).
Another possibility is employer-provided health benefits (again, deductible to you; tax free to the employee). With only one employee, you are exempt from the costly ACA "market reform" penalties; those apply to those with two or more employees. As a result, you may reimburse any portion of the employee's health insurance premiums, and also provide a Sec. 105 medical reimbursement plan for other out-of-pocket medical costs not covered by insurance. Again, a tax professional can assist in implementation.
My husband, a farmer, and I are moving into town and our son is now going to live at the farm. What insight can you share about tax rules and deductions for having an office for the farm in town in our home? Are there deductible expenses? And is there other advice as we prepare for this move?
You don't describe the business entity that you have, or the ongoing relationship that you and your husband will have to the farming business. But if you or your husband have a W-2 employee relationship to the farming business (which would occur if the business was operated in C corp. or S corp. form), there is a tax code section that prevents any deductions for leasing your home to your employer for business use. So if the business pays you rent for the home office, no deductions are allowed against that rent.
If there is an office at the farm site and it is simply for your convenience that you intend to do the recordkeeping at your new residence in town, no home office deduction is permitted. However, if there is no longer an office location on the farm (e.g. space taken over by son for his living accommodations), and your employment duties for the farm require you to keep the farm's books and records, you are entitled to a home office deduction. You'll need to determine the square footage of the office area to the total residence and then allocate your residential costs to the office area based on that percentage. IRS Form 8829 can assist in this computation.
Finally, your business status is a big factor in your ability to claim any of these home office deductions. If your husband is still an active farm proprietor, his Schedule F will be the proper location, with likely no limitations. Likewise, if your husband and your son are partners, it may be possible to claim the home office deductions against the Schedule K-1 income. But if it is an employee role in the son's business, the location of the employee business expenses in your 1040 may result in little tax benefit. Again, see your tax professional for assistance, as it is important that you get your categorization correctly determined for a home office deduction.
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 pose questions for future tax columns, e-mail AskAndy@dtn.com.
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