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Understand the tax implications BEFORE selling assets

By Leisa Boley Hellwarth, a dairy farmer and attorney near Celina

I see the future every Tuesday evening at 5:30. No, I am not psychic with time specific abilities. No crystal ball. No tarot cards or Ouija board. This semester, I am teaching Agricultural Finance at the Lake Campus of Wright State. And I have the most amazing students. Nearly all are currently farming or employed in jobs directly supporting production agriculture. They work full-time and go to school full-time. They come to class prepared, and we have actually started class early because everyone is present and ready to learn.

Most are from the Mercer, Darke, Auglaize, Van Wert and surrounding areas. I was lecturing about the challenge of unplanned expenses and provided an example of our chopper ending up in the shop last year during harvest. One of the students raised his hand to inquire what my husband’s name was. The student was employed at the dealership (and a son of the owner). That camaraderie and connection you only find in rural America.

The class has a huge amount of practical experience. In another course, we discuss Banamine and its prohibition in show animals. Every student knew what the drug was, how it was used and why it was banned for show stock before my lecture. My students are enthusiastic and determined. And I see a rare combination of technical expertise, book smarts and common sense. The future is in good hands.

Agriculture’s present condition is more of a problem. Low commodity prices, tariffs, overproduction, prices below costs of production, high input costs, and increased regulation are just some of the obstacles farmers currently face. Farm income is expected to be substantially reduced this year. Consequently, many farmers will be forced to find creative ways to generate cash to remain in business. Selling assets to raise cash is common and often necessary. Just keep potential tax consequences in mind because, if you have a gain, it may be considered income.

Before selling any assets that you no longer use or can operate without, understand the tax basis of the asset. What you paid for the asset is not necessarily what you paid for the item.

For land, tax basis is the purchase price of the property (or what it was valued at when you inherited it). Add any improvements you made that were not deducted on your prior tax returns. For buildings and equipment, the basis is the original cost less any depreciation that was written off in prior years. For livestock you raised, the tax basis is usually zero.

Calculate any gain from a sale by subtracting the basis from the sales price (less the cost of selling the asset). Any deductions for selling cannot also be included as expenses against income, such as repairs.

If some of the money received from the sale of the asset is used to pay off debt associated with that asset, that does not impact the gain calculation. Even if all of the selling price is used to retire debt, you could still have a gain. And if you release an asset to satisfy the debt on that asset, the amount of debt that is eliminated is the same as the sale price.

Next determine if the transaction will be taxed at ordinary income tax rates or a lower capital gains tax rate. If you have previously taken a depreciation deduction, then all or part of your realized gain will be taxed as ordinary income. If you sell the asset for more than what you originally paid for it, that part of the gain is taxed as a section 1231 gain along with any undepreciated basis.

Please talk to your CPA before finalizing a sale to determine if your transaction involves alternative minimum tax. For instance, if your capital gain is large, you may have to pay more than the capital gains rate by becoming subject to alternative minimum tax.

Beware of selling equipment on an installment contract sale. In this scenario, all of the prior accelerated depreciation must be added to ordinary income in the year of the sale—even if not cash was collected.

Gains from the sale of assets count against you for calculation of an earned income credit and the premium tax credit for the Affordable Care Act. Several sad cases have recently been decided that affirm this statement.

If you opt to trade an asset for like-kind property, gains can be deferred and not affect your tax liability. If you receive cash or an equipment dealer sells your asset for you, the transaction will be treated as a sale.

Please consult with your CPA regarding all of the potential consequences before you finalize the sale.

As we face the current challenges in farming, the past can be an inspiration. American agriculture has survived many bad times — the 1920s when 600,000 farmers went bankrupt, the Dust Bowl, the Great Depression, the Farm Crisis of the l980s, and the Carter Grain Embargo, to name a few. Somehow, we will persevere this time.

As we celebrate Thanksgiving, let’s be thankful for what we have and remember that “some of us grew up playing with tractors, the lucky ones still do.”

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