It’s no secret that there are many fiscal concerns of an agricultural professional. With 2015 in full-swing, there are certain areas that deserve attention from you and your trusted financial professional. All of this information might seem a bit daunting, but it doesn’t have to be. Working with an experienced CPA is really a breath of fresh air. They can guide you through all the challenges and financial victories that these topics can bring. Here are a few important topics to consider to help ensure a successful year.
Tangible Property Regulations
Tangible Property Regulations (TPRs) should be at the top the list of regulations to review. Treasury personnel have indicated that the IRS expects all taxpayers with tangible real and/or personal property to file one or more Form(s) 3115 in their 2014 tax year to properly comply with new rules. This applies even if there is no adjustment necessary to properly reflect the change in method in your taxable income. This change not only will affect taxpayers on a prospective basis but also on a retroactive basis.
CPAs and taxpayers should be scrubbing their tax depreciation schedules and fix asset class lives and bonus mistakes, while also looking at several other issues in regard to repairs and capitalization as there will be changes in the methods all taxpayers use because several prior methods previously allowed by the IRS are no longer allowed. For those who have required depreciation corrections, a Form 3115 must be filed before the IRS audits for those issues. If not, the IRS has promised to deny the deduction for the remaining depreciable basis that should have already been taken. TPRs are complex and sneaking up on many agricultural professionals. Working with a CPA to determine how to be compliant is vital.
Buzz continues regarding Section 179 of the tax code, especially since an extension for this provision was recently approved. Section 179 allows farmers to upgrade, replace or purchase new equipment and write off the full purchase price during the current tax year. The maximum deduction remains at $500,000 for 2014. With the door left open, even those who purchased a good amount of equipment in recent years to take advantage of the deduction may want to keep shopping for good deals. Those looking to do trade-ins may not see as much benefit if the equipment has been fully depreciated through Section 179 guidelines. Keep in mind Section 179 is not a permanent tax savings, but an accelerated deduction with limits. A CPA should be able to look at the farm’s records and make recommendations regarding purchases, trade-ins and the general ins and outs of Section 179.
Importance of calculating basis for deductions
Tax concerns stretch far beyond needed equipment purchases. Having basis for all tax deductions is an on-going battle that a CPA should always be fighting on behalf of the farm. This is especially true when a farm operates under partnership or S Corporation status (pass-through entities). This is often the case, since farm tax law allows these set-ups to generate a small profit or loss as long as a tax basis exists. Tracking capital or debt basis, determining the deductibility of pass-through losses, and calculating the amount of loss carryover are the responsibility of each individual partner/shareholder. However, the person preparing the entity tax returns often prepares some (or all) of the shareholder returns.
Basis records must be correctly maintained because basis limits the amount of pass-through loss that can be deducted, determines gain or loss when entity interest/stock is disposed of and determines the amount of tax-free distributions that can be received from the pass-through entity. The IRS is expanding audits to specifically focus on basis calculations for pass-through entities. Now is the time to review basis schedules with a tax advisor, especially if recent transactions have involved distribution/contribution of real estate or promissory notes. If you are showing losses from pass-through entities, be sure you have enough basis to deduct the loss.
Estate/succession planning opportunities
Don’t let the financial responsibilities of today be the burden of tomorrow. Estate and succession planning is important. How will the farm be operating in 10 years? Who will be at the helm? These are questions to ponder. Looking at assets, daily operations, cash flow and family dynamics will come into play. Additionally, farmers who have accumulated significant assets and net worth should know their deferred tax liability and the impact it will have on the planning process. Furthermore, those farmers that have significantly leveraged their farm operation should know if liquidation would create an overall (after tax) negative net worth. A financial professional can make planning ahead easier and can help keep emotions at bay when a number of family members are involved in the direction of the business. The end result should be a plan that gives all parties involved peace of mind moving forward.
Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. He can be contacted at 614-494-5300 or holbrookmanter.com. Holbrook & Manter is a professional services firm founded in 1919 in central Ohio.