Tax planning is proving to be a bit more challenging than normal this year. Unless Congress acts, a number of popular deductions and credits expired at the end of 2014 and may not be available for 2015. The most popular deductions not available this year include, for example, generous bonus depreciation and expensing allowances for business property.
As I write this in early December, Congress is working on and is expected revive some or all the favorable tax rules that have expired. We are hoping Congress will renew the “extenders package” for at least two years and not just for 2015. However, which actions Congress will take remains to be seen.
Here are two important considerations to keep in mind for all farmers:
1. Effective tax planning requires considering both the current year and next year — at least. Without a multi-year outlook, you can’t be sure maneuvers intended to save taxes on your 2015 return won’t backfire and potentially cost additional money in the future.
2. Be aware of the Alternative Minimum Tax (AMT) in all of your planning, because what may be a great move for regular tax purposes may create or increase an AMT problem. There’s a good chance you may trip into AMT if you deduct a significant amount of state and local taxes, claim multiple dependents, or recognized a large capital gain this year.
Here are a few other year-end reminders. As always, a qualified CPA can help you sort through the options and implement strategies that make sense for you.
Section 179 and Bonus Depreciation
Buzz continues regarding Section 179 of the tax code, especially since an extension for this provision has not been approved as of the writing of this article. 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 is currently $25,000, but is expected to be retroactively renewed for 2015 at $500,000.
Bonus depreciation of 50%, which is an eligible deduction for new equipment purchases, expired in 2014, but much like the 179 expensing is expected to be retroactively restated for 2015. This type depreciation deduction needs to be weighed in conjunction with the 179 expensing as part of your overall tax planning.
Keep in mind Section 179 and Bonus depreciation 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.
Maximize retirement plans
SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement. SEP IRAs are established by employers on behalf of their employees, and they are a common way for self-employed individuals to maximize their retirement savings. Many farmers have purchased equipment over the past years and may not be in the market to upgrade. As an option, farmers should look to at funding and maximizing some sort of retirement plan as part of their overall wealth planning process. In addition, small businesses often take advantage of SEP IRAs as well in order to give employees the retirement-savings benefits they want.
But the most important reason why the SEP IRA is such a strong retirement-plan option is that it allows farmers set aside significant amounts of money for retirement. In 2015, an employer can contribute up to 25% of each employee’s wages toward their respective SEP IRAs, up to a maximum of $53,000. For self-employed individuals, the 25% limit is applied after accounting for the impact of the tax deduction and associated self-employment taxes on earnings, leading to a slight reduction in the effective percentage. But even with these adjustments, people who work for themselves can put almost 20% of their net profits into a SEP IRA. Finally, another advantage of a SEP IRA is it can be funded all the way until the filing of the return, including extensions. For high-income earners, this retirement plan vehicle can be a huge advantage over the smaller limits of alternatives such as regular IRAs and SIMPLE IRAs.
Ohio small business deduction
Virtually all businesses are now eligible for a 75% tax deduction on the first $250,000 of business income ($250,000 for individuals with a filing status of married filing jointly or single and $125,000 for individuals with a filing status of married filing separately).
This deduction was the centerpiece of a major tax reform package initiated by Ohio Governor John Kasich and approved by the Ohio General Assembly. House Bill 64 and Senate Bill 208 continued the business income deduction to 2015 and forward.
The business deduction enables a business owner to deduct 75% of business income from the Ohio adjusted gross income (OAGI) they report on their Ohio personal income tax return. This 75% deduction is available on up to $250,000 of business income, meaning the deduction is capped at $187,500 for each investor or owner, with limitations based on filing status. The remaining business income will be taxed at a graduated rate up to 3%.
The business income definition is broad and included owners of and investors in Ohio businesses structured as sole proprietorships, one-member LLC’s and pass-through entities (PTEs) qualify for this tax cut. PTEs include: partnerships, Subchapter S corporations (S-corps) and Limited Liability Companies (LLCs). Keep in mind business income also includes income from rental activities.
New for taxable year 2016 and forward, the business income deduction will enable a business owner to deduct 100% of business income from the adjusted gross income they report on their Ohio personal income tax return.
Tangible Property Regulations
After much of a build-up in 2013 and 2014 on the cumbersome implementation of the new tangible property regulations (TPR), the IRS on February 13, 2015 IRS Released Rev. Proc. 2015-20 (the Guidance) which softened the 2014 reporting requirements for most taxpayers.
The guidance alleviated the need for certain taxpayers (with total assets of less than $10 million OR average annual gross receipts of $10 million or less for the prior three tax years) to file one or more Forms 3115 (Change in Accounting Methods) to implement the tangible property regulations. Most taxpayers were relived the new guidance exempted them from not having to perform the accumulative computation by being below the threshold (unless there was an actual benefit to do so).
While the guidance alleviates the need to file one or more Forms 3115 in certain circumstances, it does not eliminate ongoing responsibility to ensure compliance with the new regulations (the new TPR regulations is over 300 of regulations and 200 pages of guidance). Therefore, farmers, still need to be aware of the new regulations and understand the ongoing consequences on their business.
There is still work that needs done now in order to meet these requirements and it will impact any business, rental, farm, etc. that owns tangible property. 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 they apply to de minimis safe harbor policies.
Being compliant in these and all tax-related scenarios is vital. While now is a good time to be tax planning, it should really be an on-going process. Create a partnership with a CPA that is experienced and cares about your business stability and success and begin exercising year-round proactive tax planning.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. 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. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through the firm website.