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Taxes

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Which Accounting System Is Best For You? Cash or Accrual? ... Use deferred sales contracts. Buy machinery, supplies etc before end of year. Use Section 179 ... – PowerPoint PPT presentation

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Title: Taxes


1
Taxes
  • Chapter 9

2
Which Accounting System Is Best For You?
  • Cash or Accrual?
  • It depends on your individual situation

3
What is the Cash Method of Accounting?
  • Records income and expenses in the period in
    which they are actually received or paid
  • Inventory is not used
  • Taxes paid on income minus expenses

4
Advantages Disadvantages of Cash Accounting?
  • Advantages
  • Easier
  • no inventory
  • Flexible Timing
  • can plan income and expenses
  • Disadvantages
  • Inaccurate measure of profitability
  • ex cash transactions on first or last day of
    year
  • Income Variations
  • sell current crop last years at same time

5
Accrual Method
  • Records income when it is earned and expenses
    when they occur
  • Uses an inventory
  • An increase in year end inventory is treated as
    income

6
Advantages Disadvantages of Accrual Accounting
  • Advantages
  • Accurate measure of profitability
  • Reduces variation in income
  • Disadvantages
  • More bookkeeping
  • Can create tax liability on items not sold yet

7
Farm Income
  • Sale of raised products
  • Sale of items purchased for resale
  • Government Program Payments
  • Patronage Refunds
  • Crop Insurance proceeds
  • Custom Hire

8
Farm Expenses
  • Feed, seed, fertilizer, fuel, labor
  • Depreciation, rents, interest
  • Repairs, taxes, utilities, storage

9
What is Depreciation?
  • Assets with a useful life of more than one year,
    may not be deducted as an expense in the year of
    purchase
  • Part of the cost of the asset will be deducted in
    each year of that assets productive life until
    the value is zero

10
What can be depreciated?
  • Useful life of more than one year
  • Used in the business
  • Must be purchased

11
What information is needed to calculate
depreciation?
  • Basis cash paid plus depreciable balance of
    their trade-in
  • When placed in service
  • Which method of depreciation to use

12
Methods of Depreciation
  • General Depreciation System (GDS)
  • Modified Accelerated Cost Recovery System (MACRS)
  • recovers cost quicker
  • GDS MACRS can use Straight Line or Declining
    Balance options

13
MACRS
  • 3 Year Property
  • Breeding Swine
  • 5 Year Property
  • Breeding Sheep, Cattle
  • Trucks, Computers
  • 7 Year Property
  • Machinery, Equipment, Fence
  • 10 Year Property
  • Single purpose lvstk/hort struct.

14
MACRS
  • 20 Year Property
  • Farm Buildings
  • 27.5 Year Property
  • Residential Property
  • 31.5 Year Property
  • Office buildings, motels, stores

15
Straight Line Depreciation
  • Purchase price of asset divided by the years of
    service
  • Ex 140,000 combine depreciated over 7 years
    20,000 per year

16
Declining Balance Method
  • Gives largest depreciation deductions at the
    beginning, then smaller each year
  • More accurately represents the wear and tear of
    the asset

17
Section 179 Expense Deduction
  • Allows you to take up to 17,500 of the purchase
    price of an asset the first year, then depreciate
    the rest
  • Ex 140,000 combine, Sec. 179 of 17,500 first
    year new basis of 122,500
  • Depreciate 122,500 over 7 years 17,500 per
    year
  • Why use Section 179?

18
Convention
  • The IRS does NOT allow you to take a full years
    depreciation for the first year that an asset is
    placed in service
  • May use the month, quarter, or year the asset is
    placed into service
  • Mid-Month, Mid-Quarter, Mid-Year

19
Convention
  • Mid-month convention etc. only affects the first
    and last year of a depreciation schedule
  • Ex If you purchase a 140,000 combine in August
  • Depreciated over 7 years 20,000 per year
  • Year 1 dep. 5/12 20,000
  • Year 2-7 dep. 20,000
  • Year 8 dep. 7/12 of 20,000

20
Develop a Depreciation Schedule for the following
  • Item purchased Tractor
  • Date purchased May 5
  • Cost 70,000
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Month

21
Answer
  • Year 1 6,667
  • Year 2 10,000
  • Year 3 10,000
  • Year 4 10,000
  • Year 5 10,000
  • Year 6 10,000
  • Year 7 10,000
  • Year 8 3,333

22
Develop a Depreciation Schedule for the following
  • Item purchased Tractor
  • Date purchased Dec 5
  • Cost 70,000
  • Years of Service
  • Straight Line Depreciation
  • Section 179 Deduction 17,000
  • Convention Mid-Quarter

23
Answer
  • Year 1 1,893
  • Year 2 7,571
  • Year 3 7,571
  • Year 4 7,571
  • Year 5 7,571
  • Year 6 7,571
  • Year 7 7,571
  • Year 8 5,678

24
Develop a Depreciation Schedule for the following
  • Item purchased 10 Heifers
  • Date purchased Sept. 10
  • Cost 800
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Month

25
Answer
  • Year 1 400
  • Year 2 1,600
  • Year 3 1,600
  • Year 4 1,600
  • Year 5 800

26
Develop a Depreciation Schedule for the following
  • Item purchased Pickup
  • Date purchased Feb. 27
  • Cost 24,000
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Month
  • Business Use 75

27
Answer
  • Year 1 3,300
  • Year 2 3,600
  • Year 3 3,600
  • Year 4 3,600
  • Year 5 300

28
Develop a Depreciation Schedule for the following
  • Item purchased Barn
  • Date purchased Sept. 23
  • Cost 20,000
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Year

29
Answer
  • Year 1 500
  • Year 2-20 1,000
  • Year 21 500

30
Develop a Depreciation Schedule for the following
  • Item purchased Computer
  • Date purchased October 22
  • Cost 3,000
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Month

31
Answer
  • Year 1 150
  • Year 2 600
  • Year 3 600
  • Year 4 600
  • Year 5 600
  • Year 6 600

32
Develop a Depreciation Schedule for the following
  • Item purchased Bull
  • Date purchased May 3
  • Cost 2,000
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Month
  • Section 179 Deduction 2,000

33
Answer
  • Year 1 267
  • Year 2 400
  • Year 3 400
  • Year 4 400
  • Year 5 400
  • Year 6 133

34
Develop a Depreciation Schedule for the following
  • Item purchased Fence
  • Date purchased July 30
  • Cost 6,000
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Month

35
Answer
  • Year 1 428
  • Year 2-7 857
  • Year 8 429

36
Develop a Depreciation Schedule for the following
  • Item purchased Car
  • Date purchased March 19
  • Cost 15,000
  • Years of Service
  • Straight Line Depreciation
  • Convention Mid-Month
  • Business Use 25

37
Answer
  • Year 1 625
  • Year 2 750
  • Year 3 750
  • Year 4 750
  • Year 5 750
  • Year 6 125

38
Strategies to Increase Taxable Income
  • Sell marketable grain/lvstk
  • Off Farm Income
  • Postpone expenditures until beginning of next
    year
  • Pay bills begin. Of next year
  • Dont use Section 179

39
Strategies to Reduce Taxable Income
  • Postpone sales until next year
  • Use deferred sales contracts
  • Buy machinery, supplies etc before end of year
  • Use Section 179
  • Make advanced purchases

40
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