Title: Taxes
1Taxes
2Which Accounting System Is Best For You?
- Cash or Accrual?
- It depends on your individual situation
3What 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
4Advantages 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
5Accrual 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
6Advantages 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
7Farm Income
- Sale of raised products
- Sale of items purchased for resale
- Government Program Payments
- Patronage Refunds
- Crop Insurance proceeds
- Custom Hire
8Farm Expenses
- Feed, seed, fertilizer, fuel, labor
- Depreciation, rents, interest
- Repairs, taxes, utilities, storage
9What 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
10What can be depreciated?
- Useful life of more than one year
- Used in the business
- Must be purchased
11What 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
12Methods 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
13MACRS
- 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.
14MACRS
- 20 Year Property
- Farm Buildings
- 27.5 Year Property
- Residential Property
- 31.5 Year Property
- Office buildings, motels, stores
15Straight Line Depreciation
- Purchase price of asset divided by the years of
service - Ex 140,000 combine depreciated over 7 years
20,000 per year
16Declining Balance Method
- Gives largest depreciation deductions at the
beginning, then smaller each year - More accurately represents the wear and tear of
the asset
17Section 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?
18Convention
- 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
19Convention
- 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
20Develop 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
21Answer
- 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
22Develop 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
23Answer
- 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
24Develop 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
25Answer
- Year 1 400
- Year 2 1,600
- Year 3 1,600
- Year 4 1,600
- Year 5 800
26Develop 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
27Answer
- Year 1 3,300
- Year 2 3,600
- Year 3 3,600
- Year 4 3,600
- Year 5 300
28Develop 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
29Answer
- Year 1 500
- Year 2-20 1,000
- Year 21 500
30Develop 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
31Answer
- Year 1 150
- Year 2 600
- Year 3 600
- Year 4 600
- Year 5 600
- Year 6 600
32Develop 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
33Answer
- Year 1 267
- Year 2 400
- Year 3 400
- Year 4 400
- Year 5 400
- Year 6 133
34Develop 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
35Answer
- Year 1 428
- Year 2-7 857
- Year 8 429
36Develop 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
37Answer
- Year 1 625
- Year 2 750
- Year 3 750
- Year 4 750
- Year 5 750
- Year 6 125
38Strategies 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
39Strategies 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
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