Taxes

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Taxes

• Chapter 9

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Which Accounting System Is Best For You?

• Cash or Accrual?
• It depends on your individual situation

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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

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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

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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

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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

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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

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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

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What can be depreciated?

• Useful life of more than one year
• Used in the business
• Must be purchased

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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

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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

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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.

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MACRS

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

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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

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Declining Balance Method

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

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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?

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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

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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

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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

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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

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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

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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

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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

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Answer

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

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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

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Answer

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

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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

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Answer

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

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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

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Answer

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

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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

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Answer

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

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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

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Answer

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

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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

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Answer

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

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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

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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

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