Taxes Original Power Point Created by Casey Osksa Modified by Georgia Agricultural Education Curriculum Office June 2002

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

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

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

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

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

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

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

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 asset’s productive life until the value is zero

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

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

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

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.

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

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

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

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?

Convention The IRS does NOT allow you to take a full year’s 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

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

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

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

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

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

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

Answer Year 1 = $ 400 Year 2 = $ 1,600 Year 3 = $ 1,600 Year 4 = $ 1,600 Year 5 = $ 800

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%

Answer Year 1 = $ 3,300 Year 2 = $ 3,600 Year 3 = $ 3,600 Year 4 = $ 3,600 Year 5 = $ 300

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

Answer Year 1 = $ 500 Year 2-20 = $ 1,000 Year 21 = $ 500

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

Answer Year 1 = $ 150 Year 2 = $ 600 Year 3 = $ 600 Year 4 = $ 600 Year 5 = $ 600 Year 6 = $ 600

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

Answer Year 1 = $ 267 Year 2 = $ 400 Year 3 = $ 400 Year 4 = $ 400 Year 5 = $ 400 Year 6 = $ 133

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

Answer Year 1 = $ 428 Year 2-7 = $ 857 Year 8 = $ 429

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%

Answer Year 1 = $ 625 Year 2 = $ 750 Year 3 = $ 750 Year 4 = $ 750 Year 5 = $ 750 Year 6 = $ 125

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 Don’t use Section 179

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