J C. Hobbs Associate Extension Specialist Agricultural Economics Dept. Agricultural Economics Learn at Lunch End of Year Income Tax Management December 18, 2018   J C. Hobbs Associate Extension Specialist Agricultural Economics Dept.

End of Year Tax Management Never let the tax tail wag the business dog The decision must make sound business and economic sense Some tools work prior to year end Some tools work after the tax year has closed

Purchase Depreciable Assets Changes to depreciation and expensing First year additional depreciation (Bonus) Section 179 expensing election MACRS changes Shorter recovery period (New machinery and equipment) 200% declining balance method (faster depreciation write off or cost recovery)

First–Year (Bonus) Depreciation 100% first-year depreciation (Jan 1, 2018 – Dec 31, 2022). Now allowed for both new and used property. 80% 2023 60% 2024 40% 2025 20% 2026 Bonus deprec. sunsets after Dec. 31, 2026

Code Section 179 (Expensing) Made permanent and indexed for inflation For 2018, Section 179 allowed amount is $1 million with investment limit of $2.5 million SUVs limited to $25,000 Full size crew cab pickups (<6,000 lb. GVWR) with a short box (less than 72 inches) are SUVs by definition No change in carryover rules of excess

Bonus vs Section 179 Bonus Depreciation Must elect out of bonus depreciation and can elect out on certain classes of assets (3-, 5-, 7-, and 10-year class life assets) Can offset W-2 wages as well as other income Conversion to personal use does not require recapture of excess over regular MACRS depreciation

Bonus vs Section 179 Section 179 Must elect to use but election can be for one specific asset or percentage of asset Cannot create a farm loss but can offset W-2 wage income Conversion to personal use causes partial recapture (amount over regular deprec.)

New Rules for Farm Machinery and Equipment Depreciation Shorter Recovery Period: Machinery and Equipment placed into service after Dec. 31, 2017: Cost recovery period is now 5 years for new machinery and equipment; used is still 7 years Grain bins, fences, cotton ginning equipment, and land improvements are 7 year assets

Farm Asset Depreciation Rule Change Faster Write-Off: for some Farm Business Assets placed into service after Dec. 31, 2017: NOW: 200% declining balance is to be used on 3-, 5-, 7- and 10-year property (all farm assets other than multi-purpose farm buildings, drainage facilities, water wells and land improvements) 150% declining balance on 15 and 20 year property (includes multi-purpose farm buildings, drainage facilities, water wells and land improvements)

New $150,000 Tractor Depreciation Alternatives

Farm Income Averaging Reduce high income of current year by taking advantage of unused lower tax brackets from the 3 prior years. Ex: 2015 – $20,000 below beginning of 25% bracket. 2016 - $25,000 below beginning of 25% bracket. 2017 - $30,000 below beginning of 25% bracket.

Farm Income Averaging Move $60,000 from 2018 and put $20,000 additional income in 2015, 2016, and 2017. Income averaging does not reduce self-employment tax or net investment income tax

Prepaid Expenses Amount paid during the current tax year for items that will be used in the following year Must be a payment; not a deposit Must be made for a valid business purpose Must not materially distort income Refer to IRS Pub 225: Farmer’s Tax Guide

Deferred Payment Contract A contract that requires that the payment will be received in the year after the commodity is sold. Requirements: Must be a bona fide arm’s-length contract with the buyer. Seller cannot have any right to the commodity after it is delivered. Must avoid constructive receipt so contract must be in place before delivery.

Crop Insurance and Disaster Payments Generally report the payment in the year received. However can elect to postpone if all 3 of the following conditions are met. Use the cash method of accounting. Receive the insurance proceeds in the same tax year the crops were damaged. Show under normal practices the sale would have occurred in the year after the damage.

Decrease Taxable Income Make needed repairs Pay accrued interest on loans Establish a retirement plan and deduct contributions (traditional IRA, SEPIRA, Simple IRA)

Increase Taxable Income Sell grain and livestock in 2018 that could be sold in 2019 (must evaluate weights and prices) Delay paying for supply, feed or other expenses until 2019 Collect fees, rents, and accounts in 2018 that will be due in 2019 Delay payment for repairs until 2019 Note: be sure it makes economic sense!

Tax Planning and Management Year-round every day job. Basic tax law knowledge needed. When you don’t know, ask questions. Ask “what if” rather than say ‘this is what I did’. (The oops cannot always be fixed.) Professional advice may be needed. Year-end tax planning is always useful (level taxable income over lifetime).

Evaluation Link https://okstatecasnr.az1.qualtrics.com/jfe/form/SV_7TFTNwC2hteN1Ix Thank you for your attention!! IRS Publication 225: Farmer’s Tax Guide for 2018 https://www.irs.gov/pub/irs-pdf/p225.pdf J C. Hobbs Associate Extension Specialist Email: jc.hobbs@okstate.edu