1. Taxes
Chapter #9
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2. Which Accounting System Is Best For You?
Cash or Accrual?
It depends on your individual situation
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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
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4. Advantages & Disadvantages of Cash Accounting?
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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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
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6. Advantages & Disadvantages of Accrual Accounting
Accurate measure of profitability
Reduces variation in income
Disadvantages:
More bookkeeping
Can create tax liability on items not sold yet
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7. Farm Income Sale of raised products Sale of items purchased for resale
Government Program Payments
Patronage Refunds
Crop Insurance proceeds
Custom Hire
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8. Farm Expenses Feed, seed, fertilizer, fuel, labor
Depreciation, rents, interest
Repairs, taxes, utilities, storage
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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 asset’s productive life until the value is zero
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10. What can be depreciated?
Useful life of more than one year
Used in the business
Must be purchased
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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
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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
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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.
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14. MACRS 20 Year Property Farm Buildings 27.5 Year Property
Residential Property
31.5 Year Property
Office buildings, motels, stores
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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
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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
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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?
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18. 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
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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
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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
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21. Answer Year 1 = $6,667 Year 2 = $10,000 Year 3 = $10,000
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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
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23. Answer Year 1 = $ 1,893 Year 2 = $ 7,571 Year 3 = $ 7,571
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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
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25. Answer Year 1 = $ 400 Year 2 = $ 1,600 Year 3 = $ 1,600
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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%
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27. Answer Year 1 = $ 3,300 Year 2 = $ 3,600 Year 3 = $ 3,600
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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
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29. Answer
Year 1 = $ 500
Year 2-20 = $ 1,000
Year 21 = $ 500
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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
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31. Answer Year 1 = $ 150 Year 2 = $ 600 Year 3 = $ 600 Year 4 = $ 600
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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
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33. Answer Year 1 = $ 267 Year 2 = $ 400 Year 3 = $ 400 Year 4 = $ 400
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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
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35. Answer
Year 1 = $ 428
Year 2-7 = $ 857
Year 8 = $ 429
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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%
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37. Answer Year 1 = $ 625 Year 2 = $ 750 Year 3 = $ 750 Year 4 = $ 750
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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
Don’t use Section 179
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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
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