End Of Year Tax Planning
Many livestock operations should already be turning to their advisors for tips and strategies on how to reduce their operation’s — and their own — tax bill. Fortunately, every operator has at their disposal a number of basic strategies along with several unusual year-end moves to help reduce the annual tax bill.
Generally, a profitable cattle operation will want to accelerate deductions and defer income. By deferring (postponing) income to a later year it may be possible to minimize the current income tax liability. Thus, when that deferred income is eventually reported, in all likelihood the feedlot business will be in a lower income tax bracket.
On the deduction side, the operation may be able to accelerate state and local income taxes, interest payments and real estate taxes.
Depreciation is the income tax deduction that allows a cattle business to recover the cost or other basis of property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property such as buildings, machinery, vehicles, furniture, and equipment. Also depreciable is intangible property, such as patents, copyrights, and computer software.
Last year’s “extenders” bill permanently set the Section 179, first-year expensing write-off at $500,000 with a $2 million overall investment limit before phaseout. While there is no increase in that $500,000 limit on qualifying business property and equipment expenditures, thanks to the inflation adjustment, the investment limit for 2016 increases to $2,010,000 before phaseout.
Also depreciation connected, bonus depreciation remains at the 50 percent level through the 2017 tax year after which it is phased down to 40 percent in 2018, 30 percent in 2019 before finally zeroing out in 2020 and later years. The bonus depreciation deduction is on top of any allowable Section 179 deduction.
Small Business Health Care Tax Credit
Businesses employing 25 or fewer full-time-equivalent employees with average annual wages of less than $50,000, may qualify for a tax credit to help pay for employees’ health insurance. The tax credit is worth up to 50 percent of the employer’s contribution toward its employees’ premium costs (up to 35 percent for tax-exempt employers).
Whenever possible, end of year repairs and maintenance expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) can take advantage of a “de minimis” safe harbor by electing to deduct smaller purchases ($500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Feedlots and businesses with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings.
Work Opportunity Tax Credit (WOTC)
Thanks to last year’s tax “extenders” bill, the WOTC has been extended through 2019 for employers hiring members of targeted groups. That “extenders” bill also added qualified long-term unemployment recipients to the roster of targeted groups effective January 1, 2016.
Because Congress delayed extending the WOTC and its provisions were made retroactive, a new one-time deadline was created. Unfortunately, qualifying employers had only until September 28, 2016 to file certification requests for eligible workers hired in 2015 and during the first eight months of 2016. Targeted workers hired 28 days ago can, of course, qualify for the WOTC.
Partners or S corporation shareholders in entities that have a loss for 2016 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity’s tax year.
Remember however, by increasing basis, the owner or shareholder is putting more of his or her funds at risk. Does the loss signal future trouble?
While 2017 is knocking on the door, there is still time to make changes that could save the feedlot, stocker or cow-calf operation — and you — money. Remember however, year-end is the best time for operators to meet with their accountants, tax professionals and advisers to budget revenues and expenses for the following year with the goal of tax savings, year-after-year.