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Tax deductions question for breeding stock

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sassafras manor

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I have always gone the AI route or used a neighbors bull in the past but we are to the point that I am considering purchasing one of the neighbors bulls and was wondering how breeding stock was deducted on income taxes?
Thanks
 

Bright Raven

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Breeding expenses are deducted on Schedule F, Part II, Line 31. There is no distinction between Seedstock or Feeder breeding expenses. Cost of Keeping a bull would also go on Schedule F under the other categories of feed, supplies, etc.
 
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sassafras manor

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So then the purchase expense of the bull would be deducted the year of sale (same as feeders) vs being depreciated out over several years? Sorry if it sounds like a stupid question but am trying to think of everything in advance of the potential purchase.
 

Bright Raven

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sassafras manor":1q17kdmy said:
So then the purchase expense of the bull would be deducted the year of sale (same as feeders) vs being depreciated out over several years? Sorry if it sounds like a stupid question but am trying to think of everything in advance of the potential purchase.

Yes. The basis is the initial cost less the selling price. One would enter that on Schedule F during the tax year the bull is sold.
 

Katpau

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I am not sure I agree with Bright Raven's handling of this, but I may be misinterpreting his response. Breeding stock is usually considered a capital expense and is depreciated. I would download IRS Publication 225 and read the information that begins on page 35. https://www.irs.gov/pub/irs-pdf/p225.pdf

In many cases you can chose to deduct the whole cost as a section 179 expense in the year of purchase. You can also chose to depreciate over 5 years using the recovery period from the General Depreciation schedule under "cattle, dairy or breeding" listed on page 42. When you sell that bull you must recapture any gain over book value at the time of sale. You will report the sale on schedule 4797. If you paid $1500 for the bull and he was depreciated down to a value of $500, but you sold him for $1500 you need to recognize the $1000 depreciation as a gain. If he sold for more than $1500 you would carry the balance of that gain to schedule C where it will be recognized as a capital gain and may be taxed at a lower rate. If you deduct all of the cost under section 179 you will need to recognize the entire sale price, less any costs of the sale, on schedule 4797 as a gain. The easiest way to deal with this is to buy a tax program like Tax Cut and be sure to follow instructions. The advantage of showing sales of breeding stock on schedule 4797 rather than as income on schedule F, is that you won't pay Social Security Taxes on those gains. I realize that for many that post here, this may not be an issue, as they may be reporting a loss on Schedule F. If you are close to retirement and looking for high income years to boost SS earnings, this may also not be to your advantage.
 
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sassafras manor

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Katpau,
Thanks for your insight. We have grown our herd from retained heifers and have never purchased breeding animals in the recent past. I thought there was something mentioned at my tax appointment this year about breeding animal purchases being different for tax purposes but that was 4 months ago. I guess if all else fails I can call my tax lady for her interpretation.
 

Katpau

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I am a retired accountant. At one time farms were my specialty. I only do my own now, and I am not always up on the ever changing rules, but I feel confident that a bull purchased for breeding is treated as a capital expense. If you let your tax lady know the bull was purchased for breeding purposes I am sure she will help you decide the most advantageous way to handle it for your own personal circumstances.
 

1982vett

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Katpau":1sl6j1de said:
I am not sure I agree with Bright Raven's handling of this, but I may be misinterpreting his response. Breeding stock is usually considered a capital expense and is depreciated. I would download IRS Publication 225 and read the information that begins on page 35. https://www.irs.gov/pub/irs-pdf/p225.pdf

In many cases you can chose to deduct the whole cost as a section 179 expense in the year of purchase. You can also chose to depreciate over 5 years using the recovery period from the General Depreciation schedule under "cattle, dairy or breeding" listed on page 42. When you sell that bull you must recapture any gain over book value at the time of sale. You will report the sale on schedule 4797. If you paid $1500 for the bull and he was depreciated down to a value of $500, but you sold him for $1500 you need to recognize the $1000 depreciation as a gain. If he sold for more than $1500 you would carry the balance of that gain to schedule C where it will be recognized as a capital gain and may be taxed at a lower rate. If you deduct all of the cost under section 179 you will need to recognize the entire sale price, less any costs of the sale, on schedule 4797 as a gain. The easiest way to deal with this is to buy a tax program like Tax Cut and be sure to follow instructions. The advantage of showing sales of breeding stock on schedule 4797 rather than as income on schedule F, is that you won't pay Social Security Taxes on those gains. I realize that for many that post here, this may not be an issue, as they may be reporting a loss on Schedule F. If you are close to retirement and looking for high income years to boost SS earnings, this may also not be to your advantage.
I agree, bright ravin isnt shining on this. I think you could get away with AI services as veterinary, but the purchase of a bull is different.
Only correction would be the capital gain/ or loss would flow to schedule D, not C. Pretty sure that was just a typo.
 

Bright Raven

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1982vett":2ymcf31i said:
Katpau":2ymcf31i said:
I am not sure I agree with Bright Raven's handling of this, but I may be misinterpreting his response. Breeding stock is usually considered a capital expense and is depreciated. I would download IRS Publication 225 and read the information that begins on page 35. https://www.irs.gov/pub/irs-pdf/p225.pdf

In many cases you can chose to deduct the whole cost as a section 179 expense in the year of purchase. You can also chose to depreciate over 5 years using the recovery period from the General Depreciation schedule under "cattle, dairy or breeding" listed on page 42. When you sell that bull you must recapture any gain over book value at the time of sale. You will report the sale on schedule 4797. If you paid $1500 for the bull and he was depreciated down to a value of $500, but you sold him for $1500 you need to recognize the $1000 depreciation as a gain. If he sold for more than $1500 you would carry the balance of that gain to schedule C where it will be recognized as a capital gain and may be taxed at a lower rate. If you deduct all of the cost under section 179 you will need to recognize the entire sale price, less any costs of the sale, on schedule 4797 as a gain. The easiest way to deal with this is to buy a tax program like Tax Cut and be sure to follow instructions. The advantage of showing sales of breeding stock on schedule 4797 rather than as income on schedule F, is that you won't pay Social Security Taxes on those gains. I realize that for many that post here, this may not be an issue, as they may be reporting a loss on Schedule F. If you are close to retirement and looking for high income years to boost SS earnings, this may also not be to your advantage.
I agree, bright ravin isnt shining on this. I think you could get away with AI services as veterinary, but the purchase of a bull is different.
Only correction would be the capital gain/ or loss would flow to schedule D, not C. Pretty sure that was just a typo.

My apologies to Sassafras Manor. I am going to defer to you and Katpau. I don't currently have a bull so I deduct breeding expenses such as semen on Line 31. My question is, do you have to depreciate the bull or could you treat the bull like you do other livestock? On a net gain/loss basis on schedule D? The same as you would the purchase of a cow?

Note: I also think Katpau means Form 4797 not Schedule. Typo I am sure.
 

Katpau

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Oops! Schedule D is correct. Thank you 1982vett. I need to think before I type. Schedule C is for reporting business income, schedule D capital gains. Form 4797 would also be correct rather than "schedule" 4797. I am getting old and my mind is not as sharp as it once was. A good (young?) accountant is your best bet for handling this. There is more than one way to handle many accounting situations including depreciation. Your own situation will impact how it is handled.
 

Bright Raven

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Katpau":13okp79t said:
Oops! Schedule D is correct. Thank you 1982vett. I need to think before I type. Schedule C is for reporting business income, schedule D capital gains. Form 4797 would also be correct rather than "schedule" 4797. I am getting old and my mind is not as sharp as it once was. A good (young?) accountant is your best bet for handling this. There is more than one way to handle many accounting situations including depreciation. Your own situation will impact how it is handled.

Thanks. And trust me, I understand the getting old!
 

Katpau

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Bright Raven, I am not sure what you are asking in your last post. I treat the purchase of all breeding stock, bull or cow, in the same way. They go on my depreciation schedule and depreciation is carried from a form 4562 to schedule F on line 14. How I chose to depreciate them depends on the year. When income is higher I might chose to write them off under section 179. In other years I might want to stretch out the expense, and depreciate. When sold any gain or loss is calculated on Form 4797. I use a tax program, so most of the work is done by my computer.
 

Bright Raven

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Katpau":nmhqxyoj said:
Bright Raven, I am not sure what you are asking in your last post. I treat the purchase of all breeding stock, bull or cow, in the same way. They go on my depreciation schedule and depreciation is carried from a form 4562 to schedule F on line 14. How I chose to depreciate them depends on the year. When income is higher I might chose to write them off under section 179. In other years I might want to stretch out the expense, and depreciate. When sold any gain or loss is calculated on Form 4797. I use a tax program, so most of the work is done by my computer.

First. I have not bought an animal for about 4 years. I don't depreciate them like other capital property. If I sell one, I report it on Form 4797. I figure entry by adjusting for the basis. For example, if I paid 2500 in 2012 and sold for 2500 in 2014, the net to report as income on 4797 is Zero.

Edited to add: I don't use a program. I do everything by pencil and paper. I file only on paper. I cannot keep up with technology like I once could.
 

BRYANT

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a bull is the same as buying a cow they are depreciate unless they are sold the same year you bought them. If the purchase price is totally deprecated when you sell they are counted a capital gains.
 

Katpau

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Bright Raven,
That is interesting. I have never heard of anyone not using depreciation on an asset that goes down in value with time. I would worry that showing a cow as sold on form 4797 with a date of purchase several years prior but no accumulated depreciation, might trigger an audit.
 

Bright Raven

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TennesseeTuxedo":bdu9emyo said:
New stock purchased off the farm is to be depreciated over 5 years according to our accountant.

I am building my herd using my replacement heifers. There is no breeding bull in my program. In the past, I apparently missed out on some depreciation opportunities.
 

TennesseeTuxedo

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Bright Raven":1lx99ylu said:
TennesseeTuxedo":1lx99ylu said:
New stock purchased off the farm is to be depreciated over 5 years according to our accountant.

I am building my herd using my replacement heifers. There is no breeding bull in my program. In the past, I apparently missed out on some depreciation opportunities.

I've often thought that buying bred heifers or second calf cows and keeping good records and depreciating them was a smart way to go. Buy a certain number as replacements each year and sell their predecessors as breds or even 3 in 1s as the gain some age.
 

NonTypicalCPA

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A little late to the game here. I’m a CPA with my own practice. Have a lot of farmers as clients. Breeding stock is depreciated. Old rules over 3 years unless you elect to take it all in year one using Section 179 deduction as mentioned above. Under the new laws for 2018 most assets will be deducted in year one.
As a side note, the handful of cattle producers I have as clients almost never show a profit (why do I have cattle?).
 

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