Tax question - depreciation

[badaxemoo]

If you have a cow that is in the middle of being depreciated, and you cull her and sell the beef, how do you figure the taxes?

For example, the cow (heifer) was purchased for $1000. Let's say you've written off $600 in depreciation and then sell $1500 worth of hamburger directly to customers.

Is it as simple as it appears?

 

[tom4018]

Can't state exactly how it is done. But we have had to cull some early that we purchased, somehow the add what is depreciated back in and then what you got out of the cull. Thats what I pay them for.

 

[Douglas]

$1100 gain

 

[Angus Cowman]

$1100 gain

minus cost of processing which might not directly go against the cow but will come off of the top as an expense to offset income

 

[1982vett]

Very little is simple when the IRS is involved.

Assuming you have owned the animal 18 months or more, I'm going to use 1/1/2006 for a purchase date and today as a sale date. I'll even use $250 as a processing fee.

Situation specific... And not tax advice.

The cost basis of the cow is $1000. You sold the animal for $1500. This amount is reduced by any sales expenses. I suppose processing fees could be considered sales expense. But in this situation your gain is going to be a LT Capital Gain in which garners a lower tax rate. It would be tax advantageous to take the processing fee as a business expense on Schedule F where it offsets profits taxed as ordinary income. That will be a
$500 LT Capital gain that is reported on Schedule D of the Form 1040.
$680 (recaptured depreciation) Form 4797.
($330) loss on Schedule F. (current depreciation and processing fee)
Gross income is $850.
$500 taxed at LT capital gains rates and $250 taxed as ordinary income.

If you were to include the $250 as a sales expense and lower your Cost Basis of the cow to $750 you are looking at
$250 LT Capital Gain
$680 (recaptured depreciation) Form 4797
($80) loss on Schedule F (current depreciation)
Gross income is still $850.
$250 taxed at LT capital gains rates and $500 taxed as ordinary income.

Douglas' number is right overall not accounting for processing fees. But the total gain has two tax rates.

 

[marksmu]

Vett - that is the BEST "NOT" tax advice I have ever seen on an internet forum.

I am saving that for future use. I am going to have a heck of a mess of a tax problem in the next few years, as I am getting started and my start up goals do not include profit in years 1-5...Since I dont need to take money out, I intend to use the money for expansion....I've been talking with my CPA, but he swears up and down I will be a hobby farm if I dont show a profit in 2/5 years, even if I am trying to expand.

 

[TexasBred]

That is why we have "CPA's". I figure if they're willing to put their name on it I'm willing to sign it as well.

 

[Brandonm22]

Believe the CPA, the tax attorney, Alan Cohan, who writes for Cattle Today has documented how the IRS is going much harder after farms and they throw that "Hobby" status around a lot more than they used too. If you thumb through the Cattle Today archives you will learn a lot more about this subject.

http://www.cattletoday.com/archive/2009 ... 1950.shtml

Even IF you win a case in tax court, you probably spent $40,000 on legal fees.

 

[1982vett]

Vett - that is the BEST "NOT" tax advice I have ever seen on an internet forum.

I am saving that for future use. I am going to have a heck of a mess of a tax problem in the next few years, as I am getting started and my start up goals do not include profit in years 1-5...Since I dont need to take money out, I intend to use the money for expansion....I've been talking with my CPA, but he swears up and down I will be a hobby farm if I dont show a profit in 2/5 years, even if I am trying to expand.

Again, Not tax advise.
Tell you CPA to get out Publication 225, Farmers Tax Guide, and read it then read it again. ;-)
http://www.irs.gov/pub/irs-pdf/p225.pdf

Page 26 Losses From Operating a Farming


* he needs to understand "at risk"
You are at risk in any activity for:
1. the money and adjusted basis of property you contribute to the activity

* he needs to understand "passive activity limits"
A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate.

You seem to have no problem making the "at risk" portion of this.

Not For Profit Farming

In determining whether you are carrying on your farming activity for profit, all facts are taken into account. No one factor alone is decisive. Among the facts to consider are whether: (just a few)
You operate your farm in a businesslike manner.

The time and effort you spend on farming indicates you intend to make it profitable

Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming.

You or you advisers have the knowledge needed to carry on the farming activity as a successful business.

You can expect to make a future profit from the appreciation of the assets used in the farming activity.

Once your CPA grasps these concepts you shouldn't have a problem.

 

[xbred]

My CPA told me, .....simply having losses for several years (say 6 years) will not deem your operation a "hobby farm"..your reasonable plan and actions to profit will go a long way toward giving you "reptuable" status...

 

[Running Arrow Bill]

First line of defense is to have and use a CPA for your tax things. Second is to have a CPA that is knowledgable of agricultural issues.

That said,

If someone is having a few cattle along with their "day job", then the situation gets sticker. If your DAY job IS your cattle operation, it becomes more plausible.

For any business type, it should be established as a business. As such, have a:

• 1. Business Plan.
  2. Separate bank account for business.
  3. Keep detailed records.
  4. Advertise your business to the general public every month (or every week if appropriate).
  5. Have business cards, vehicle signage, ranch signage.
  6. Use a formal Invoice for any sales (not just a "receipt book").
  7. Sell something from the operation (obviously).
  8. Run the operation as a "Business", not a part-time activity.

Note: 6 cattle on a rented or leased pasture (for a simple example) is probably not going to convince the IRS you are NOT a Hobby Farmer (aka "business" to reduce your "day job" tax liability)

JMO

 

[Wewild]

Add to list.

Barter if you can.

 

[TheBullLady]

We've had a CPA for years, as both hubby and I are "independant contractors".. and I hate accounting stuff.

Having said that, our accountant told me years ago that cattle can't be depreciated. We simply report the amount we spent buying them, the details of feed, and whatever we get when we sell them.. whether it's as beef to an individual, or to the auction barn. Doesn't make any difference. I think you're making it too difficult! My accountant told me he didn't need to know if anything died.

 

[1982vett]

We've had a CPA for years, as both hubby and I are "independant contractors".. and I hate accounting stuff.

Having said that, our accountant told me years ago that cattle can't be depreciated. We simply report the amount we spent buying them, the details of feed, and whatever we get when we sell them.. whether it's as beef to an individual, or to the auction barn. Doesn't make any difference. I think you're making it too difficult! My accountant told me he didn't need to know if anything died.

Raised Breeding stock can't be depreciated because you have expensed the cost of raising them. Breeding stock you buy are depreciable if you use the cash method of accounting. MACRS, 5 year asset class, 150 DB method (in most cases).

Not familiar with the accrual accounting method where you don't depreciate them because you hold the livestock in inventory. Someone else will have to pick it up from here.

 

[talldog]

First line of defense is to have and use a CPA for your tax things. Second is to have a CPA that is knowledgable of agricultural issues.

That said,

If someone is having a few cattle along with their "day job", then the situation gets sticker. If your DAY job IS your cattle operation, it becomes more plausible.

For any business type, it should be established as a business. As such, have a:

• 1. Business Plan.
  2. Separate bank account for business.
  3. Keep detailed records.
  4. Advertise your business to the general public every month (or every week if appropriate).
  5. Have business cards, vehicle signage, ranch signage.
  6. Use a formal Invoice for any sales (not just a "receipt book").
  7. Sell something from the operation (obviously).
  8. Run the operation as a "Business", not a part-time activity.

Note: 6 cattle on a rented or leased pasture (for a simple example) is probably not going to convince the IRS you are NOT a Hobby Farmer (aka "business" to reduce your "day job" tax liability)

JMO

Sound Advice !! Take Heed !! :tiphat:

 

[Brandonm22]

Most CPAs guarantee their work and as such some tend to sometimes be over cautious. On another note, if you have a job, investment income, a serious cattle operation, estate planning issues, payroll, and small business income etc where the return is going to get complicated you probably don't need to be getting your taxes done by the girl in the H&R Block cubicle at Wal-Mart.

 

[Douglas]

We've had a CPA for years, as both hubby and I are "independant contractors".. and I hate accounting stuff.

Having said that, our accountant told me years ago that cattle can't be depreciated. We simply report the amount we spent buying them, the details of feed, and whatever we get when we sell them.. whether it's as beef to an individual, or to the auction barn. Doesn't make any difference. I think you're making it too difficult! My accountant told me he didn't need to know if anything died.

This is very incorrect information. Sounds like a tax guys that wants to keep things simple for the both of you, and believes if your caught doing things wrong the cost won't be significant and be less that trying to keep accurate records.