MP Ranch
Welcome to the business. I usually hesitate to use the term “tax shelter” when describing the type of operations that most of us CattleToday folks have --- too many unsavory deals in the past, with little or no economic substance were promoted as “tax shelters”. But nevertheless, there can be income tax advantages associated with your proposed cattle business, and also the ability to reduce self-employment taxes if you happen to have self-employment income from some other source,
Be sure to keep good, detailed records. Seek out the advice of as many cattle people, extension agents, etc. as you can (in addition to the fine folks here at CT) and try document your investigations, analysis, etc. and develop a good “paper trail” of all the investigative work you do, the training you obtain, etc. If you have an accountant, get him to give you some additional guidelines about how to conduct your operations so as to maximize your tax benefits and minimize the chances/possibility that the IRS would seek to treat your operations as a “Hobby” (a hobby largely being the kiss of death from the standpoint of tax benefits).
Craig is correct: one of the primary tax benefits is the ability to immediately write off relatively large amounts paid for breeding herd animals, tractors, fencing, etc. --- assuming you have “earned income” from wages or some other “self-employment” activity (in addition to being able to write off the cost of feed, hay, vet supplies and services, and other “consumable” expenses commonly incurred in the business). Properly structured, your cattle business losses in the first few years (and forgive me for assuming that they indeed will be losses) can then be used to offset taxable income from other sources such as your “real job”, interest, dividends, etc. As I recall, you are not a Texan yet, but own the property in Texas on which you will soon begin your cattle operation. You’ll find that one of the biggest “shelters” is simply the much lower land value for ad valorem taxes if you qualify for the ag exemption. Never spend money on cattle business related things just because they happen to be deductible. I can’t tell you how many otherwise very intelligent clients and acquaintances I have heard say silly things like “he just does it for a tax shelter”. Remember that even if an expenditure is 100% deductible it could still be costing you 50% or more after taxes, depending on your tax bracket – Uncle Sam and the state taxing authorities only pick up part of the tab via allowing you a deduction.
The issue of incorporating your operations, or going the LLC route, brings up many considerations beyond the scope of this discussion. As a practical matter, there are no magical, greatly enhanced tax benefits associated with incorporating (or LLC'ing) a small ranching enterprise, and there can in fact be significant problems associated with having highly appreciated property such as land in a corporation. Generally speaking, I have always urged clients not to incorporate unless they first felt the need to do so for legal liability protection. In many situations the legal liability issue is paramount, but for most smallish ranching operations the sole proprietorship (or possibly even better, a single member LLC) works just fine. But you should consider various types of commercial insurance, certainly including liability insurance. Texas is not a free-range state, so at a minimum make sure you have good fences --- and a business liability and umbrella policy wouldn’t be a bad idea.
Another thought: you should consult your accountant or attorney if you are seriously considering incorporating or creating even a single member LLC for Texas operations. If you decide to incorporate talk to your attorney about filing Form 2553 to elect "S" corporation status. Also, note that Texas essentially has a 4.5% income tax rate for corporations and LLCs (although it is called the “franchise tax”) --- but under fairly recently enacted CURRENT law there generally is no Texas franchise tax unless the gross receipts of the business exceed $150,000 in a year. Because of the $150,000 gross receipts rule you most likely won’t have to worry about the franchise tax unless you get a heck of a lot bigger than I think you will, but the law could change again at the whim of the bozos in Austin.
Good luck to you. Arnold Z.