Be aware of tax management opportunities for 2008
December 24, 2008
The old saying is “nothing is more certain than death and taxes.” I usually tell people that paying income tax is a good thing because that means you made a profit.
Another old saying is that opportunity knocks but once. 2008 is a special year for Kansas farmers because there are some provisions in the tax code that are beneficial that may never be there again.
It won’t be long before we will be thinking about filing our 2008 income taxes. If we are going to manage those taxes, we need to take some action now or if we have already done some things that will reduce our 2008 tax load, we need to visit with our tax adviser to see how those things will help us. By now, most of you have read in the popular farm press about the larger first-year depreciation rules for this tax year.
I have never been one to think you should “blow” money, just to save paying taxes. That’s like “cutting off your nose in spite of your face,” since we are into old expressions. On the other hand, if you have items you are going to purchase anyway and you can use the tax code to make these items more economical in the short run, then do it.
On your 2008 depreciation schedule it will be important to specify whether purchased depreciable property is new or used. First, let’s check new rules for direct expensing or commonly referred to as Section 179.
Direct expensing allows an expense deduction in the year of purchase for costs that normally must be deducted or depreciated over many years. The direct expensing maximum limit increased to $250,000 for tax years that begin in 2008 (it was $125,000 in 2007). Eligible property includes pickups over 6,000 pounds Gross Vehicle Weight Rating, farm machinery and equipment, single purpose livestock or greenhouse structures and drainage tile. Structures such as a grain bin or swine building are eligible, but a general machine shed is not.
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After direct expensing deductions are taken, an additional 50% bonus depreciation is required in 2008 for new property (not used) for which the Modified Accelerated Cost Recovery System (MACRS) applies and which have a class life of 20 years or less. This includes most depreciable farm property.
A strategy to maximize depreciation in 2008 would include using direct expensing for eligible used property, using any remaining direct expense allowance expensing for new property, and then using the 50% bonus depreciation on all the new property cost that is left. Whatever basis or cost remaining then gets normal depreciation treatment. Order makes a difference on property. The direct expensing is taken first, then 50% bonus is taken, and finally normal depreciation on the rest. The overall result is that depreciation for 2008 is tremendously flexible and allows for some unique tax planning.
I should point out that the really big spenders don’t win out in this case. The $250,000 limit begins phasing out at $800,000 of eligible property purchases placed in service during the tax year. Each dollar of purchases above $800,000 decreases the amount by one dollar. If $1,000,000 of qualified property is placed in service, the direct expensing limit is reduced by $200,000 ($1,000,000 minus $800,000) resulting in a limit of $50,000 ($250,000 minus $200,000). For many farm businesses, direct expensing may provide adequate deductions when added to normal depreciation, but for large farms or those that have deferred income in past years, additional depreciation is available for 2008.
The other item to point out is that the long term capital gains rate changed from 5% and 15% in 2007 to 0% and 15% in 2008. So on property such as cull cows, the lower rate is for capital gains below the 25% ordinary income bracket and the higher rate is for gains above the 15% ordinary bracket. The top of the 15% ordinary bracket is $65,100 of taxable income for a couple married, filing jointly.
One more thing that applies to us and other parts of Kansas is the Additional Tax Relief for businesses affected by the Kansas storms and tornadoes of May 4, 2007. This impacted Greensburg, Macksville, Claflin and areas to the south of Great Bend and Ellinwood. An increased section 179 expense deduction and a special depreciation allowance may be available for qualified Recovery Assistance property. This ends December 31, 2008.
As always, if you need supplies for 2009, you can pre-pay some of those in this tax year. You are limited to 50 percent if you use cash accounting. I personally encourage farmers to use the accrual method so you can carry inventories and get a truer measure of where you are financially.
If all of this is confusing to you, check with your tax planner or tax preparer. If you don’t have one, I would encourage you to stop by the office and check into joining our Farm Management Association. We also have free copies of the Farmers Tax Guide available to help you.