There’s more than one way to sell cattle at tax time

Many cattle producers face an unusual circumstance this tax year. Quickly rising 2014 cattle prices generated a lot of profit, so producers are looking for ways to reduce income tax liabilities by deferring 2014 income until 2015. Prices continue to hold steady so producers might consider income deferment on 2015 income, too.

There’s more than one way to sell cattle at tax time

Many cattle producers face an unusual circumstance this tax year. Quickly rising 2014 cattle prices generated a lot of profit, so producers are looking for ways to reduce income tax liabilities by deferring 2014 income until 2015. Prices continue to hold steady so producers might consider income deferment on 2015 income, too.

Curt Barnekoff, a certified public accountant with WIPFLI-GHG in Havre, Mont., offers suggestions for several ways to sell cattle in one year, yet get paid in the next year.

“You can hold the check in your wallet and deposit it whenever you want to,” he notes.

Holding check a no-go

But the Internal Revenue Service considers having a check in a wallet as a constructive receipt because a person has access to the money and controls whether to spend it or not, even if the money is not in a bank account. The income then must be declared on a tax return.

“Holding a check is convenient, but it is not allowed for income tax purposes. Also, there is the risk of whether the check will still be good. And what if you lose your wallet?” Barnekoff asks.

Another option is to let the buyer hold the money until the seller asks for it.

“You still have the constructive receipt problem because you can have the money whenever you ask for it. And what if the buyer disappears, files bankruptcy or dies? You have no documentation,” says Barnekoff.

An easy solution would be to write up a contract with the buyer, as long as the contract is not assignable or transferable. If it were, then the IRS would consider the contract as giving the cattle seller some economic benefit — and, thus, a constructive receipt.

Again, the buyer could vanish without a trace, leaving the seller holding a flimsy piece of paper.

Eliminating some of the worry

Barnekoff suggests using an unrelated third party to hold the money as a deferred contract.

The third party, buyer and seller all sign agreements. The third party — usually a financial institution — sticks the check into a holding account and gives the money to the seller when specified in the agreement.

The seller cannot receive “interest” on the money because that would constitute economic benefit in IRS lingo, but most banks pay a “premium” that just happens to equal the current interest rate.

Using a third party, the seller no longer has to worry about the buyer disappearing, but deferred-payment sales accounts are only insured by the FDIC up to $250,000.

Money from all of a third party’s deferred payment agreements are in one account so that account is probably much higher than $250,000.

The seller can elect to be paid whenever he or she chooses, whether that is the next year or 10 years from now. Also, the seller can divide a single sale into several deferred payment agreements.

For example, if a cattle producer sold $300,000 worth of calves in 2014, she could elect to receive $150,000 in 2015, 100,000 in 2016 and $50,000 in 2017.

“You can defer for as long as you want, or get partial payments, but you have to decide that when you set up the agreement,” says Dan Majerus, president of Stockman Bank in Conrad, Mont.

“Agriculture is the only industry that can mess with income timing. We should use that to our advantage,” says Barnekoff.

Schmidt writes from Conrad, Mont.

 

Key Points

Producers are looking for ways to reduce income tax liabilities.

One option is to let the buyer hold the money until the seller asks for it.

Or use an unrelated third party to hold the money as a deferred contract.

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PROTECTION: Curt Barnekoff role-plays the audit process. “You don’t have to be in the room [during an audit]. You can give your accountant the authority to answer those questions,” he says. Often, an IRS auditor will request to meet at the taxpayer’s ranch, but she can meet at the accountant’s office instead. “Create a buffer between the IRS and you with your CPA or tax attorney. You pay them to protect you,” Barnekoff says.

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DEFER STRATEGICALLY: Dan Majerus, president of Stockman Bank in Conrad, Mont., describes how to set up a deferred payment contract so the seller can avoid constructive receipt of income.

 

New repair, maintenance regulations

After Marriott International Inc., FedEx and a Seattle tugboat company beat the Internal Revenue Service in a court battle, the tax agency clarified that expenses qualifying as a repair can be completely deducted by business owners, while expenses qualifying as maintenance must be depreciated over several years.

Montana CPA Curt Barnekoff summarizes the 93-page IRS report of definitions regarding repairs.

“Essentially, if you make a repair to a piece of equipment that you expect to make at least twice in 10 years, that is an expense,” he says.

“What about laying down new asphalt on a driveway that already had asphalt?” asks Jeannette Rankin, a cattle producer from Oilmont, Mont.

“That is an improvement to the land so you need to depreciate it,” Barnekoff says.

The IRS also clarified the definition of supplies, noting that supplies that are not consumed within the tax year and cost more than $200 must be depreciated.

“So that means if you buy fence posts, twine, portable corral panels, or anything that you might not use up in a year, be sure to have the invoice list the per item cost,” Barnekoff says. “If you buy 1,000 fence posts, have the clerk write the invoice as the cost per post.”

CRP vs. self-employment

People who work for wages pay 7.65% of their income as their contribution to Social Security and Medicare, and their employer contributes another 7.65% for them.

Self-employed agricultural producers are supposed to pay the entire 15.3% of their income as their contribution to Social Security and Medicare.

Many ag producers earn some income from the Conservation Reserve Program.

“If you are actively farming, then your CRP income counts as part of the self-employment tax calculation,” says Curt Barnekoff, a certified public accountant with WIPFLI-GHG in Havre, Mont. “If you are retired, CRP is not subject to self-employment tax.”

The gray area comes from people who hold CRP contracts, but hire someone else to maintain the land for the contract.

Court challenge

Roland and Maureen Morehouse challenged the IRS in court over this gray area.

The court decided passive owners of CRP do not need to include CRP payments in their self-employment tax calculations.

The ruling came on Oct. 10, but the irs.gov website, updated Jan. 12, stated: “Unless the taxpayer is receiving Social Security retirement or disability benefits, CRP ‘annual rental payments’ are includible in net income from self-employment subject to self-employment tax.”

“Talk to your accountant about this one,” Barnekoff advises.

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STUDY THE OPTIONS: Jeanette Rankin thinks hard about how to incorporate tax advice on her north-central Montana ranch.

 

This article published in the April, 2015 edition of WESTERN FARMER-STOCKMAN.

All rights reserved. Copyright Farm Progress Cos. 2015.

Tax/Estate Management

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