President Obama signed the new tax bill into law on Sept. 27. This law contains several new provisions as well as extensions of older provisions that were scheduled to expire at the end of 2010. Many of these provisions are very beneficial to businesses engaged in agriculture and provide numerous opportunities you should consider as you review your tax situation and do your year-end planning. Expensing of equipment purchases In the past, equipment and single-purpose agriculture building (barns, hay sheds, milk parlors, etc.) purchases were depreciated over a certain period of years. Several years ago, provisions were made allowing certain dollar amounts to be expensed in the year purchased.
Prior to the enactment of the new tax law, the amount eligible for expensing was set at $250,000. This dollar amount has been increased to $500,000. Now for 2010, unless total equipment and building purchases exceed $2,500,000, you can expense the cost of equipment purchases and single-purpose agriculture buildings up to $500,000. If your current year equipment purchases total more than $2,000,000 but less than $2,500,000, the amount eligible for expensing is phased out ratably.
First-year bonus depreciation
Under current law, purchases of new equipment and buildings with a life of 20 years or less are eligible for a special first-year bonus depreciation equal to 50 percent of cost. (Agriculture buildings all have a 20-year life or less, so they are eligible for the first-year bonus depreciation.) This provision, which was scheduled to expire at the end of 2009, has been extended for 2010 and 2011. Bonus depreciation is especially beneficial if you are unable to expense new equipment and buildings because you have exceeded the $2,500,000 limitation for the expensing option.
First-year depreciation for autos and light trucks
Under prior law, automobiles and light trucks have been limited on the amount of first-year depreciation that was allowed (automobiles – $3,060 and light trucks and vans – $3,160). For 2010 only, these limits have been increased by $8,000 (automobiles – $11,060 and light trucks and vans – $11,160). The limitation applies to automobiles, vans and trucks that have a 6,000-pound gross (loaded) vehicle weight or less. Tax treatment for trucks that have gross vehicle weight in excess of 6,000 pounds remains the same.
Expense of startup costs
When you start a new business, you incur certain expenses such as legal, due diligence, etc. that are considered “startup expenses.” Under the old law, you could expense up to $5,000 in the year the business started and were required to amortize the balance over 60 months. For 2010 only under the new law, you can expense up to $10,000 in the year the business starts operations before having to amortize the balance over 60 months. 2010 phase-out rules apply for startup expenditures in excess of $60,000 (previously $50,000).
Self-employed health insurance premiums
Under the old law, health insurance premiums were deductible for federal and state income tax purposes but did not reduce self-employment earnings. For 2010 only, these premiums are now deductible when calculating net income from self-employment, as well as federal and state income taxes.
Built-in gains tax on conversion to S corporation status
Under past law, if you converted a regular corporation (C Corp) to an S Corporation (S Corp) and there were assets that had “built-in gains” that were sold within 10 years of the conversion, the gain was subject to a special corporate tax of 35 percent (as if they had been sold while in the C Corp). In 2009 and 2010, this holding period was reduced to seven years. Thus, if the assets were sold after seven years, they were not subject to the “built-in gains tax.” With the passage of the new law, effective for 2011, if the assets have been held for five years, they are no longer subject to the “built-in gains tax.”
15 percent capital gains and qualified dividend rate
Under current law, long-term capital gains and qualified dividends are taxed at a maximum federal rate of 15 percent. In some cases, depending on your total taxable income, the rate is 0 percent. Unfortunately, these rates will expire at the end of 2010 and have not been extended under the new tax act. You may consider selling capital assets during 2010 rather than waiting until later years if you have some flexibility in the timing of such gains.
Workers’ compensation insurance and state and federal unemployment taxes
In some states, agriculture employers have limited exceptions for not being required to carry workers’ compensation insurance. These limits are generally based on the amount of wages paid and in certain states whether or not the wages are paid to non-family members.
Some states require all employers to have workers’ compensation insurance either through state insurance funding or private carriers. In some cases, there are no exceptions for agriculture workers.
You should contact your state agency to ascertain the requirements for your state. Penalties can be substantial for not being covered by workers’ compensation insurance.
If you have annual wages in excess of $80,000 or quarterly wages in excess of $20,000, you may be required to pay both federal and state unemployment taxes. PD
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Paul Simkins
- CPA/Tax officer
- Jones-Simkins, P.C.
- Email Paul Simkins