Transcript Taxes Chapter #9 11/6/2015 Which Accounting System Is Best For You? Cash or Accrual? It depends on your individual situation 11/6/2015

Taxes
Chapter #9
11/6/2015
Which Accounting System Is
Best For You?
Cash or Accrual?
It depends on your individual
situation
11/6/2015
What is the Cash Method of
Accounting?
Records income and expenses in
the period in which they are
actually received or paid
Inventory is not used
Taxes paid on income minus
expenses
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Advantages & Disadvantages of
Cash Accounting?
Advantages:
Disadvantages:
Easier
Inaccurate measure
of profitability
no inventory
Flexible Timing
can plan income
and expenses
ex: cash
transactions on
first or last day of
year
Income Variations
sell current crop &
last years at same
time
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Accrual Method
Records income when it is
earned and expenses when
they occur
Uses an inventory
An increase in year end inventory
is treated as income
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Advantages & Disadvantages
of Accrual Accounting
Advantages:
Accurate measure
of profitability
Reduces variation
in income
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Disadvantages:
More bookkeeping
Can create tax
liability on items
not sold yet
Farm Income
Sale of raised products
Sale of items purchased for
resale
Government Program Payments
Patronage Refunds
Crop Insurance proceeds
Custom Hire
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Farm Expenses
Feed, seed, fertilizer, fuel, labor
Depreciation, rents, interest
Repairs, taxes, utilities, storage
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What is Depreciation?
Assets with a useful life of more
than one year, may not be
deducted as an expense in the
year of purchase
Part of the cost of the asset will
be deducted in each year of
that asset’s productive life until
the value is zero
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What can be depreciated?
Useful life of more than one year
Used in the business
Must be purchased
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What information is needed to
calculate depreciation?
Basis: cash paid plus depreciable
balance of their trade-in
When placed in service
Which method of depreciation to
use
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Methods of Depreciation
General Depreciation System
(GDS)
Modified Accelerated Cost
Recovery System (MACRS)
recovers cost quicker
GDS & MACRS can use Straight
Line or Declining Balance
options
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MACRS
3 Year Property
Breeding Swine
5 Year Property
Breeding Sheep, Cattle
Trucks, Computers
7 Year Property
Machinery, Equipment, Fence
10 Year Property
Single purpose lvstk/hort struct.
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MACRS
20 Year Property
Farm Buildings
27.5 Year Property
Residential Property
31.5 Year Property
Office buildings, motels, stores
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Straight Line Depreciation
Purchase price of asset divided
by the years of service
Ex: $140,000 combine
depreciated over 7 years =
$20,000 per year
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Declining Balance Method
Gives largest depreciation
deductions at the beginning,
then smaller each year
More accurately represents the
wear and tear of the asset
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Section 179 Expense
Deduction
Allows you to take up to $17,500
of the purchase price of an
asset the first year, then
depreciate the rest
Ex: $140,000 combine, Sec. 179
of $17,500 first year = new
basis of $122,500
Depreciate $122,500 over 7 years
= $17,500 per year
11/6/2015 Why use Section 179?
Convention
The IRS does NOT allow you to
take a full year’s depreciation
for the first year that an asset
is placed in service
May use the month, quarter, or
year the asset is placed into
service
Mid-Month, Mid-Quarter, Mid-Year
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Convention
Mid-month convention etc. only
affects the first and last year of
a depreciation schedule
Ex: If you purchase a $140,000
combine in August
Depreciated over 7 years =
$20,000 per year
Year #1 dep. = 5/12 $20,000
Year #2-7 dep. = $20,000
11/6/2015 Year #8 dep. = 7/12 of $20,000
Develop a Depreciation
Schedule for the following:
Item purchased: Tractor
Date purchased: May 5
Cost: $70,000
Years of Service:
Straight Line Depreciation
Convention: Mid-Month
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Answer
Year
Year
Year
Year
Year
Year
Year
Year
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1
2
3
4
5
6
7
8
=
=
=
=
=
=
=
=
$6,667
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$3,333
Develop a Depreciation
Schedule for the following:
Item purchased: Tractor
Date purchased: Dec 5
Cost: $70,000
Years of Service:
Straight Line Depreciation
Section 179 Deduction: $17,000
Convention: Mid-Quarter
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Answer
Year
Year
Year
Year
Year
Year
Year
Year
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1
2
3
4
5
6
7
8
=
=
=
=
=
=
=
=
$
$
$
$
$
$
$
$
1,893
7,571
7,571
7,571
7,571
7,571
7,571
5,678
Develop a Depreciation
Schedule for the following:
Item purchased: 10 Heifers
Date purchased: Sept. 10
Cost: $800
Years of Service:
Straight Line Depreciation
Convention: Mid-Month
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Answer
Year
Year
Year
Year
Year
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1
2
3
4
5
=
=
=
=
=
$
$
$
$
$
400
1,600
1,600
1,600
800
Develop a Depreciation
Schedule for the following:
Item purchased: Pickup
Date purchased: Feb. 27
Cost: $24,000
Years of Service:
Straight Line Depreciation
Convention: Mid-Month
Business Use: 75%
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Answer
Year
Year
Year
Year
Year
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1
2
3
4
5
=
=
=
=
=
$
$
$
$
$
3,300
3,600
3,600
3,600
300
Develop a Depreciation
Schedule for the following:
Item purchased: Barn
Date purchased: Sept. 23
Cost: $20,000
Years of Service:
Straight Line Depreciation
Convention: Mid-Year
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Answer
Year 1 = $ 500
Year 2-20 = $ 1,000
Year 21 = $ 500
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Develop a Depreciation
Schedule for the following:
Item purchased: Computer
Date purchased: October 22
Cost: $3,000
Years of Service:
Straight Line Depreciation
Convention: Mid-Month
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Answer
Year
Year
Year
Year
Year
Year
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1
2
3
4
5
6
=
=
=
=
=
=
$
$
$
$
$
$
150
600
600
600
600
600
Develop a Depreciation
Schedule for the following:
Item purchased: Bull
Date purchased: May 3
Cost: $2,000
Years of Service:
Straight Line Depreciation
Convention: Mid-Month
Section 179 Deduction: $2,000
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Answer
Year
Year
Year
Year
Year
Year
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1
2
3
4
5
6
=
=
=
=
=
=
$
$
$
$
$
$
267
400
400
400
400
133
Develop a Depreciation
Schedule for the following:
Item purchased: Fence
Date purchased: July 30
Cost: $6,000
Years of Service:
Straight Line Depreciation
Convention: Mid-Month
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Answer
Year 1 =
$ 428
Year 2-7 = $ 857
Year 8 = $ 429
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Develop a Depreciation
Schedule for the following:
Item purchased: Car
Date purchased: March 19
Cost: $15,000
Years of Service:
Straight Line Depreciation
Convention: Mid-Month
Business Use: 25%
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Answer
Year
Year
Year
Year
Year
Year
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1
2
3
4
5
6
=
=
=
=
=
=
$
$
$
$
$
$
625
750
750
750
750
125
Strategies to Increase Taxable
Income
Sell marketable grain/lvstk
Off Farm Income
Postpone expenditures until
beginning of next year
Pay bills begin. Of next year
Don’t use Section 179
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Strategies to Reduce Taxable
Income
Postpone sales until next year
Use deferred sales contracts
Buy machinery, supplies etc
before end of year
Use Section 179
Make advanced purchases
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