Gains or losses on the sale of breeding stock or dairy animals are not reported on Schedule F, Profit or Loss from Farming. These are reported as capital gains and losses.
Why is this important? Farm income is reported on Schedule F. Schedule F income is subject to both federal and state income taxes as well as federal self-employment ( FICA and Medicare) taxes. If the farm is operated as a sole proprietorship or partnership, which most are, the SE tax is 15.3% per cent of net farm income (7.65 per cent employee's portion plus 7.65 percent employer's portion). If the farmer reports gains on sale of breeders on Schedule F, he or she will pay self-employment tax on income not subject to self-employment tax. Additionally, gains on sale of breeders and capital gain not ordinary income.
Most cash method farmer-most are- raise their breeding and dairy stock. As cash method taxpayers, they currently expense rather than capitalize and depreciate the cost of feed, vet bills, etc. In the year these expenses are incurred. These raised animals have no depreciable basis. Breeders purchased basis is the amount the farmer paid for the stock.
When a raised breeder two or more years old is sold, the total selling price is capital gains taxed at -0-%, 15% or 20% depending on the taxpayers tax bracket. Capital gains are not subject to the 15.3% self-employment tax.
Purchased breeders' cost is depreciated upon sale, the depreciation taken over the year of ownership is re-captured as ordinary income (not subject to self-employment tax) to the extent of the gain on the sale. The excess above re-captured depreciation is taxed as capital gain.
All of the gains from sales of raised breeders is capital gains.
FIRST, WHAT IS NOT A SELF-DIRECTED IRA ?
Many investors think that since they have a choice between Mutual funds, Exchange-Traded Funds, stocks and bonds, that these traditional IRA Trust or custodial accounts are self-directed. NOT SO.
In a true self-directed IRA, you may invest in just about anything other than life insurance and collectibles. Many alternative investments (alternative to traditional investments such as stocks and bonds) provide greater diversification for the portfolio when combined with some part of the portfolio made up of stock and bond mutual funds or ETF's
You have a voice in the part of the portfolio that contains investments that you know. If you are astute in managing rental estate, you may have some or all of your IRA funds invested in properties that you select.
You must first find an IRA trustee that allows such an arrangement. The Trustee wil allow you to use a self-directed IRA and, also, allow you to choose the real properties of your choice.
Other alternative investments you may choose are:
* Raw land
* First and second mortgages
* Options to buy and sell real estate
* Private Placements L.L.C.
* Precious metals
As you hve probably surmised by now, you have to know what you are doing. Self-directed is just that self-directed. You are required to select the investment you want your trustee to buy, you choose the investments to sell and when. You become the investment manager of your self-directed IRA.
In the traditional IRA setting, the portfolio manager makes these decisions alone.
These alternative investments do not decline in value at the time of a bear market for stocks and bonds. Thus, you may expect a winner in your portfolio regardless of the ups and downs of the market.
Be aware of the pitfalls associated with self-directed IRAs. You and your family may not use the assets contained in the portfolio (e.g., the beach house cannot be rented by you).
Additionally, self-directed IRAs are hands-on arrangement. Most of the management duties (e.g., buying and selling properties, etc.) are your responsibilities.
The self-directed IRA trustee will help you to obey the rules and avoid prohibited transactions.
My recommended trustee for your self-directed IRA is The Entrust Group, www.the entrust group.com, 1-800-392-9653. No, I have no connection with this firm.
If you operate your business as a sole proprietorship and have no employees, you man hire your spouse and adopt a Health Reimbursement Plan and deduct insurance premiums and medical expenses on your business form instead of the itemized deduction schedule. This strategy will work for sole proprietors and farmers.
The term of art is a Section 105 plan. The benefits of the plan are best for sole proprietors and farmers that have no eligible employees.
How does a Section 105 Plan work.
* Hire your spouse to do work for your business
* Institute a Section 105 Plan which allows your Schedule C or Schedule F business to reimburse the spouse for insurance premiums and deductibles and Co-payments the spouse pays
* Do the reimbursement monthly backed up with documentation
* Have the spouse file with the business weekly signed time sheets
* The reimbursements may be considered spouse's total compensation
* If medical reimbursements are the total pay, Form W-2 is not required
* If a Section 105 Plan is established, it must include all eligible employees, thus, it works best where the spouse is the only eligible employee
What are the benefits of a Section 105 Plan ?
* The business may deduct the reimbursement on Schedule C or in the case of a farm Schedule F.
* The deduction reduces income for both income tax purposes as well as self-employment ( FICA and Medicare) purposes
* The employee - spouse does not report the reimbursement as income
* Medicare premiums may also be reimbursed
* Dental and eye care are medical expenses
* Mileage reimbursed at the applicable rate per mile is also a medical expense
* Medical expenses incurred on behalf of the employee spouse, the employee-spouse and dependent qualifies for reimbursement, children up age 27 do not need to be a dependent to qualify for reimbursement
If you were an eligible individual under the "Last-Month Rule" at the first day of each month during the year. (To refresh your memory as to definitions of terms, please refer to our blog "How a Health Saving Account Can Save You Income Taxes" dated July 06, 2016 at www.creasmanfp.com) The "Last Month Rule" means you were an eligible individual on December 1, thus, you may contribute up to $ 3,350 or $6,750 depending on whether your's is a single plan or family plan. You have until April 15, 2017 in which to make the contribution. The contribution is deductible on your 2016 tax return. You may contribute an additional $1,000 if you are age 55 at year-end. However, if you take advantage of the "Last Month Rule", you are subject to the "testing period" provision. The testing period provision is best explained by an example:
You take advantage of the "Last Month Rule" when you contribute $ 3,350 to your Health Saving Account on April 1, 2017. You are under age 55 at December 31, 2016 so the additional $1,000 contribution is not available to you. You deduct the contribution - $3,350 - on your 2016 tax return. If you meet the "testing period rule", there is no downside for taking advantage of the last month rule.
The testing period runs from December 1, 2016 through December 31, 2017. You must maintain your Health Saving Account throughout the testing period.
What if you fail to do so ? You take advantage of the last month rule for tax year 2015. You maintained your HSA until June, 2016. Since you did not meet the testing period provision, you will report as income the deduction taken in 2015 for the amounts allocated to the months during 2015 that you were not an eligible individual. In this scenario 279.17 X 11 months = $3,071 would be included in your 2016 tax as income. Additionally, the $3,071 income would result in a ten percent penalty - $307.
So, you should look before you leap.
Your dependent children may be hired by you if you operate your business as a sole proprietorship. The same is true if the business is a husband-wife partnership.
* Until the child reaches age 18, you are not required to withhold FICA (social security) or medicare taxes from child's wages.
* Neither are you required to "match" these taxes as is required for other employees.
* The amount paid to children as wages reduces your earnings generated by the business. Thus, your income tax, FICA and medicare taxes are reduced.
* Since the child has earned income, he or she can contribute to a traditional or ROTH IRA.
* It is mind boggling how much the amount contributed by the young grows to at child's age 65. Money earned on money, etc. is the ingredient responsible for the accumulation of wealth. When one starts investing at a younger age, the money invested is a small percentage of the final account balance. Additionally, the earning invested in either a traditional or ROTH IRA is not eroded by income taxes until funds are withdrawn.
* There must be established an employer - employee relationship - Time worked records.
* Child must actually perform services and you must pay a fair wage for the services.
* To determine a fair wage Google - "Salary Guide" 2016.
* You must comply with child Labor Laws. The Fair Labor Standards Act provides that youth younger than 16 years of age working in a business solely owned by their parents can work anytime of day and any number
of hours. This exception doesn't apply if the business is engaged in manufacturing, mining or that are involved in activities determined to be hazardous by the Department of Labor.
* Have the child complete a time record daily and submit a weekly record of time worked.
Children are entitled to a standard deduction equal to their amount of earned income (e.g.,wages) up to $ 6,300. A child with earned income may contribute up to $ 5,000 to an IRA account. Combined $ 11,300 of business income may be moved from the parent's income taxed in the parent's income tax bracket, FICA and medicare to the child's zero tax bracket. The child is allowed to draw from his/her IRA account to finance higher education cost without incurring the 10% penalty normally imposed of early withdrawals from IRA accounts.