As we look back at the last calendar year, it’s a good time to sharpen your pencil and consider some tax strategies that may help minimize your tax liabilities. Here are three areas that every agribusiness should be aware of when working with their tax advisor:
Transition of Family LLCs: In order to minimize estate taxes, farmers often transfer their land and real property into family-owned LLCs. Minority interests may be granted in these LLCs to their heirs at discounted values due to lack of control. These discounts can be up to 50% of the fair value of the LLC interest and help reduce the estate tax impact of the gift. However, if proposed changes to the IRS Code are enacted, this tax planning tool will go away. To date, it’s not certain what the final effective date will be for these changes, if they are enacted into law. Therefore, if you have a family owned LLC and have not evaluated the impact of these potential changes on your estate and business transition planning, we recommend that you contact your CPA or attorney immediately to evaluate the appropriate course of action for your personal situation.
New Repair Regulations: IRS regulations now allow businesses to expense asset purchases of $2,500 or less, per unit (up from $500 or less). This increase alleviates the time and effort required to track, capitalize, and depreciate relatively minor purchases. It also provides an incentive to make year-end purchases as they can be expensed against income for the current year, even if they were only placed in service for a day. Businesses should create or update their written capitalization policies to document their chosen dollar threshold to be applied consistently to all asset purchases to take advantage of this strategy.
Expanded Bonus Deprecation on Trees and Fruit Bearing Plants: A tax savings opportunity is available to those who haven’t elected out of UNICAP (i.e., the IRS rules for capitalization of inventory for cash basis tax payers). These businesses can plant trees and plants bearing fruits and nuts now and take bonus depreciation. Under the old rules, agribusinesses would have to wait until the tree or plant become commercially productive to claim the depreciation expense. This potential tax savings should be considered when you are deciding when to plant any new fields. The available bonus depreciation is 50% in 2016, 50% in 2017, 40% in 2018, and 30% in 2019.
Here are some additional reminders for you to review with your tax advisor:
Entity Structure Planning: The PATH Act of 2015 made permanent the five year waiting period for built-in gains associated with C-Corporations that have converted to S-Corporations. If you have been considering converting to an S-Corporation because of the tax advantages now may be the right time to convert to an S-Corporation.
Tax Filing Deadlines: This new tax year brings a few adjusted deadlines for businesses that you should be aware of as you gather documents in preparation for your 2016 returns. Partnership returns are now due by March 15th (previously April 15th) and C-Corporation returns are now due by April 15th (previously March 15th).
Oregon Pass-Through Tax Rate: Effective last year, Oregon taxpayers may apply a lower tax rate on active pass through income that they receive from an S-Corporation or Partnership (other than a single-member LLC). However, there is an election that must be made on the Oregon business tax return to take advantage of the reduced rate. You should work closely with your tax advisor to ensure this election was made correctly – the tax impact for many could be as much as 2%. If you have questions on taking this election, you may contact one of our team members at [email protected]. Unfortunately, once the initial filing deadline has past a missed election cannot be corrected with an amended return.
Many of these tax saving strategies may seem daunting, however, when you are working with your team of experts they can be easily implemented to help you reap what you sow and keep more of your hard earned dollars.
Our knowledge of the entire agri-business supply chain from grower to processor to retailer allows us to help our clients achieve their goals. Please contact either of us at Aldrich Advisors (formerly AKT) at 503-620-4489 if you’d like to review these opportunities or discuss other options for tax savings.