Farm Business Management

Tax Planning Information for Fall, 2004

Jim Christensen, Kenyon Farm Business Management Instructor

Tax Relief - 2004

The latest tax cuts and other provisions of the American Jobs Creation Act of 2004 were signed into law on October 22, 2004. A summary of the tax saving provisions are listed as follow:

1. Marriage Penalty Relief (Extended to year 2010)
   1. Taxable Income: The first $7,000 for single tax filers and $14,000 for married filing jointly(MFJ) will continue to be taxed at the 10% rate
   2. For MFJ, the standard deduction is twice that of a single tax payer. For 2004: Single $4,850: MFJ $9,700
   3. The 15% tax bracket is double that of a single tax payer. For 2004: Single $29,050; MFJ $58,100.
2. New Tax Law Revisions Related to Farming
   • Repeal of 4.3 cent diesel fuel tax
   • Sec. 179 (1st year Depreciation): Extended until 2007.
   • • $100,000 (since 2002-annually adjusted for inflation) For 2004: $102,000.
   • Extended ethanol subsidies through 2010.
   • Created new bio-diesel tax subsidies to year 2006
   • Alternative Minimum Tax (AMT) will no longer affect the tax savings of Farm Income Averaging.

Capital Gains Rates Lowered since May 5, 2003.

Capital Gains continue to be taxed at the lowest tax rate. It is part of the reason more land is becoming available for sale. The most common capital gains that farmers may have this year are: land sales, installment sale income, raised breeding livestock sales, and sales of stocks, bonds, and mutual funds. Farm machinery sales, to the extent of depreciation taken, are taxed as ordinary gain and do not qualify for the CG rate. Capital Gain Rate 5% Taxable income is < $58, 100 (MFJ) Capital Gain Rate 15% Taxable income is > $58,100 (MFJ) Minnesota Capital Gain rates are the same as the ordinary income rate.

Sec. 179 (1st Year Depreciation: The top limit is $102, 000 for 2004 with a top limit on investment for the year at $410,000. Eligible property that will qualify for Sec. 179 depreciation includes tractors and farm machinery, storage bins, drainage tile, purchased breeding livestock, and single purpose buildings such as hog, dairy, and beef confinement units. Generally the life of the property is 15 years or less and it can be new or used property. Business use must be over 50% to qualify.

Bonus Depreciation:
This special depreciation allowance has been available since the 2002 Tax Act. This year 30% or 50% can be elected for use on purchased depreciable assets. Bonus depreciation will no longer be available after 12-31-04. Property must be new, and can have a life of up to 20 years. Newly constructed machine sheds qualify for this depreciation. Bonus depreciation may be used on any remaining basis after using Sec 179 depreciation. The biggest drawback for using bonus depreciation has been that Minnesota law never followed the federal law. The first year you take bonus depreciation on your federal tax return, 80% of that depreciation will be added back to the Minnesota return as income, and will be allowed over the next four years at 20% per year.

Depreciation "Order of Use": Order of use of the depreciation methods when a farm asset is purchased: 1) Use the Sec 179 (1st year) depreciation first; 2) use the 30% or 50% bonus depreciation next; 3) and last, any remaining basis will be depreciated by regular depreciation methods under the MACRS depreciation tax rules.