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Livestock Transactions and Form 1099-MISC: A Comprehensive Guide

This chapter discusses agricultural issues related to livestock transactions and the use of Form 1099-MISC for reporting payments. Topics include net investment income tax, inherited property, repairs, and revoking a CCC loan election.

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Livestock Transactions and Form 1099-MISC: A Comprehensive Guide

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  1. Agricultural IssuesChapter 9 pp. 301-347 2015 National Income Tax Workbook™

  2. Issues pp. 302-347 • Livestock Transactions • Form 1099-MISC • Net Investment Income Tax • Inherited Property • Oil and Gas Payments and Deductions • Repairs • Revoking a CCC Loan Election • Marketing Gain on CCC Loans

  3. Issue 1: Livestock Transactions pp. 302-315 • Livestock acquisition • Livestock sales • Casualty gain or loss

  4. Livestock acquisition p. 302 • Reason for acquiring determines treatment • Example 9.1: Purchased for resale Sale price $13,000 Purchase price - 8,000 Gain $ 5,000

  5. Depreciation pp. 302-303 • Depreciation begins when first placed in service for intended use • Immature livestock • IRS says • When draft animals can be worked • When dairy animals can be milked • When breeding animals can bred • Taxpayers could argue when dairy animals can be bred

  6. Example 9.2: Placed in Service pp. 303-304 • Purchased 15 heifers in 2014 for $22,500 • Bred the heifers in May 2015 Cost $22,500 50% AFYD* - 11,250 Depreciable basis $ 11,250 MACRS rate × 15% Cost recovery $ 1,688

  7. Livestock sales pp. 304-307 Purpose for holding livestock determines where a sale is reported. • Held for sale: Schedule F (Form 1040) • Dairy, breeding, sport, or draft: Form 4797 • < 12 (24) months: Form 4797, Part II • > 12 (24) months: • Depreciated: Form 4797, Part III • Not depreciated: Form 4797, Part I

  8. Example 9.3: Dairy livestock pp. 304-307 Calves held for sale $12,150 Raised cows $48,600 Purchased cows $ 6,800 Culled heifers $8,500 Schedule F, line 2: 12,150 Form 4797, line 2: 48,600 Form 4797, line 10: 8,500

  9. Form 4797 p. 307 Line 20 6,800 Line 21 15,000 Line 22 15,000 Line 23 0 Line 24 6,800 Line 25a 15,000 Line 25b, 30, 31, 13 6,800

  10. Casualty gain or loss pp. 307-315 Dairy, breeding, sport, or draft livestock is treated the same as other trade or business property: • Loss is decrease in FMV (limited to basis) • Gain is insurance or government payments in excess of basis

  11. Example 9.4: Dairy Livestock pp. 307-310 CostFMVInsur.Basis 2 raised cows 0 2,200 2,000 0 Purchased cow 2,100 1,100 1,000 0 Purchased cow 2,100 1,100 1,000 1,062

  12. Form 4684 p. 308 ABC Line 20 1,062 Line 21 2,000 1,000 1,000 Line 22 2,000 1,000 Line 23 1,100 Line 24 0 Line 25 1,100 Line 26 1,062 Lines 27 & 28 62

  13. I.R.C. § 1231 Netting p. 310 • Net casualty gains are netted with other I.R.C. § 1231 gains (unless they are deferred) • Net casualty losses are ordinary deduction

  14. Example 9.5: Casualty gain deferred pp. 310-311 Insurance proceeds received $3,000 Adjusted tax basis - 0 Gain realized $3,000 Gain deferred - 3,000 Gain recognized $ 0 Cost of replacement property $4,500 Gain deferred - 3,000 Basis of replacement property $1,500

  15. Property held for sale p. 312 Generally, no special tax treatment of involuntary conversion • Reimbursements reported on Schedule F • Usually no gain or loss items have zero basis

  16. Weather-related provisions pp. 312-314 Two provisions • Involuntary conversion (applies only to draft, breeding, or dairy animals) • 1-year postponement of gain (applies to all livestock)

  17. Involuntary Conversion pp. 312-313 • Sale must be due to weather conditions (disaster declaration is not required) • Replaced within 2 years • New livestock used for same purpose (breeding, dairy, or draft) • Applies only to sales in excess of normal • Must attach a statement to tax return

  18. 1-year deferral p. 313 • Must be disaster declaration • Applies only to sales in excess of normal • Must attach statement to tax return

  19. Livestock deaths due to disease pp. 314-315 • Not a casualty because not sudden • It is an involuntary conversion • Section 1231 property gain or loss is netted with other section 1231 gains and losses • Reported on Schedule F or Form 4797

  20. Issue 2: Form 1099-Misc pp. 315-317 • Taxpayers must issue Form 1099-MISC to vendors whom they pay $600 or more for • Rent • Services • Exception for corporations other than • Attorneys fees • Veterinarians

  21. Reconciling Forms 1099-MISC to tax return pp. 316-317 • Taxpayers should report amounts reported on Forms 1099 they receive where IRS expects to see it or get corrected Form 1099 • Example 9.6: Form 1099-PATR $952 IRS expects to see it on Sch. F Interest was deducted on Sch. E

  22. Example 9.7: Triple net lease pp. 316-317 Mortgage interest $ 6,500 Mortgage principal 13,500 Property taxes 7,500 Insurance 2,500 Total deemed payments $30,000

  23. Issue 3: Net Investment Income pp. 317-319 • Active farmers are not subject to NIIT on • Operating income • Gain on sale of assets used in farming • NIIT is 3.8% of lesser of • Net investment income • Excess MAGI

  24. MAGI Thresholds for NIIT p. 317

  25. Investment income p. 317 • Gross income from interest; dividends; net capital gains; rental and royalty income; nonqualified annuities; and • Income from businesses that are • involved in trading of financial instruments or commodities • passive activities for the taxpayer

  26. Not investment income p. 317 • wages; unemployment compensation; • operating income from a nonpassive business; • social security benefits; • alimony; • tax exempt interest; • self-employment (SE) income; • Alaska Permanent Fund dividends; and • Distributions from retirement plans

  27. Farms in transition pp. 318-319 Income from payments received during farm transition may be net investment income • Example 9.8: renting to LLC • Under self-rental rule, rent and gain on sale are not net investment income • Example 9.9: not materially participating • Example 9.10: sale of assets

  28. Issue 4: Inherited Property pp. 319-320 • Basis of inherited property is adjusted to the value on the date of death or alternate valuation date • Automatic long-term capital gain holding period • Exception: income in respect of a decedent (IRD)

  29. Example 9.11: Growing crops pp. 319-320

  30. Issue 5: Oil and Gas Payments and Deductions pp. 321-328 • Transfers of Mineral Rights (sale or lease) • Damage Payments • Advance Royalty Payments • Oil and Gas Depletion • Pipeline Right-of-Way Easements

  31. Transfers of Mineral Rights pp. 321-322 • Sale of mineral rights • Section 1231 gain or loss • Landowner must prove cost basis or inherited basis • Lease of mineral rights • Landowner reports payments on Schedule E (Form 1040)

  32. Damage Payments pp. 322-323 • Payments for crops go to owner of the crops • Reported on Sch. F or Form 4835 • Payments for damage to land or timber reduce basis • Excess over basis is reported on Form 4797 or Form 8949

  33. Advance Royalty Payments p. 323 Ordinary income • To extent of actual production, claim greater of percentage or cost depletion • For remaining payment, claim cost depletion

  34. Oil and Gas Depletion pp. 323-327 Owners of an economic interest in oil or gas can claim a depletion deduction to recover their capital investment in amount sold or consumed. The deduction is greater of: • Cost depletion, or • Percentage depletion

  35. Cost depletion pp. 324-325 • Estimate reserves • Divide adjusted depletable basis by remaining oil or gas to get unit cost • Multiply unit cost by number of units sold to get cost depletion deduction

  36. Example 9.15 p. 325 Adjusted basis $22,000 Barrels sold 5,000 Barrels remaining 35,000

  37. Percentage depletion pp. 325-326 • Allowed even if basis is zero • Generally, 15% of gross income • Cumulative percentage depletion for all of the taxpayer’s properties is limited to his or her taxable income from all sources

  38. Gross income p. 325 • Normally, royalty payment • Does not include • lease bonus or advance royalty payable without regard to production • delay rental payments and most land damage payments

  39. Taxable income from the property p. 325 Gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to the mining processes, including mining transportation (gross income for most landowners)

  40. Taxable income form all sources pp. 325-326 • Percentage depletion deduction for all properties may not exceed 65% adjusted taxable income from all sources for the year • Adjustments • net operating loss carrybacks; • capital loss carrybacks; • percentage depletion; and • distributions to trust beneficiaries.

  41. Example 9.20 p. 326 Gross income $55,000 Royalty check (taxable income limit) $51,700 Adjusted taxable income $120,000 Percentage depletion (15% of $55,000) $8,250 Gross income limit ($120,000 × 65%) $78,000 Remaining basis ($22,000 ­­­- $8,250) $13,750

  42. Pipeline Right-of-WayEasements pp. 327-328 • Perpetual easement: right to lay, construct, operate, maintain, inspect, remove, alter, abandon in place, replace, relocate, and reconstruct a pipeline • Temporary easement: during construction: rental income on Schedule E (Form 1040) • Crop damage proceeds: ordinary income on Schedule F (Form 1040) or Form 4836

  43. Perpetual Easement Issues pp. 327-328 • Payment for easement reduces basis in land affected by the easement • Payment in excess of basis is section 1231 gain

  44. Issue 6: Repairs pp. 328-335 T.D. 9636: Amounts paid may be: • Currently deductible or • Capitalized

  45. De Minimis Safe Harbor p. 328 • Economic useful life < 12 months, or • Cost < an amount specified by the taxpayer ($500 or $5,000 limit)

  46. De Minimis Safe Harbor p. 329 • Must deduct amounts paid that are in the safe harbor • If the cost of property was deducted under the safe harbor, gain on disposition of the property is ordinary income

  47. Example 9.22: Accounting Procedure pp. 329-330 • Accounting procedure says < $400 • Elected safe harbor • $350 power washer must be deducted Q&A #1: Change in accounting procedure does not require Form 3115

  48. Example 9.22: Accounting Procedure p. 329 Q&A #2: • 10 heifers @ $400: must deduct • 7 heifers @ $450: must capitalize

  49. Example 9.22: Accounting Procedure p. 330 Q&A #3: • Accounting procedure says < $600 • $550 compressor is not in the safe harbor

  50. Example 9.23: AFS pp. 330-331 Richard has an AFS and qualifies for $5,000 safe harbor • Q&A #1: Program converts cash basis to accrual basis • Q&A #2: Cannot choose to capitalize 20 heifers on his tax return

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