Essay Example on Farmers: Tax Exemptions Under Tax Cuts and Job Act

Introduction

The Internal Revenue Service and the Department of Treasury have provided a revenue procedure giving farmers, especially those who have been elected out of some specific capitalization rules, and they need to apply for the small business taxpayer exemption in a similar taxable year (Decker, & Ray, 2017). Notably, the Tax Cuts and Job Act also provided more provisions that exempt the small business taxpayers from the rule of capitalization, as stipulated in section 263A. Through the satisfaction of the gross receipts test for the taxable year, the taxpayer can then qualify as a small business. More precisely, a small business that pursues farming activities has to record a gross income of approximately $ 25 million for the taxable year starting in 2018, as well as to record $26 million at the start of 2019 to qualify for the gross receipts test (Decker, & Ray, 2017). The current guidelines require the farmers to cancel elections based on section 263A, and that farmers should apply an exemption for the small business taxpayer as stipulated under the same section within the taxable year.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Facts

Farming business is a trade that involves the cultivation of land as well as harvesting of a horticultural or agricultural commodity, for example, the activities of operating a nursery, harvesting of fruits and trees. Farming business can as well include training, feeding, caring, and management of animals. According to the rules for property produced in the farming business, the concept of harvesting excludes contract harvesting of such commodities as well as purchasing and reselling the agricultural commodities (Fischer, & Marsh, 2013). Understandably, the taxpayer is involved in growing a plant or raising animals with the motive of holding them for further cultivation and development before sales (Marsh, & Fischer, 2013). Further cultivation and development are determined by considering all the facts and circumstances such as the duration between of acquisition and when the taxpayer makes the commodity ready for sale if the plant is left in the container in which it is purchased and the value that the taxpayer adds to the commodity during horticultural or agricultural processes.

Law

There are various revenue rulings, regulations, and codes that are enacted to guide farmers on uniform capitalization rules. According to section 263A of the International Revenue Service, the capitalization of direct cost as well as the allocable percentage of Indirect cost for the farm businesses which benefits or the cost that are met with the motive of producing property in the farm business including the plants and animals regardless of the duration of the production, are usually capitalized by the taxpayers (Godsey, 2018). Similarly, the section requires that both water and soil conservation costs which a taxpayer has chosen to subtract as enshrined in section 175 as well as the fertilizers identified by the taxpayer for deductions under section 180, all are not subjected to the capitalization process, except for a situation where such expenses are needed to be capitalized in the duration of production of animals and plants (Godsey, 2018).

Concerning the inventory methods, the law stipulates that the cost needed to be allocated to any animal or plant can be determined through the application of a reasonable invention valuation approach, including unit-livestock-price or the farm-price technique. Based on the unit-livestock approach, the law requires the prices to involve the capitalization cost under section 263A (Michalek, & Ciaian, 2014). The taxpayer who chooses to apply the unit-livestock-price approach can utilize the cost allocation concept for allocating direct or indirect costs for the inventory produced in the farm business. The tax shelters utilize the approach must apply the annual standard unit price for the acquired commodities within the taxable year.

Analysis

Based on the analysis of the guidelines for uniform capitalization rule for the farmers, the expenditures for the production of plants needs to be capitalized as stipulated in section 263A, for example, the preparatory cost which is incurred for the plants to start growing including the cost of purchasing seedlings, seeds and plants as well as the cost incurred during cultivation, planting, plant development and maintaining (O'Neill, & Hanrahan, 2016). Also, the productive period cost includes water and soil conservation, irrigation farm management, and the cost of pruning. Other costs included fertilizing, frost protection, harvesting, storage, tax depreciation, and the cost of repairing farm equipment, the capitalized interest as per the stipulation of the law. Again the cost of animal production needs to be capitalized, for example, the cost incurred to start raising the animal, which includes acquiring, caring, and raising the animal (Kunkel, & Wick, 2015). Other costs include the cost of hiring labor, taxes, and farm overheads.

Conclusion

It is worth noting that the exception from the capitalization rule cannot apply to the costs which need to be capitalized under different Internal Revenue Code or any provision of the regulation, such as that of section 471 of the law. The IRS gives farmers guideline procedures to ensure that a small farming business has to satisfy a certain minimum, especially for 2018 and 2019, at the beginning of the year, and the law requires farmers to apply for the exemption for the small business taxpayer in a taxable year. The cost allocated for any animal or plant can be determined when different valuation methods are used, including the unit-livestock-price method, and the farm-price method.

References

Decker, J., & Ray, R. (2017). Tax Strategies for US Farmers: Tax Reduction and Averting Risk. Revista Internacional Administracion & Finanzas, 9(1), 49-61. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3025037

Fischer, M., & Marsh, T. (2013). Biological assets: financial recognition and reporting using US and international accounting guidance. Journal of Accounting and Finance, 13(2), 57-74. http://www.na-businesspress.com/JAF/fischer2_abstract.html

Godsey, L. D. (2018). Tax considerations for the establishment of agroforestry practices. https://mospace.umsystem.edu/xmlui/handle/10355/69209

Kunkel, P. A., & Wick, S. S. (2015). Farm Legal Series: Choosing the Right Business Entity. https://conservancy.umn.edu/bitstream/handle/11299/199828

Marsh, T., & Fischer, M. (2013). Accounting for agricultural products: US versus IFRS GAAP. https://scholarworks.sfasu.edu/accounting_facultypubs/4/

Michalek, J., & Ciaian, P. (2014). Capitalization of the single payment scheme into land value: generalized propensity score evidence from the European Union. Land Economics, 90(2), 260-289. http://le.uwpress.org/content/90/2/260.short

O'Neill, S., & Hanrahan, K. (2016). The capitalization of coupled and decoupled CAP payments into land rental rates. Agricultural Economics, 47(3), 285-294. https://onlinelibrary.wiley.com/doi/abs/10.1111/agec.12229