“it has to do with the number of animals that are marketed above your normal amounts. Those above- normal numbers of livestock are the only ones that are eligible for this deferral of income for the 1 year on market animals, and in the re- placement of breeding animals up to 4 years.” But with the higher 2013 capital
gains rate, Childs says, some people may want to recognize the gain in 2012, even though it’s above an average amount of taxable income. “If you’re in the 10 percent or 15 percent tax bracket for 2012, then that capital gains rate is actually zero. There’s no tax due on the gain. And if you’re in the 25 percent or higher tax bracket for 2012, then the capital gains tax bracket is only 15 percent,” he says. Section 179 depreciation may
also apply to livestock purchases but Childs says many people mis- takenly believe they can depreciate raised breeding animals. He says, “Only purchased ani-
mals have a basis in them, because on all raised breeding animals we deduct the cost of raising them each year that they incur, as in feed and vet and those kinds of deductions.” In addition, on a raised animal
100 percent of the purchase price is available for capital gain treatment, but on a purchased animal only the sale price above the purchase price would be available for capital gains. All other gain would be due to depreciation and would have to be captured as ordinary income. Similarly, if a producer donates
a raised calf to a charity for resale, there is no basis in the animal, and therefore nothing to write off.
Business deductions — vehicles, home offi ces Producers should also be aware
88 The Cattleman March 2013
of business deductions available to them. Vehicle expenses can be deducted either through the stan- dard mileage rate — which goes to 56.5 cents in 2013 from 55.5 cents in 2012, 24 cents for medical and moving expenses, and 14 cents for charitable driving — or by keep- ing records of actual expenses like tags, title, insurance, tires, batter- ies, and fuel. “However,” Childs says, “they
also have an allowance where you can do sampling, where you can keep a travel log for only a por- tion of the year if you can produce evidence that would indicate that it’s used in the same manner and the same percentage use for the rest of the year. So, you only keep records for 3 months and apply the business use of the vehicle for the entire 12 months of the year. Also, there’s a ‘safe harbor’ option for small business owners to use only 75 percent of the expenses and keep no records, and be within the limits of the law.” If the producer sells a residence
in which he or she maintains a business offi ce, Childs notes there is an exemption of up to $250,000 on the net gain, up to $500,000 for a couple, provided they have lived in the house for 2 of the last 5 years. “It’s a pretty good deal,” he says, “but if part of that residence is busi- ness property, you have to recognize that gain and either recapture the depreciation as part of your income, or pay the capital gain tax rate on that business portion of the home.”
Hobby or planned business? Part-time ranchers need to be
aware before writing off losses that their operation may be classifi ed as a hobby by the IRS. Childs says there are a number of factors the taxman considers.