- - AGRICULTURAL CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1600) Unit Title: AGRIBUSINESS TAXATION ____________________________________________________________________________ (CLF1602) Topic: INCOME TAX Time Year(s) MANAGEMENT 1 hour 3 / 4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson the students will be able to: Learning Outcome #: (K-3) - List records and information helpful for tax management. (K-5) - Give examples of deductible business expenses. (K-6) - Describe varying types of tax credits. Special Materials and Equipment: References: Resources: Deere & Company. (1987). FARM AND RANCH BUSINESS MANAGEMENT (2nd ed.). Available from: John Deere Technical Services, Department F, John Deere Rd., Moline, IL 61265. Internal Revenue Service (1990). Publication 225, FARMER'S TAX GUIDE. Internal Revenue Service. (1990). Publication 334, TAX GUIDE FOR SMALL BUSINESS. Up to five copies of these publications are available free from the Internal Revenue Service (IRS) by calling 1-800-829-3676. For larger quantities, call 1-800-829-1040 and ask to speak with a tax education coordinator. Evaluation: Successful completion of activity assignments TOPIC PRESENTATION: INCOME TAX MANAGEMENT A. The purpose of income tax management is to maximize after tax income. The key points to income tax management include: 1. The goal is to keep taxes as low as possible. Pay only the taxes required by law. 2. Complete all forms accurately and submit them to the proper tax agency on time. 3. Make use of all applicable exemptions and deductions. 4. Balance the tax load from year to year. 5. Make tax considerations and integral part of the management decision making process. B. Records and Information Useful for Tax Management 1. Successful tax management requires: a. Accurate and complete records of all income and expenses b. Thorough and up-to-date knowledge of the tax code 2. The major records required include: a. Receipts for all sales b. Purchase cost of items purchased for resale c. Capital sales qualifying for capital gains treatment d. Expense records e. Depreciation records f. Business deduction records g. Bank records of interest earned and finance charges paid 3. Information required includes: a. Information on investment tax credits b. Information on the federal gas tax credit c. Information on Social Security taxes d. State and federal information on filing tax returns 4. Most large businesses employ the services of a professional accountant to assist them in preparing their taxes. __________________________________________________________ ACTIVITY: 1. Provide students with a copy of the completed tax form provided in IRS publication 334, (Tax Guide for Small Business) or publication 225 (FARMER'S TAX GUIDE). Ask students to examine the completed forms and make lists of the records and information required to complete them. Note to Instructor: IRS publication 225, FARMER'S TAX GUIDE, contains example records and completed forms for a moderate-sized farming operation. 2. Invite a local accountant or tax lawyer to speak to the class on tax laws affecting agricultural businesses. 3. Conduct a research project on how current tax laws affect small businesses in the community. __________________________________________________________ C. Deductible Business Expenses 1. Income tax is calculated based on net income, i.e., the amount of income which affects costs. 2. Most agricultural business expenditures are deductible. The major categories of expenses are: a. Cost of items purchased for resale b. Repairs and maintenance c. Interest paid on loans d. Feed, seed, fertilizer, and chemicals e. Business supplies f. Breeding fees and veterinary expenses g. Fuel and oil h. Storage costs i. Utilities j. Cash rent k. Freight, trucking, and postage l. Agricultural publications and association dues m. Insurance 3. Some taxes are also deductible as business expenses; these include: a. Real estate taxes paid on business real estate b. Property taxes paid on business assets c. Social security taxes d. Vehicle registration and license fees 4. Capital assets with a useful life of more than one year may not be deducted as an expense in the year of purchase. These assets must be depreciated over the useful life of the asset. They include: a. Machinery and equipment b. Breeding livestock c. Orchards and vineyards d. Farm buildings ============================================================================== ***INSTRUCTOR PLEASE NOTE*** Refer to the CLF 1305 (Inventory and Depreciation) in the 1300, Agribusiness Accounting unit for further information. ============================================================================== D. Capital gains are treated specially in the tax code. 1. Capital gains or losses from the sale of a capital asset are the difference between the selling price and the adjusted basis. 2. Items eligible for capital gains tax treatment include: a. Depreciable property used in the business (see C4 above) b. Livestock held for draft, breeding, dairy, or sporting purposes c. Land used in farming 3. Capital gains treatment allows 60% of the profit from the sale of a capital asset to be excluded from gross income. E. General Business Credit 1. The general business credit consists of the following credits: a. Investment credit b. Jobs credit c. Research credit d. Low-income housing credit 2. Investment Credit a. This credit was largely discontinued in 1985. b. Of potential importance to agriculturalists is the credit for qualified timber property. c. This credit is available for up to $10,000 of the expense incurred each year to forest or reforest property held for growing trees for sale or use in producing timber products. 3. Jobs Credit a. This credit provides an incentive to hire persons from targeted groups that have a particularly high unemployment rate or other special employment needs. 4. Research Credit a. This credit is designed to encourage businesses to increase the amounts they spend on research and experimental activities. 5. Low-Income Housing Credit a. This credit generally applies to qualified low-income housing buildings placed in service after 1986. b. For more information about tax credits, see Form 8586 and Section 42 of the IRS Code. 6. Accurate records must be kept to claim investment tax credits. These include: a. Month and year the property was placed in service b. Estimated useful life of the property c. Adjusted basis of the property d. Date of acquisition and date of disposition of the property F. Federal Gas Tax Credit 1. Excise taxes paid on fuels used on a farm or for farming purposes and on fuels used in off-highway business use are refundable. 2. Included in the definition of "farm" are facilities used in the production of: a. Livestock b. Poultry c. Fish d. Fruits and vegetables e. Rangeland f. Greenhouses used for producing agricultural or horticultural commoodities 3. Off-highway use includes use of fuel in vehicles or equipment not registered for highway use such as bulldozers. Motorboats are not included. 4. Gasoline and diesel fuel are treated differently in the tax code. For more information see Publication 378, "Fuel Taxes and Refunds." __________________________________________________________ ACTIVITY: 1. Use records from CLF1301 (Review of Recordkeeping) or those provided in IRS Publication 225 (FARMER'S TAX GUIDE) to complete a federal income tax return for a farm business. __________________________________________________________ 11/1/91 EEZ/tf #%C