The Win of Commodity Gifts

Your pay day happens a few times a year, so why not gift on the same schedule?  Producers have an opportunity to make contributions of raised commodities directly to a charitable organization. The fair market value of the gifted commodity is excluded from taxable income of the donor, resulting in the potential for significant federal, state and self-employment tax savings.  The expenses to grow the commodities are still able to be deducted as an expense.

Guidelines to follow:

  • The donor must be a cash basis farmer, who is actively engaged in a farming activity.
  • The donor must be sure that commodities gifted are not collateral for a CCC loan or under a loan deficiency payment contract.
  • Clear title to the commodity must pass to the charitable organization. When the donor delivers grain to the elevator, the producer must use the charity’s name on the assembly sheet or warehouse receipt.
  • The assembly sheet or warehouse receipt should be delivered to the charitable organization with a letter indicating that the commodity has been donated and that the charity is now the owner of the commodity and may sell at any time.
  • The charitable organization must direct the sale of the commodity. The charity must call the elevator and request the commodity to be sold.

The big benefit here is you still take all the expenses of your inputs, but don’t have to recognize the income from the sale of the commodity.  You don’t get to deduct it as an itemized deduction as that would be double dipping, but reduced income, reduced SE tax and adjusted gross income are all wins.

Consult your tax adviser with questions.  If you don’t have one call us for a free consultation.

QCD – what?

Acronyms, you have to love them.  This is a method of distributing money directly from your IRA to a charity and a win for everyone.  Giving a Qualified Charitable Distribution (QCD) directly from your IRA can allow you to benefit from charitable giving even if you don’t normally itemize your deductions. Giving directly from your IRA allows you to ignore your QCD IRA distribution when calculating your taxable income and also take the standard deduction.

Normally, charitable giving can only be deducted if it is less than 50% of your adjusted gross income (AGI). Giving directly from your IRA allows you to effectively reduce your AGI even if the gift amount would otherwise be greater than 50% of your AGI.

Qualified Charitable Distributions count as IRA distributions and can be used to satisfy all or part of your required minimum distribution (RMD).

Three factors must be satisfied to be considered a QCD:

  • Individuals age 70 ½ or older can make QCDs, which are transfers from their traditional IRA.  QCDs cannot be made from employer-sponsored retirement accounts, like a Simple IRA or SEP IRA.
  • The distribution must transfer directly to a qualified charity.
  • The individual must receive a confirmation letter from the charity. The letter must include the statement that no goods or services were received in exchange for the gift.

This is a great way to gift if you are able to utilize it.  100% exclusion of income of your gift and reducing your AGI helps reduce other limits on itemized deductions.  Talk to your tax adviser.

Charity Planning

30% of annual charitable gifts are made in December.  How does your giving compare?  Here are some options to help you plan your gifting.  As always, this is in accordance with tax law in effect today for 2017.

Deductible charitable contributions include money or property (stock, goods, vehicle, real estate, etc.) given to:

  • Churches and other religious organizations
  • Federal, state and local governments, solely for public purposes
  • Nonprofit schools and hospitals
  • Public charities such as Salvation Army, Red Cross, Goodwill, etc.

The deduction for charitable contributions cannot exceed 50% of the taxpayer’s AGI.  A reduced limit of 30% or 20% applies for certain contributions.  If you can’t use it all in one year the deduction does carry forward.

Documentation required:

  • Bank record or written communication from charity
  • Written acknowledgment if a single donation is more than $250
  • Charity must require written disclosure for any payments in excess of $75
  • Appraisal may be required if a gift of property is made

The burden of proof is on you, the taxpayer to gather your receipts if your charity was ever questioned.

Gift of services

This is not deductible.  If you donate your time to a nonprofit you can’t take the value of your time.  However, if your business donates a service worth $1,000 you can deduct the normal business expenses associated with that service, but you cannot deduct the full fair market value of 1,000 unless you report it as income first.

Plan carefully to maximize your deductions.  Talk to your tax advisor with questions.

The Importance of Social Security Credits

Do you question if Social Security will be around when you retire?  Even if you are in your 30’s and are skeptical, here are some important reasons why you should want your social security credits:

  1. Retirement benefits
  2. Protect your family when you die
  3. Protect yourself when your family dies
  4. Protect yourself in case of disability

 

How do you qualify?

You must pay in to the social security system by working – either as an employee or being self-employed.

Social Security credits are based on the amount of your earnings. Your earnings and work history is used to determine your eligibility for retirement or disability benefits or your family’s eligibility for survivors benefits when you die. How long you have to work and pay in depends on your age, but the minimum to receive benefits is 10 years of work or 40 credits.

 

How to pay in?

When you work for an employer, you automatically have Social Security taxes (6.2% on the first $127,200 in wages and 1.45 % Medicare tax) withheld from your paycheck. Employers are required to match the amounts withheld. It’s the employer’s responsibility to submit these taxes to the SSA and to report your annual wages with a W2 wage statement.

In 2017, you receive one credit for each $1,300 of earnings, up to the maximum of 4 credits per year. ($1300 x 4=$5200). If you earn at least $5200 in wages a year, then you earn your maximum credits.

What if I am self-employed?

If you are self-employed, you earn Social Security credits the same way employees do up to the maximum of 4 credits per year. If you are self-employed you report your earnings and pay taxes when you file your annual tax return. Self-employed individuals pay combined employee and employer rates which is 12.4% on your entire net earnings. You are able to take a tax deduction on net earnings from self-employment of 50% the amount of your total Social Security Tax.

What if I am self-employed and show a loss?

If your net earnings are less than $400 you can use an optional method. You have the option to report $5200 in earnings on your tax return and only pay the social security taxes to get your maximum 4 credits when you would not have otherwise paid in to social security.

Plan carefully to make sure you have the minimum credits.  Your loved ones will appreciate your planning if the time ever comes that they qualify for benefits on your account.

Accounting Assistant Position

TruCount CPA seeking an accounting assistant to work in Brookings, SD.  We are a local accounting firm serving agribusinesses, businesses, and individuals providing tax and accounting services from start up through maturity.

Responsiblities
• Assist in monthly accounting including entering transactions, accounts payable, accounts receivable, sales / use tax, payroll, bank statements, monthly adjusting entries, year-end reporting

• Assist in individual income tax preparation

• Process tax returns

• General office support

Experience / skills

• Hunger to learn and grow

• Highly organized, strong understanding of numbers

• Experience preferred, but not required

• Ability to work independently and contribute to a team

• Ability to quickly learn technology

• Communicate professionally with clients

• Strict confidentiality

Work Status

• 20-30 hrs/week with potential for more hours January – April

• Flexible schedule

• Wages DOE

Send your resume to Julie Underwood at julie(at)trucountcpa.com to apply for the position.

Plan to Pay Less Taxes

With two and a half months left in 2017 current year tax liability is easier to estimate. Below are five tax saving tips.

1) Defer income

Normally for individuals, income is taxed in the year it is received. A way to decrease current tax is to defer it. W2 wages are not deferable, however, if you are expecting a bonus, that could potentially be deferred to next year. If you are a business owner who sends bills to your customers, you could wait until the end of the year to send them. The expectation when deferring income is that next year when the income is claimed you will be in a lower tax bracket.

2) Prepaying Expenses

Just as income is taxed in the year it is received, deductions are expensed in the year they are paid. A way to lower tax is to prepay deductions. Examples of these deductions are charitable contributions, property taxes, mortgage interest and medical expenses. Medical expenses will only help if you have met the 10% of adjusted gross income threshold. The expectations of prepaying expenses are that you will be in a higher tax bracket then expected for the following year.

3) Maximizing Retirement Contributions

A great way to lower income tax is by maximizing retirement contributions. The maximum contribution amounts allowed in 2017 for a 401(k) are $18,000 for individuals 49 and younger and an additional $6,000 if you’re 50 or older. The maximum for IRAs are $5,500 for individuals up to 49 and $6,500 for 50 or older. 401(k) deposits need to be made by December 31, 2017 and IRA deposits need to be made by April 18, 2018. To find out if you can qualify for an IRA deduction click here.

4) Take advantage of Capital Loses

If you have sold stocks and mutual funds that have a loss, those losses can help reduce any realized taxable gains. If the gains are less than the losses, $3,000 of the excess loss can be used to decrease other ordinary income. Anything above the $3,000 can be carried forward and be deducted in future years.

5) Tax Free Income

If you have unrealized capital gains you can realize those gains in the 15% tax bracket and pay 0% taxes. Carefully plan to make sure you don’t go over thresholds.

You may find yourself wondering why would anyone want to increase their current year liability. For someone that is expecting a large increase in income next year that would result in a jump in tax brackets, it would be worth saving their deductions for the higher tax bracket and pay the lower tax this year. No matter what direction you decide to go, if you need help finding the best options for you, consult with your local tax preparer.

Farm Use Tax 101

With harvest getting started in South Dakota, some farmers do not realize use tax may be due when they buy products or services without paying South Dakota sales or excise tax.

What is Use Tax?

A purchaser owes use tax on the use of products and services in South Dakota when sales or excise tax is not paid. Unless specifically exempt by law, all products and services, including farm machinery, attachment units and irrigation equipment, used in South Dakota is subject to either sales or excise tax. For example, if a farmer buys a tractor from a dealer in a state that does not tax tractors, use tax is due. This link lists some items that are tax exempt for farmers.

What is the tax rate?

Farm machinery, attachment units, and irrigation equipment used exclusively for agricultural purposes are subject to:

  • 4.5% state tax

Farm machinery, attachment units, or irrigation equipment that is NOT used exclusively for agricultural purposes are subject to:

  • 4.5% state tax; and
  • Municipal sales or use tax

Tools and shop supplies are subject to:

  • 4.5% state tax; and
  • Municipal sales or use tax

Municipal tax applies if the item is delivered to you inside a city that imposes a sales or use tax.

What if I trade-in equipment?

Use tax is due on the trade difference. For example, if the purchase price of a new tractor is $325,000 and you receive $155,000 credit for your used tractor, use tax is due on $170,000 ($325,000 – $155,000 = $170,000). Make sure you pay close attention to your receipts to make sure sales tax was not included on the credited amount.

What if I buy a piece of equipment from another farmer?

If you buy equipment from a person who does not sell equipment on a regular basis and the equipment was not sold at an auction, you do not owe use tax on the purchase. This is called an occasional sale and is exempt from sales or use tax.

When and how do I pay use tax?

Use tax is due when the product is delivered to you in South Dakota. Complete and mail this form along with your payment to the address listed on the form.

If you are questioning if you owe tax on a purchase, consult with your local tax preparer.

Employer Options for Health Insurance

Most employees not only wish to be paid, they wish to have access to benefits. Or ways to reduce the amount they have to pay for ever increasing health insurance costs. As an employer you have several options you can offer for health care. However, there are laws that govern what kind of coverage at a minimum you must provide. Most of this is driven by the total number of employees you have. The Affordable Care Act set the limit at 50 full time equivalent employees. If you have more than 50 full time equivalent employees, then you must offer group health insurance. If you have less than 50 you have several options and a few are listed below.

High Deductible Health Plan

A High Deductible Health Plan (HDHP) is a health insurance plan that contains certain requirements with respect to deductibles and out-of-pocket expenses. The deductibles are generally higher than for a standard health insurance plan. Out-of-pocket expenses are generally not covered (up to a maximum amount) until the annual deductible is reached. Due to the nature of these health plans the premiums are generally lower.

HSA

A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.

Per IRS regulations, employer contributions to employee HSA’s must meet compatible contribution rules. If the contributions do not meet the rules, they will not be tax-deductible to the employer. This means that an employer must contribute the same amount for all individual plans. However, they can offer a different amount for family plans but all family plans must be the same amount. For example, an employer can contribute $75 per month to an employee-only HSA and $150 to family HSA plans.

HRA

A Health Reimbursement Arrangement (HRA) is a tax-advantage benefit that allows both employees and employers to save on the cost of healthcare. HRA plans are employer-funded medical reimbursement plans. The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis.

FSA

A health Flexible Spending Arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from contributions.

The Affordable Care Act: Are you In Compliance?

The Affordable Care Act (ACA) requires taxpayers to do at least one of three items listed:

  • Have qualifying health insurance coverage all year.
  • Have an exemption from the requirement to have coverage.
  • Make an individual shared responsibility payment when filing your federal income tax return.

Qualifying Heath Insurance

Qualifying health insurance coverage is an insurance plan that has been certified by the Health Insurance Marketplace. It provides essential health benefits, follows established limits on cost-sharing, and meets other requirements under the ACA. Most taxpayers are in this category. For a list of minimum essential coverage options click here.

Exemption

Taxpayers who do not have qualifying health insurance will normally be assessed a tax penalty for each month they do not carry qualifying health insurance. However, if they qualify for a health coverage exemption they will not need to pay a fee. Click here for a list of exemptions and who grants them. Furthermore,  coverage exemptions are reported on Form 8965 and get attached to your personal tax return.

Shared Responsibility Payment

If qualifying health insurance isn’t obtained and there are no exemptions that qualify; an individual shared responsibility payment will need to be made. The law says that individuals, employers and the government have the responsibility of keeping everyone covered by insurance.  Consequently, the issued tax penalty is to help cover the taxpayers share.  For an explanation of how the shared responsibility payment is calculated click here.

In conclusion, we all know the ACA has been a hot topic of debate. In most recent news, the Senate voted to reject the measure to partly repeal the ACA. It was a close 49 to 51 vote that left us on the edges of our seats, making it clear that this will not be the final discussion on this topic. However, until something is repealed or passed the ACA will stay as is.