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Yes, tax season is snow storms, turkey dinner and college bowl games away, but having an eye on the tax prize in July can yield benefits in the winter months ahead.

Some facts to consider, while the audit rate at 0.59%, certain actions can increase that chance of getting the governments all seeing eye pointed at your return.

  1. Higher than average deductions are a warning sign. Considering that people are now considering clustering charitable giving in order to beat the standard deduction, it almost feels like donations amped up to get past the standard deduction will equal increased scrutiny. Further, donating more that $500 of non-cash items means having to fill out an extra form, which is more work for the tax payer and makes the tax return more expensive to prepare in most cases. Some donations will require appraisals (which is not new). This year the amount of charitable giving claimed on tax returns fell substantially as the standard deduction was doubled.
  2. Small businesses with over $100,000 in gross income with large write offs for meals, transportation, travel and 100% use of a vehicle for business purposes are likely targets for audits to support the claims.

Businesses that show losses for a number of years, especially for farm, hobby like businesses and real estate ventures are perpetual targets of increased review. Farm operations should do everything possible to show a tax return once every five years with a positive net income or be prepared to show how the farm operation is truly its own enterprise and not just a tax shelter for off farm income. Those with letters behind their names at work should take note, whether those letters are J.D, M.D, CFP C.P.A, or D.O.

Despite the alarming number reported in the media, Chapter 12 bankruptcy is not on the increase, yet. The reported 75% increase in Chapter 12 Bankruptcy filings was 2 more filings than this time last year. While farm bankruptcy numbers aren’t up, those operating in the shadow of bankruptcy continue grow. The shadows are where things aren’t to litigation yet, but it is clear absent joint action, litigation is likely.

When it is clear that an operation cannot make scheduled payments? It is time to talk to the lender, not on the due date when it is clear that the payment can’t be made. The topics that need to be addressed and considered are

  1. What is the financial condition now and what are its prospects going forward?
  2. What is the physical inventory and value of the assets of the operation with realistic numbers at a liquidation value (understanding that a creditor may apply a 50% or greater discount from what Fair Market Value might be on TractorHouse or BigIron to account for the costs of liquidation)?
  3. What is the tax implication of accelerating sales or the sale of capital assets like equipment and land?
  4. What is broke in the operation or the conditions that lead us here?
  5. What can be fixed in the operation?

Those are the broad-based principles that need to be considered. In the application of these questions, the operation should consider the cash flow for each enterprise (grain, livestock. custom work) and identify what operation is stealing revenue and which ones are generating revenue. Interfamily operations should also be examined. Is the operation subsidizing a brother, a child, a parent’s operation intentionally or unintentionally? Consideration to the impact of missing your payment on their ability to continue is critical.

What is a reasonable ask to the creditor? While it is fact intensive and based on the prior performance of the relationship, creditors can make some concessions where it is appropriate. Things like, removal of delinquency fees and interest, re-amortization of debt over a longer period to reduce payments, foregoing collection activity for a set time period or agreeing to allow another creditor to step in “in front of” the creditor to provide operating capital to generate funds to pay the original creditor are all possibilities.

From the creditor’s prospective, they are concerned about ensuring they have their “ducks” in a row regarding financing documents and once they are secured in that regard, they generally seek the best opportunity to achieve the most recovery in the shortest time possible with the least amount of effort and capital spent to recover the asset. Almost always, the creditor will require a release indicating that the borrower isn’t going to receive concessions from the creditor and then turn around and sue them for violations banking law. This is not an indication that the creditor did something wrong, it’s just a wise business practice. Remembering that it is business and not personal is essential to a successful discussion with the creditor.

You have 100% chance of dying, we all do. Having a discussion while you are able to communicate your wants, needs, and desires with those who might be asked to make those decisions is as important as establishing a succession plan or making sure Aunt Millie’s china never falls into the hands of a Cardinals fan.

Communication about your own desires and what type of medical and emergency treatment you want, can relieve the confusion and anxiety that comes with a medical emergency for both yourself and all involved. Your age when you have this conversation is immaterial. People 18years old-88 years old should be able to discuss their thoughts on life changing events and how they desire them to be handled and who makes those decisions.

According to an AARP Survey, “More than 90 percent of people think that it is important to have conversations about end-of-life care with their loved ones, yet less than 30 percent have done so. Similarly, 70 percent of people say they want to die at home, but in reality, 70 percent die in hospitals or institutions."

Conversations between family members can help individuals understand and participate in the process. It will not be an easy conversation. It should not be started after the plates are cleared and before desert is served at the next family event. Here are some relevant things to kick around and discuss.

  • When you think about the dying because of a terminal illness or slowly progressing issue, what's most important to you? How would you like this phase to be?
  • Do you have any particular concerns about your health?
  • What events do you need to get in order, or talk to your loved ones about? (personal finances, property, relationships)? Who is on the team, CPA, Lawyer, Investment advisor, land manager, real estate agent, etc.?
  • When was the last time the will was reviewed.?
  • Where are your documents to be found? Does somebody know how to get access to them keys, combinations, etc.?
  • Who do you want (or not want) to be involved in your care? Do the health care and general powers of attorney reflect who you want making decisions for you if you cannot?
  • How much deference to doctors do you want given when their recommendation contradicts your earlier directives?
  • Where are the hang fires? I.e. disagreements or family tensions that you're concerned about? If something is brewing, action while you have say in it might be a better course of conduct.
  • Where do you want (or not want) to receive care (Home, nursing facility, hospital)? A nursing home administrator once shared with me that the worst directive is to tell your children you never want to go to a nursing home. The guilt complex it can create on an already stressful time of transition is immense. Everybody would prefer die at home, sometimes that is simply not feasible, practical, or considerate to the members of the family.
  • Are there kinds of treatment you would want (or not want)? (resuscitation if your heart stops, breathing machine, feeding tube). When would it be OK to shift from a focus on curative care to a focus on comfort care alone?

This type of discussion is a gift to give your loved ones and the ones you are asking to make decisions for you when you cannot. It will bring peace of mind and comfort for family to know that the decisions they may have to make are what you would want them to do for you.

Section 179 Tax Deduction

Why does a farm truck have to be so big? So that we can deduct it, that’s why.

The new law changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017

 The following trucks and business vehicles qualify for 100% deduction

  • Vehicles that can seat nine-plus passengers behind the driver’s seat (Hotel / Airport shuttle vans, short buses).
  • Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a cargo van ala the A-Team, not the custom captain’s chairs style aka grandma’s conversion van.
  • Heavy construction equipment will qualify for the Section 179 deduction,
  • Typical “over-the-road” semi Tractors will qualify.

And new rules means that as long as its new to you and not purchased from a relative you can expense it right away.

Notice 4 door pickups and SUVS aren’t on that list. They need be heavy vehicles in order to maximize deduction opportunities Over 6,000 lbs.

. Absent invoking bonus depreciation, the maximum depreciation deduction is:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period 

 

Other vehicle thoughts.

Your business vehicles should be titled in the business or in a separate entity that then leases to your business. Makes sense, right? How can an asset be listed on the balance sheet if the entity doesn’t have title to it, or at least the right to the title, and risk of loss? However, some insurance companies will now want to charge an additional premium for a business vehicle. This is a money grab silly as risk is based on use, not the name on the title in the glove compartment.

Take a look at how your vehicles are titled, who is an authorized user under the policy and where the vehicle is carried for tax purposes.

I cannot stress the magnitude of the poor of decision it is to lease a vehicle, particularly on business vehicles over $80,000. Vehicle leases are generally not capitalized leases and not eligible for 179 expensing.

The residual value offered on a 36-month lease will be about 60%.

The leasing company takes the degradation in value ($80,000 minus $48,000) and apply a capitalization rate of 8% to 12%. This is essentially your interest rate while leasing.

You must watch mileage limitations such as 10,000 miles per year with penalties for going over the limit. The Little old lady who just drives to church in rural Iowa probably gets 10K in mileage.

Tuesday, July 23, 2019
  • Patrick B. Dillon
  • Jill Dillon
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Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
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Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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