File Tax Help

At A Price – Corporation Protects Assets

As enrolled agents and CPAs well know, as does any registered tax agent schooled by tax CPE, tax continuing education courses for tax professionals, all taxpayers are faced with the choice of taking the standard deduction or itemizing their deductions when filing the federal income tax return.

IRS Publication 225 Any tax professionals looking to develop a further understanding of the tax incentives for farming should first download and read IRS Publication 225 - Farmer's Tax Guide. It was co-authored by the IRS and farm extension specialists, and explains in plain language the complicated tax rules that apply to most farmers. Business vs. Hobby Farming There are significant financial differences between the classification of a farm as a business versus its classification as a hobby. When the farm does not constitute the taxpayer's sole or primary business, the related deductions are significantly limited. When a farm is the primary business, dozens of tax incentives are instantly available. Again, Publication 225 explains the criteria for classifying a farm as a business, most notably, (a) demonstrating intent to make a profit and (b) succeeding in making the farm a profitable venture in three years of a five-year period.

Standard deduction Standard deduction amounts are based on a taxpayer's filing status and are impacted by yearly inflation adjustments. For 2010, the standard deduction amounts are as follows: Single: $5,700 Married Filing Jointly: $11,400 Head of Household: $8,400 Married Filing Separately: $5,700 Qualifying Widow/Widower: $11,400 Different standard deductions for Different Taxpayers

The standard deduction amounts are contingent upon a number of variables including an individual's: filing status; age (whether they're 65 or older); ability to see (e.g, they're blind); dependency status If any of these conditions apply, then the Standard Deduction Worksheet-on the back of Form 1040EZ, or in the 1040A or 1040 instructions-should be used. The standard deduction amount also depends on whether a taxpayer intends to claim the additional SD for the following: a loss from a disaster declared a federal disaster state or local sales or excise tax paid in 2010 on a new vehicle purchased before 2010 To claim these additional amounts, a Schedule L must be filed.

Resale Deductions The vast majority of farmers buy livestock, equipment and other items for the sole purpose of resell them. The IRS does permit the deduction of these expenses, along with charges for transporting livestock and farm equipment.

You may be able to minimize taxes through electing a status as an S Corporation. Talk to your CPA to see if this option is right for you, and to file documents in a timely fashion to protect the tax advantages.

The S election allows you to report the corporation's profit on your personal tax return. Depending on your personal tax bracket and the company's profits (or losses), good planning could make a difference in your total tax bill. As a shareholder in an S Corporation, you draw a reasonable salary for which you pay Social Security and Medicare taxes. You're entitled to also take a stockholder distribution, which is not subject to the payroll taxes. If done correctly, you can save up to 15.3% (combined rate for Social Security and Medicare taxes) on the amount of the distribution. Be aware that there are limitations on the amount of distribution allowed before triggering other tax implications. This is why you need the help of a tax professional.

IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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