Episode 22: 3 Things New Farmers Should Know About Taxes with Jon Stoller
Taxes. Every producer has to do them. But if you’re new to farming, taxes can be particularly complicated. And as the year comes to an end, you might be thinking, “What do I need to do to prepare my farm taxes?” Or even, “What do I need to know so that I’m not leaving money on the table?”
That’s where working with a tax professional who’s well versed in agriculture is an investment, accountant Jon Stoller says, is worth making.
“Working with an accountant is an investment,” says Jon. “But the rules are so complicated that I just don’t see how, if you’re [farming] regularly, that you’d have a fighting chance of knowing what’s out there and what to do.”
Jon stresses that producers should always consider working with an experienced tax expert at year-end, but notes there are some best practices and important information producers can equip themselves with before meeting with their accountants.
Whether you use QuickBooks or a shoe box, a hand ledger, or an Excel spreadsheet, Jon says that the tool you use doesn’t matter nearly as much as keeping organized records.
“What matters is that you understand what the numbers are and where they’re coming from and that you have a sense of what’s going on,” explains Jon.
Staying organized and knowing your income and expenses will make tax time much easier.
Know your numbers
Before you step into your accountant’s office, the basic information you need to know is what kind of income you have, what your grain sales were, government payments, crop insurance proceeds, and what you spent money on.
Jon says to figure out, “First, how much income do I have, and what expenses do I have? Then, what projected profits do I think I’ll have?”
In years past, Jon explains that farmers were quick to “go and buy any equipment they wanted to try to bring down their taxable income.” While this may have helped in previous years, today’s equipment is in short supply.
Jon explains farmers should consider that profit is good. “With profit, you have the ability to pay down debt,” says Jon.
Play the long game
While you might only give your taxes thought during tax season, Jon suggests “playing the long game.”
“You can’t just worry about what your tax is going to be this year,” explains Jon. “We all want to add assets to our balance sheet, reduce our debt, and increase our income, but that takes a long-term objective.”
As we enter a high-inflation, high-cost environment, building working capital is a wise decision.
For more information about what producers should know about taxes, listen to AgCredit Said It’s Podcast Episode 22, where our hosts sit down with Jon to dive deeper into what farmers should consider when preparing their taxes.
Here’s a glance at this episode:
- [03:50] Jon explains why farmers should meet with their tax accountant before year-end and discusses what they can organize beforehand.
- [4:56] When it comes to taxes, Jon advises on how to “play the long game”, and not just focus on what your current year’s tax will be.
- [7:07] Jon gets into the specifics of what farmers need to have, or know, before starting the tax conversation with their accountant.
- [10:20] While major tax law changes aren’t anticipated, Jon explains some aspects that are expiring.
- [15:01] From a farming perspective, Jon explains each of the different operating entities and the tax advantages and disadvantages of each.
- [21:59] Jon answers what deprecation is and the different types of periods in which deductions can be spread.
- [27:38] Jon explains what capital gains are and how it relates to tax treatments for equipment and land.
- [31:23] Jon leaves with what he feels farmers should do to make tax time easier for themselves.
Connect with Jon Stoller online at https://www.brsw-cpa.com/
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Guest Jon Stoller
Jon joined Bashore Reineck Stoller & Waterman Inc in 2004, beginning his career at the Van Wert office. He became as owner in 2015. His practice concentrations are accounting and auditing (including not-for profits), and taxation for family businesses, agriculture, manufacturing, and health care industries. His favorite part of his job is meeting and working with clients. Outside of work, Jon enjoys spending time with family, music and choir, running, vacationing, participating in church activities and reading.
Host Phil Young
Phil is an account officer for AgCredit serving Van Wert County. He’s been in ag lending for over four years but his agricultural background goes back much further. He grew up on his family’s farm where his father raised a large herd of sheep. Currently, he helps with the family farm raising corn, soybeans and wheat. Phil likes working at AgCredit because he can help people achieve their goals. Whether that is purchasing a new piece of farm ground, updating a piece of equipment, or helping a borrower understand their financials, helping his clients succeed is always his goal.
Host Brenna Finnegan
Brenna has been an account officer serving Lorain, Huron and Erie Counties for four years. She’s worked in the agricultural industry for over 17 years with experience in livestock production, specialty crop production, seed production, and processing/distribution. She grew up on a small family farm raising row crops and cattle. She currently has her own herd of beef cattle that she breeds and sells as show stock calves for 4-H and FFA members. At AgCredit, Brenna enjoys being able to work directly with the local farmers and especially helping young farmers achieve something that they didn’t think they could.
Brenna Finnegan (00:08):Welcome to AgCredit Said It. In each episode, our hosts sit down with experts from all parts of the agriculture industry to bring new insights and must-have information on all things from farming to finances and everything in between.
Brenna Finnegan (00:27):Welcome back to Ag Credit Said It. I'm Brenna Finnegan, and I'm all the way out here in Van Wert, we're here with Phil Young today for a tax episode.
Phil Young (00:36):Hey, guys. Welcome back. This is a fun topic. I'm kind of a nerd, so I like talking about taxes. I don't know about you, Brenna.
Brenna Finnegan (00:43):I do numbers, so it's kind of hard not to be like, "What does this mean? What does that mean?"
Phil Young (00:49):It's a good episode. Looking forward to you guys hearing it and hopefully learning something.
Brenna Finnegan (00:54):As we near year-end, we think about ourselves as being a financial business. We always have to bring up the importance of year-end financials and planning. Today, we're here with Jon Stoller, a certified public accountant, to talk about the importance of meeting with your tax accountant at the end of the year and to walk us through some great tax questions.
Brenna Finnegan (01:15):Welcome, Jon.
Jon Stoller (01:16):It's good to be here. Thanks for having me.
Brenna Finnegan (01:18):Good. Why don't you go ahead and give us a little bit of background on you?
Jon Stoller (01:24):Yeah. Thank you, Brenna. My name is Jon Stoller, and I'm here from Van Wert County. I went to college at Ohio State University. I was down there for four years, and then, upon graduating, came back and started working for the same firm that I'm with now. I learned mostly from working directly with my father, Rod Stoller, who still works part-time, though he's transitioning out. He enjoys going to Florida.
Phil Young (01:50):Aha.
Jon Stoller (01:51):He's in that stage of life.
Phil Young (01:52):I'm jealous.
Jon Stoller (01:53):But he's there to give advice when I need help, so I appreciate that. We really do enjoy working with farmers and the planning associated with that. There are a lot of options in the tax code that farmers can take advantage of, but, in all things, if you don't plan for it and the year ends, you lose your ability to do things.
Brenna Finnegan (02:17):There's only a big enough window, and it's all got to fit within it, right?
Jon Stoller (02:20):And when December 31st clicks... I do know that while some people might want to hold checks, you do run a risk when you do that, so it's best to get it done before the year's over.
Phil Young (02:35):Yeah. There's no do-over button that you can push.
Brenna Finnegan (02:37):I always wondered about the date. You write a check on December 29th, and they don't cash it on their books as income till after the new year, but do I count that expense still, that year? Sometimes, it's the timing of everything. Farmers on January 2nd they're firing up the trucks and hauling grain in so that they can get some cash for the new year.
Jon Stoller (03:06):If a farmer wants to have a deduction, he needs to write the check, and it needs to be put in the mail by December 31st. You can't write a check, put it in your bottom desk drawer, hold onto it until January after you've sold your January grain, and then try to do it. You need to have written the check and put it in the mail so that it's out of your control.
Phil Young (03:28):Okay. Gotcha.
Brenna Finnegan (03:30):Good to know.
Phil Young (03:30):That is good to know.
Brenna Finnegan (03:31):Might have to take some pictures of some envelopes, then. Well, let's go ahead and dive into some additional questions. Obviously, starting out in wanting to know, a tax accountant, why is it important for farmers to meet with their tax accountant at or before year end?
Jon Stoller (03:50):This is the opportunity to change things. The first step is that the farmer needs to be organized. The farmer needs to know what kind of income they have and what kind of expenses they've had. Primarily, their income would've come earlier in the year, in January of '22 in our case now, and then they've had their expenses they've been paying throughout the year. First, how much income do you have, and what expenses do you have? What projected profit do you think you'll have? Now, in years past, farmers would be able to go and buy any equipment they wanted. Equipment's in short supply now, so that is a harder tool to use if you're trying to bring down taxable income.
Brenna Finnegan (04:36):Yeah, those last-minute guys that call in and say, "Hey, I need to go buy this because my tax guy says I need to go spend some money in order to reduce my obligation." It always gets interesting at the year-end.
Phil Young (04:51):Yeah. Other than equipment, what other...
Jon Stoller (04:56):Let's talk about equipment. The heart-to-heart I like to have with farmers, though, is when you go buy equipment, is it a wise-economic choice? There's always the aspect of not wanting to pay tax. I don't want to pay tax either. I think we all are American in that regard. We don't want to pay taxes. But you have to pay for it, so just to go spend the money just to spend the money isn't always wise. We also know that if you're highly leveraged and you don't have rates locked in, it's going to get harder.
Brenna Finnegan (05:30):Very much so.
Jon Stoller (05:33):It's not just tax that we look at. If I sit down with someone and I try to put myself in their shoes and ask myself, "If I was in your shoes, what would I be thinking, and what are all the different aspects to consider?" Sometimes profit is good. With profit, you have the ability to pay down debt, long-term debt.
Brenna Finnegan (05:51):Correct.
Jon Stoller (05:52):Which, in the end, we all want to add assets to our balance sheet, reduce our debt, and increase our income, but that takes a long term-goal; a long-term objective. You got to play the long game. You can't just worry about what my tax is going to be this year.
Phil Young (06:10):Yeah. The other side of that, too, is we're kind of entering a high-inflation, high-cost environment, so just building working capital, taking that punch in the gut and paying taxes, and not buying something, and just keeping the cash and building working capital is also a good decision too. As you said, is it a good investment in their farm? Is it a wise choice to buy that piece just to avoid a little bit more of a tax expense versus building that balance sheet a little bit?
Brenna Finnegan (06:39):I've always thought about it as like a one-time-payment-type thing: make that payment to the government instead of having something continuously every year or for the next five years or seven years, whatever it might be for that loan. You got to weigh it out. Is that one-time payment worth it? Which one does it outweigh? You kind of start to wonder.
Brenna Finnegan (07:07):Now, you mentioned in there becoming organized. I'm not going to say, "How many guys come up and say, 'Well, here's my shoebox full of stuff,'" but organization is probably one of, I would say, the least-priority-type things that a farmer has on their mind. I don't want to stereotype it, but they tend to think, "Hey, I got all this stuff over here." Some are very, very good at it. Some are not and probably need somebody to do it. Going through with organization, what would you like to see when somebody walks into your office?
Jon Stoller (07:46):It doesn't have to be anything complicated. At the end of the day, they need to know what kind of income they have, what their grain sales were, what government payments were, crop insurance proceeds, and a lot of different types of income, and then they need to have an idea of what they spent money on. Now, one trick when they're estimating how much they spent, is if they've paid AgCredit principal payments, that's not deductible. It's only the interest. There might be some cash outflow items. They're thinking, "Wow, I just made this $100,000 payment to the bank," but only $10,000 of it was interest. There are a few adjustments that you have to make when you're estimating what you think your taxable profit's going to be.
Brenna Finnegan (08:32):So, knowing the difference, breaking out all your payments and making a column of principal interest and all your other lovely farm expenses that people have.
Jon Stoller (08:43):What I call it is you need to understand the game that you're playing. From my experience, it usually takes about once or twice to get hit really hard, and then most people learn and they will have a good idea. I tell my guys, "You're always welcome to call me. If you have an idea where you're at, that's fine, I'm not going to bug you about it, but just be aware of where you're at and what you have coming." I'm anticipating a coming tax season where there's going to be some big balances owed. Prices are high. Yields have been good, and I'm thankful for that. Inputs have gone up, but it's also been hard to get inputs, and it's also been hard to find equipment. It will be interesting to see, but I tell my clients, "I hope you have to pay a lot of tax for the right reason."
Phil Young (09:44):Right. Yeah. That's a good thing.
Brenna Finnegan (09:47):Makes sense.
Jon Stoller (09:47):If the choice is being successful, making money, and paying tax versus always having a loss and not paying tax…
Phil Young (09:54):Yeah. I'll sign up for that quote-unquote burden. We've seen, in the last few years, with different administrations that have come through, some tax-law changes. Is there anything, that from a farmer's perspective, you think we should share with everyone? Are there any new things with taxes, tax brackets, or anything like that?
Jon Stoller (10:20):This coming year, most of the rules we've had are carrying forward. Nothing has happened in Congress to change that, but there are certain things that are expiring or changing. Bonus depreciation is going to become more limited based on a schedule that was put in place back with the tax-jobs-cut acts that Trump and his organization put into place. There's an acronym for it. The people in Congress love their acronyms.
Phil Young (10:46):They do.
Jon Stoller (10:47):Their big fancy acronyms for stuff.
Phil Young (10:49):They do.
Jon Stoller (10:50):Another aspect that could hurt is, if a business is highly leveraged and they're paying a lot of interest expense, there are going to be some limits on how much interest you can deduct. Now, in the past, a certain percentage of your income, only a certain amount, could be deducted. In the past, though, you could add back depreciation. Let's say someone had a $100,000 profit but they had $500,000 of depreciation. You'd take the $100,000; add the $500,000 of depreciation. That gives you $600,000. Then you would take the percentage. I think it was 30%, times the $600,000, and that would determine whether there was a limit or not. The depreciation made it a moot point, but that depreciation add-back goes away.
Phil Young (11:39):So, it's just solely based on revenue now, or solely based on the percentages based on the revenue.
Jon Stoller (11:44):On the net income.
Phil Young (11:45):Yeah, net income. Okay. Gotcha.
Jon Stoller (11:48):This is going to be a factor this year that we didn't have before.
Phil Young (11:52):Okay.
Brenna Finnegan (11:53):Some major limitations, then, for some, I would assume.
Jon Stoller (11:56):Depending on how leveraged the business is and how low the income is in relation to its interest. Now, the interest wouldn't be lost, but you just couldn't deduct it in that year. It carries forward to a future year when that might be there.
Phil Young (12:14):Gotcha. Okay.
Jon Stoller (12:15):Now, the other tools that farmers have, crop insurance can be deferred, but I don't anticipate many people having claims for crop insurance, and that's crop insurance based on yield differences, not price differences.
Phil Young (12:29):Okay. So, that's new that you can defer that? I was going to say that's been the case, right?
Jon Stoller (12:36):That's been the case.
Phil Young (12:36):I was going to say. Yeah.
Jon Stoller (12:38):Yeah.
Phil Young (12:39):Okay. That's interesting.
Jon Stoller (12:40):I know that working with an accountant is an investment, it's not cheap, but the rules are so complicated. I just don't see how if you are in this on a regular basis, that you'd have a fighting chance of knowing what's out there and what to do. I've seen people call me up, and they want to know how much it would cost. I tell them, and they don't want to pay that. That's fine. Everyone has their choice. It's not anything that I'm upset about or worried about, but, if anything, I feel bad for them because they will end up paying more tax than they have to.
Phil Young (13:16):Yeah, at the end of the day, they're leaving money on the table. The other thing is you can write off your expense, right? They can write off the accounting expense, right?
Jon Stoller (13:26):Absolutely.
Phil Young (13:27):So, that's how you sell it, like, "This is another write-off. You can write off my services on your taxes."
Brenna Finnegan (13:31):To me, I've always figured it's worth every penny just to not ever have to worry that it was done wrong on my part. Back in the day when you only had one W-2 and you just turned it in. Times have changed with all of that. Now, having your own farm, they don't know exactly what they need to put into what category or how to classify anything to even use it as an advantage for them. To me, it's worth every penny.
Phil Young (14:02):Yeah. It's the old saying, "You don't know what you don't know," and so you don't know if you're leaving money on the table. You'll never know that unless you go chat with someone like Jon. I think you're right. I think it's a wise choice, and you guys, you know that they're getting done and they're getting done right.
Jon Stoller (14:16):You also want to make sure you work with someone who's had experience with agriculture. The tax laws associated with agriculture are unique, and there are different provisions in there that if someone is not familiar with, they might not be able to give advice.
Phil Young (14:33):Another thought I had is, I get asked this quite a bit, and we have a lot of guys that farm just under their individual names. Then, it seems like there's an increase in the number of people that are forming operating entities and landholding companies, whether that's an LLC or a corporation. From your perspective, are there any tax benefits to forming those? I know there's transition planning that goes into that as well, but, from your perspective, is there a tax benefit to doing that?
Jon Stoller (15:01):I'm still waiting for the day when I'm at a social event and someone comes and asks about the differences in operating entities. Still hasn't happened. There are differences, and there are different advantages and disadvantages to the different types. The advantage of a Schedule F sole proprietor is that it's simpler. It's easier to follow; easier to understand. If you don't like paperwork, that might be better for you. There are different options with a Schedule F that you can do to try to reduce self-employment tax.
Jon Stoller (15:38):Usually, what people don't like about Schedule F’s is if a farmer makes $100,000 on a Schedule F, you pay the income tax on that and then you pay self-employment tax. Self-employment tax is another 15% on top of your income-tax rate. Even if your overall rate might be in the 12% bracket, then you add the 15% on top of it. When they pay their bill on their 1040, most of that bill is self-employment tax. Now, if they want to draw social security someday, they have to pay self-employment tax to get social security.
Phil Young (16:10):Gotcha. Okay.
Brenna Finnegan (16:11):It's a double-edged sword.
Phil Young (16:12):Yeah. Right.
Jon Stoller (16:14):You pick your poison. However, self-employment is the biggest one. If a farmer has a Schedule F and their spouse owns the ground, the farmer could pay rent to their spouse. Then the spouse has that income as Schedule E, which is subject to income tax but not subject to self-employment tax. There are different strategies, depending on the entity, you can follow to try to do that. Now, there are certain paperwork and procedures that you need to do. Again, you have to play the game. You can't just do what you want to do.
Brenna Finnegan (16:50):There's probably some wheel turning in some heads as people are listening to this.
Phil Young (16:53):Yeah. Got to color within the lines.
Jon Stoller (16:57):But sometimes you're on this coloring page; you flip it over and switch to an LLC. You go to an LLC, and then there are whole new lines to look at. LLCs can be treated in three different ways. There is a no-tax LLC form out there. LLCs can be treated as Schedule Fs. LLCs can be treated as S corporations. LLCs can be treated as C corporations.
Brenna Finnegan (17:22):What's the difference between those?
Jon Stoller (17:24):There's a lot. Schedule F is on 1040. The income there is subject to SE tax. It's the simplest form. LLCs taxed as an S corporation have to file a separate tax return. Then it has its own S corp tax return, which then will need to give to the bank along with, then, their personals. Now you have two different tax returns. The primary benefit of an S corporation is the farmer becomes an employee of that S corporation. The farmer is paid a wage. That wage is subject to SE tax. However, any profit from the S corporation is not subject to SE tax.
Jon Stoller (18:10):You take the $100,000 that was on Schedule F; the $400,000 was subject to the 15% SE charge. The farmer switches to an S corp; pays himself a wage of $50,000. He pays SE tax on $50,000. He'll still receive credit on social security for earnings up to $50,000, but then he's not paying SE tax on the remaining $50,000, so then he can save $7,500 in tax each year.
Brenna Finnegan (18:39):Once again, the wheels are turning.
Jon Stoller (18:42):Then, there are complexities and nuances to all of those and certain things you want to do and not want to do to not draw attention to yourself. The saying is that pigs get fed, and hogs get slaughtered. Pig out, but don't be a hog. You don't want to be noticed. Those who really are aggressive and push the limit and don't have a justification for it have a dramatically higher chance of being selected for audit.
Jon Stoller (19:12):Back to the C corp. C corps are different. They are not pass-through entities. S corp, whatever profit it makes passes through to the individual. C corp has its own tax return. It has to pay its own tax. C corps have a tax rate of 21%. Then, C corps can use commodity wages. They can pay health insurance benefits for the employees and their families. C corps can even get a deduction for grocery bills if the employee of the corporation is hired to make food for the employees of the corporation.
Jon Stoller (19:46):There's a lot of taxable benefits C corps can do, but they're the most complicated, so then you have to, when it comes to paperwork, be willing to have minutes; to have resolutions; to have things documented; to have the employment agreement between the employees of the C corp. A lot of times, it's the same people. It's the farmer's family, but they have to put on different hats. "I got my C-corp hat on. I've got my employee-of-a-C-corp hat on. I'm now the renter who owns the land that the C corp is paying cash rent to."
Brenna Finnegan (20:23):There are a whole lot of shoe boxes on a counter that they're keeping track of.
Phil Young (20:27):Yep. You're the shareholder of the corporation.
Brenna Finnegan (20:28):Yep.
Phil Young (20:30):Yep.
Brenna Finnegan (20:30):I just keep thinking of operating agreements going through my head, and how it's all structured, and what label you give yourself as an owner, employee; all that.
Jon Stoller (20:41):You try to find ways to reduce self-employment tax or to try to get deductions that you otherwise wouldn't be able to get, depending on the choice of the entity form, but then you weigh that against how much complexity do I want?
Brenna Finnegan (21:01):Yeah, it gets complicated.
Jon Stoller (21:01):I can show the benefits that it could have to someone, but if they hate paperwork and it causes them headaches and worries, then it might not be worth it to that individual.
Brenna Finnegan (21:17):That’s when you hire a secretary to handle it for you.
Phil Young (21:19):There you go. Yeah. You have a bookkeeper that does that.
Brenna Finnegan (21:21):Before, you had mentioned something about depreciation. I know I get this question a lot, how is it even calculated in the first place? I know I have to Google it every time and figure it out... I'm probably still never right, but it still always gets asked, so explain what is depreciation and how does somebody calculate it?
Jon Stoller (21:48):Well, my dirty little secret is that we have tax software that calculates it for us.
Brenna Finnegan (21:56):Smart move.
Jon Stoller (21:59):The basic concept of depreciation is if you are going to pay $100,000 for a piece of equipment, 200, 300, 400, whatever you pay for it, you get a tax deduction over time. Depending on the type of equipment, there are different lives, or different periods over which that deduction is spread. There's a traditional straight line where it's basically over seven years. You take the cost, divide it by seven, and it spreads out, except for the first year's a half year, you have six normal years, and then a half year on the back end.
Brenna Finnegan (22:38):Yeah. Didn't know that. Good info.
Jon Stoller (22:41):Then, there are accelerated. It's called MACRS, modified accelerated cost recovery system, and MACRS is a faster one where you get more on the front end and less on the back end, but it's still spread over that 5-year, 7-year, 15-year, 20-year period depending on the asset that you have.
Jon Stoller (23:03):Then, there's Section 179 or bonus depreciation, and you take depreciation up front. The bonus is all or nothing. You have a purchase and you get the deduction up front, and that's it. It's done. It's great if you paid cash for something, where there's danger in bonus depreciation if someone's borrowing. They take the deduction up front, and then they have to pay for it over the next five years. You get the tax deduction in year one, but you haven't paid the bank for it. Then, when you pay the bank in years two, three, four, five, and six, there's no tax deduction because you got it back in year one.
Brenna Finnegan (23:43):So, it's paying attention, really, as to how you're mapping it all out.
Jon Stoller (23:46):Then, there's Section 179. Section 179 is you're allowed to pick how much you want to depreciate in the first year. You buy an asset for $100,000, you look at your tax planning and you say, "I want $30,000 more of deductions, but no more," you can use Section 179 to put your income where you want it and then the rest gets spread over time. That election to take what you want is in the first year only, not in future years.
Phil Young (24:14):Is it divided evenly after that, whatever's left?
Jon Stoller (24:19):Then it's spread over and you use your depreciation methods to calculate it out.
Phil Young (24:21):Gotcha. Okay.
Jon Stoller (24:23):I know a lot of the farmers that I work with want to know how much is left in their depreciation bank because what you haven't depreciated, then, in a future year, that's a tax deduction that you don't have to pay anything for.
Brenna Finnegan (24:40):I think of a product that we have as a lease. Some people use a lease to put up a barn or…
Phil Young (24:49):A piece of equipment.
Brenna Finnegan (24:50):Well, that's the main thing I think of, a piece of equipment.
Phil Young (24:53):Yeah. Piece equipment sometimes.
Brenna Finnegan (24:53):What is the advantage of a lease, and how does that pertain to the depreciation factor?
Jon Stoller (25:01):A lease eliminates the whole depreciation issue because you get the deduction as you pay for it. If you lease something and it's $10,000 a year, over five years, you just get the deduction as you pay for it. The question is, economically, does it make sense to do one or the other? Does it cost more to do the lease, or is it neutral? You just need to run the numbers.
Brenna Finnegan (25:28):Once again, it's mapping out your payments along with everything else that you have going on.
Phil Young (25:34):Yep. One of the other questions I get quite a bit and we just deal with because of selling stuff is capital gains. Obviously, you're trying to always dodge the capital gains bullet. Can you walk us through that? We have a lot of younger listeners, so what are capital gains on a tax basis? What are tools you can use to avoid it?
Jon Stoller (25:56):With capital gains, what's important is known as the character of the asset that's being sold. A tractor that you purchased and you've written completely off; purchased for $100,000, you wrote off $10,000, you have a tax basis of $0. You then trade that in, and they give you $75,000 for the trade-in value. You have to show that as a gain of $75,000 on that. That is not eligible for capital-gain rates because you already depreciated the original purchase at ordinary rates. That's called depreciation recapture, and now we're starting to wade into the thick of tax terminology here and the swamp is sucking us down.
Phil Young (26:39):We're in the thick of it. Yeah.
Jon Stoller (26:40):It's the reality of it. Depreciation recapture is something that gives tax accountants and taxpayers nightmares because you think you're going to get this great tax treatment, but you don't.
Brenna Finnegan (26:53):So, a guy that, say, this year with used equipment prices being higher and somebody turning around and selling a piece that they bought five years ago, whatever it may be, and getting more, that all comes into play with all of that, then. This year might be one year that more of that comes up, I would assume.
Jon Stoller (27:11):I anticipate more of that. Now, let's say someone bought the tractor for $100,000; depreciated it. It's now worth $0 for tax purposes. They resell it for $120,000. The first $100,000 is subject to ordinary rates because of depreciation recapture, but then anything over and above the original purchase price would get capital-gain treatment.
Phil Young (27:33):Interesting.
Brenna Finnegan (27:33):It's nice to get that check, but you have to keep that in mind too.
Phil Young (27:37):Yeah.
Jon Stoller (27:38):
Now, the land. You sell land; the land would get capital-gain treatment with one caveat. If there's tiling in the land that we wrote off, that would be subject to depreciation recapture, and you can't have an installment sale on the tiling portion. So, installment sales are where you spread out the gain over time. Let's just say, "I want to sell this, I'm going to have this huge gain. I only want to report the tax when I get the money in chunks," And that's a great tool to have. You can do that on the land portion, but for the tiling aspect of that, you have to pay the tax on the tiled portion of the sale in the first year whether or not you have received the cash. Those are also some hard conversations that I've had with people.
Brenna Finnegan (28:26):Is that all based on the dollar amount you put into it in the first place?
Jon Stoller (28:30):Yeah. Let's say, and something we do, especially here in Van Wert and Paulding County is, when you purchase land, we always try to put a value on the tile because it's not just the land you have, but it's also the tile. Let's say it's $10,000 an acre. Let's say 10% is assigned to tiling, so that'd be $1,000 an acre. Well, when that's purchased, we write off $1,000 an acre. We got the tax deduction. Now you turn around and you resell the land. That $1,000 an acre that was put to the tiling portion because it was written off completely will come back as ordinary income recapture. You get the capital gain on the land portion; you don't get the capital gain on the tile portion.
Jon Stoller (29:10):Now, when someone dies.
Brenna Finnegan (29:12):Yep. That was going to be my next question.
Phil Young (29:14):Yeah.
Jon Stoller (29:15):If you want to get out of capital-gain treatment, you die, because then whatever is left gets reset. Senior is farming. He dies. All his assets get reset at the fair market value. You need to get with someone when there's a death, and you need to get values set on equipment, on land, whatever there is in the estate, because now the heirs, the children, can take that, sell those assets, and not have a capital gain because of this step up in basis.
Phil Young (29:50):Yep. It's not quite a hit.
Brenna Finnegan (29:54):Okay. He's talking inheritance now. So, Senior is still alive and he's trying to plan for the future, distributing some of the things or just putting something in somebody else's name in order for those tax benefits. What kind of tax implications come along with that when you do such a thing?
Jon Stoller (30:12):If you gift something to someone, and you're allowed to, the tax basis of the gifter goes to the person who receives the gift. If I purchased land at $500 an acre back in 19-whatever and I gift that to someone, that person gets the tax basis at $500 an acre. If they sell it, they'll have the capital gain, so you cannot get out of capital gains by using gifting.
Brenna Finnegan (30:40):Aw, shucks.
Phil Young (30:41):Yeah.
Jon Stoller (30:42):Now, that being said, if someone wants to give you something and you don't have to pay for it, you'll still be better off even if you have a capital gain.
Brenna Finnegan (30:51):Yeah. Well, that's true.
Phil Young (30:52):Yeah. It's not a problem unless you go to sell it, right? It's only an issue if you go to sell it.
Jon Stoller (30:54):That's the other thing, too. If someone's not going to sell it, it doesn't matter. You're dealing with legacy farms, and farming is their passion.
Brenna Finnegan (31:02):Well, then it just becomes another gift, right?
Phil Young (31:03):Yeah. Right.
Brenna Finnegan (31:04):You just keep continuing the gift train. It's a snowball effect.
Jon Stoller (31:10):Yeah. It's really only an issue when you have a member of the family who doesn't want to be a part of it anymore and wants to cash it out.
Brenna Finnegan (31:19):Yep, and wants their cut. That's where we come into play.
Phil Young (31:23):Yeah, right. One of my last questions here is during tax time, as we get into it, how can a farmer make tax time easier for themselves and you? QuickBooks? What tools can help them and then help you out?
Jon Stoller (31:45):The key is organization. My concern is less with what they use to be organized and more that they are organized. It's not like if someone comes to me and they use QuickBooks or they don't use QuickBooks or they have a ledger that they use, we won’t work with them. Make sure it's organized and you have a good feel for what your income is and what your expenses are.
Phil Young (32:08):More importantly, that it's right; accurate. The record-keeping itself and not the tool.
Jon Stoller (32:13):Yeah. It can be a hand ledger. It can be an Excel spreadsheet. That doesn't matter. What matters is they understand what the numbers are and where they're coming from, and that they have a sense of what's going on.
Brenna Finnegan (32:26):I've always thought that there's something in being organized that, I hate to say it, but it's worth paying somebody to sit down and take care of making sure things are in the right categories for yourself. It's your stuff, you should always double-check it yourself anyways, but sometimes that's the hardest part for people, is just sitting down and putting things together. Whether it's writing it down on paper, using a spreadsheet, using QuickBooks, whatever it might be, I think sometimes that's hard for people to do. To me, that's always been the hardest part for some people, is just sitting down and organizing something themselves because a guy would rather be in the tractor seat than at the office desk, sorting paperwork.
Phil Young (33:10):Yeah. Just based on our conversation, there's a lot of complication to what you do and a lot of formulas, so I think it's worth talking to an accountant. It's a one-year thing, right? You only have to sign up for it for one year, do it, have an accountant do your taxes one year. If you've never had anyone do it, it may be fruitful for you. And if you don't like it, you can keep doing it yourself, but I think once they do it, they'll realize how great it is. Any other thoughts or questions you have or things you wanted to share about taxes, farming, or agriculture?
Jon Stoller (33:44):Yeah. I'm very thankful for everything I've learned from my father and my coworkers. We're a team. There's no way one person can ever have a handle on this. Even doing this for many years, you still try to stay on top of things with seminars and articles and different aspects. It's a labor, a labor of love, and an intellectual investment that you have to make in order to serve others, and that's what it comes down to. We have offices in Paulding and Columbus Grove. In Columbus Grove, the CPA there, Todd Meyer, farms full time too. He's a great resource for us to have because he actually does this and does the taxes on top of that, so he's just very valuable for us to work with.
Phil Young (34:39):Well, I think it was Benjamin Franklin back in 1789 that said there are two things that are for certain, that's death and taxes.
Brenna Finnegan (34:45):I was so going to say this.
Phil Young (34:48):Yeah, so super thankful that you were able to join us today. It's a topic that every farmer, business owner or individual has to deal with. It's taxes. You got to sit down every year and do it no matter what. Hopefully, you do it no matter what.
Jon Stoller (35:02):Well, a couple of things I like to tell people. First, we're all obligated to pay our due, but it doesn't mean we need to leave a tip for the government. If you don't know the rules, you may be inadvertently leaving them a tip when you don't have to.
Brenna Finnegan (35:19):I will never feel bad writing zero on that one if that were the case.
Phil Young (35:23):Well, good. Thanks, Jon. Thanks for joining us. Hopefully, you guys will join us for future podcasts. Like and rate us wherever you guys listen to podcasts, and we'll see you next time. Thanks, Jon.
Jon Stoller (35:36):Very good. Thank you, guys.
Brenna Finnegan (35:41):Thank you for listening to AgCredit Said it. Be sure to subscribe so you never miss an episode. While you are there, leave us a review to help others find the show. Let's talk ag in between episodes. Follow us on Facebook, Twitter and Instagram @agcredit. For more tips and resources, visit agcredit.net.