Before a taxpayer finalizes the sale of property or assets, they should consider and be informed on the tax deferred benefits of a Section 1031 like-kind exchange. This especially applies to the sale of land and other real estate. Internal Revenue Code (IRC) Section 1031 provides the governance of like-kind transactions and is a tax deferred, not tax free, exchange. Gain is deferred until the replacement property is sold. The taxpayer’s basis in their relinquished property becomes the basis in their replacement property.
In order to defer the entire gain, the total purchase price of the replacement property must be equal to, or greater than the total net sales price of the relinquished property. If not, the taxpayer could still qualify for partial tax-deferral treatment. The net sales price does not include the repayment of any mortgage or notes payable. These payments are considered as if the cash was received by the taxpayer.
Like-kind exchanges are found in three different structures:
Simultaneous exchange of one property for another
Deferred exchange
Reverse exchangeWe will focus on the deferred exchange as it is the most common, but the other two options are available and may be considered under the proper circumstances.
All three structures should employ the use of a qualified intermediary to protect the tax deferred treatment on the exchange. Your attorney cannot act as an intermediary, but may initiate and complete the legal paperwork.
To qualify for a like-kind exchange, both the relinquished and replacement property must be used in a trade or business, or for investment. They also must be of the same nature, character, or class. For instance, real property cannot be exchanged for personal property; the most common being Land for Land.
The proceeds from the sale of the relinquished property are held by the qualified intermediary. The taxpayer is required to identify potential replacement properties within 45 days from sale of relinquished property. The taxpayer then must close on the replacement property before the earlier of 180 days after the transfer of the relinquished property or the due date of the taxpayer’s federal income tax return, including extensions. The IRS offers no exceptions to these time limits.
If the Section 1031 exchange involves related parties, such as a parent, child, spouse, or entity in which the taxpayer or his relatives own greater than 50%; both parties must hold their replacement property for two years.
With Section 1031 exchanges, each exchange transaction is unique to the circumstances and should include a qualified IRC 1031 advisor. If you have any further questions, please contact your accountant.
-David G. Olson, CPA/CVA
-Deb Nies, CPA
December 2013
SECTION 1031 (LIKE-KIND) EXCHANGES
Inside this issue:
Section 1031 1 Agricultural Payroll Reporting 2 Use Tax 3 Affordable Care Act 4 Farm Income Averaging 5 Meet Our Ag-Team 6
A
GRI
-B
USINESS
D
ECISIONS
:
“Taxation is very much
like dairy farming. The
task is to extract the
maximum amount of
milk with the
mini-mum amount of moo.
And I'm afraid to say,
that these days, all
I'm getting is moo.”
AGRICULTURAL PAYROLL REPORTING REQUIREMENTS
Form 943 - Employer's Annual
Federal Tax Return for
Agricultural Employees
Farmers are required to file Form 943 if they meet one or both of the following requirements:-They pay an employee cash wages of $150 or more in a year for farm work -The total (cash and noncash) wages that they pay to all farmworkers is $2,500 or more
Form 943 must be filed by Jan 31st forthe prior year. If the total tax that you owe for the year is less than $2,500, then you are allowed to pay the amount due with the form. If the total tax due is more than $2,500, then you are required to make payments via EFTPS on no less than a quarterly basis
Social Security tax rate is 6.2%. Medicare tax rate is 1.45%. The employer matches both taxes
EFTPS payments are due on the 15th ofthe month following the period you are paying for
All W-3 and W-2 forms should reconcile to Form 943SD Form 21 - Employer's
Quarterly Contribution,
Investment Fee and Wage Report
This form is used to report paid wages and pay SD Unemployment Tax (SUTA)
Farmers are required to file Form 21 if they meet one or both of thefollowing requirements:
-They paid ag wages of $20,000 or more in any calendar quarter
-They employed 10 or more
individuals for some portion of a day in each of 20 different calendar weeks
For 2013, only the first $13,000 youpay to each employee is subject to SUTA taxes
The tax rates for SUTA vary depending on the employer and are provided by the Department of Labor each yearForm 940 - Employer's Annual
Federal Unemployment (FUTA)
Tax Return
Farmers are required to file Form 940 if they meet the samerequirements for SUTA
For 2013, only the first $7,000 you pay each employee is subject to FUTA taxes
The tax rate is 0.6%
Form 940 must be filed by Jan 31st forthe prior year. If the total tax that you owe for the year never reaches $500, then you are allowed to pay the amount due with the form. If the amount you owe exceeds $500 for the year, you will need to make payments via EFTPS on a quarterly basis. Those payments are due on the 15th of the
month following the quarter.
Form W-2 and W-3 - Wage and
Tax Statement
Every employer engaged in a trade or business who pays remuneration for services performed by an employee must file a W-2 for each employee
Anyone required to file Form W-2must file Form W-3 to transmit Copy A of Forms W-2
Copies B and C must be furnished to employees by January 31st
Copy A, accompanied by Form W-3, must be furnished to the Social Security Administration office by February 28th
Employers must have an Employer Identification Number (EIN) from the IRS if paying wagesForm 1099’s and 1096
1099-MISC (Miscellaneous) & 1099-INT (Interest) are the most common forms used
Report payments made in the course of a trade or business totaling $600 or more per person/vendor during the year for Rent, Services, Non-employee Compensation (commissions, machine hire, contract labor), Interest, and various other situations -Personal payments are not reportable -Do not report payments to corporations-Tangible items received for these payments are not reportable (hay, seed, feed, cattle)
-Intentional non-filing penalties are $250 per return (1099) with no maximum!
Copies must be furnished to recipients by January 31st
IRS copy must be mailed by February 28th— Lisa Brown, ELO Bookkeeping Manager
Use tax is paid to the South Dakota Department of Revenue by purchaser rather than
seller. Use tax is applicable when sale tax isn’t charged on the original sale. Some
examples are as follows:
Purchasing farm machinery out-of-state
Farm machinery delivered into South Dakota, even if supplier charges another
state’s sales tax
When possession is taken out-of-state and purchasers pays other state’s sales tax
– no use tax is due if the other state’s sales tax is the same or more than South
Dakota’s. If it’s less, the difference is due in use tax
The South Dakota Department of Revenue can look back five years for unpaid use
tax. This can result in significant interest and penalties. You could be assessed a
10% penalty plus 18% interest for each year up to five years (10% plus 18% x 5 years =
100%).
The following is an example from South Dakota Department of Revenue:
A farmer buys a $250,000 piece of equipment out-of-state and brings it home to
South Dakota to use.
The farmer can voluntarily pay the $10,000 use tax.
OR
When the Department of Revenue discovers a copy of the invoice , the farmer
receives a bill for the tax plus penalty and interest
Year 1 - $12,800 ($10,000 + 10% penalty + 18% interest)
Year 2 - $14,600 ($10,000 + 10% penalty + 36% interest)
Year 3 - $16,400 ($10,000 + 10% penalty + 54% interest)
Year 4 - $18,200 ($10,000 + 10% penalty + 72% interest)
Year 5 - $20,000 ($10,000 + 10% penalty + 90% interest)
Total paid- $82,000
If you have any questions, please contact your accountant.
-Deb Nies, CPA
U
SE
TAX
– T
HE
OFTEN
OVERLOOKED
TAX
HEALTHCARE ACT–
(KNOWN AS THE AFFORDABLE CARE ACT)
-Some examples of
income subject to the
Net Investment Income
Tax are: interest,
dividends, capital gains,
rental, royalty income,
non-qualified
annuities,
etc.
Penalties imposed for
not having health
insurance:
2014 $95/per uninsured
person or 1% of household
income (whichever is
higher)
2015 $325/per uninsured
person or 2% of household
income (whichever is
higher)
2016 $695/per uninsured
person or 2.5% of household
income (whichever is
higher)
-Ashley Thompson,
Bookkeeper
Reporting on Forms
W-2:
Employer Information
reporting effective 2015
(optional (i.e.: voluntary)
reporting for 2014 in
preparation for 2015)
Employers report cost of
employer-sponsored group
health insurance on Form
W-2
-Box
12
-Code
DD
-No reporting on Form
W-3
-Include both portion
paid
by
employer and
portion paid by
Employee
-Do not give a Form
W-2 solely to report
insurance
coverage
Items that must be included
on Form W-2, Box 12,
Code DD
-Major
medical
-Health FSA value for
plan year in excess of
employee’s
cafeteria
plan salary reductions
-Hospital indemnity or
specified illness, paid
through salary
reduction
(pre-tax)
or
by
employer
-Domestic partner
coverage included in
gross
income
Reporting employer cost of
coverage does not mean it is
taxable!
-For informational
purposes only
-Shows employees the
value of their health
care
benefits
-Employees use it to
compare health costs at
the Market Place as
needed
Additional Medicare Tax:
Additional 0.9 % Medicare
tax is imposed on
individuals that have wages
that exceed $200,000 for
the year. The employer
calculates and withholds
this additional tax when
processing payroll.
Net Investment Income
Tax:
Net Investment Income Tax
goes into effect in 2013.
Tax of 3.8% is imposed on
certain net investment
in-come of individuals, estates,
and trusts that have income
above the thresholds below.
“Farming
is a
profession
of hope”
-Brian
Brett
Filing Status
Threshold Amount
Married filing jointly
$250,000
Married filing separately
$125,000
Single
$200,000
Head of household (with qualifying person)
$200,000
Qualifying widow(er) with dependent child
$250,000
FARM INCOME AVERAGING
As many of you are probably aware, farmers have a wonderful tax savings tool available to them, Farm Income Averaging. Farm income averaging is the ability for qualified farmers to shift eligible farm income from the current year equally over the prior three years. This will become more important over the next couple of years with the creation of the highest 39.6% tax bracket. Since this is a new bracket for 2013, many high income producers will be able to save 4.6% for a couple of years.
The mechanics of farm income averaging is not complex. The basic concept is that a taxpayer can take qualified farming income and shift it back equally over the prior three years, at the tax bracket the taxpayer was in for those years. Qualified farm income includes income from the Schedule F, 4797, and capital gains from the sale of farm assets (excluding land sales). An example of the tax savings is shown in the exhibit below.
The tax savings is only on income tax; this will not save on self-employment tax. That said; the tax savings may be significant if the producers are able to plan and manage their income. If you can hold income down for two or three years, you may be able to blow through the self-employment tax limits; thus reducing the self employment tax liability over a four year average.
Make sure to ask your preparer if farm income averaging is an option that has been utilized for you.
-
Jonathan Guenthner, CPA
20X2 20X1 20X0 20X9Taxable Income $ 170,000 $ 35,000 $ 34,000 $ 32,000 Elected Farm Income 33,000(100,000) 33,000 33,000 Adjusted Taxable Income $ 68,00070,000 $ 67,000$ 65,000$ Income Tax $ 10,500 $ 10,200 $ 10,050 $ 9,750 Tax as Originally Computed -- (5,100)(5,250) (4,800) Additional Tax 4,95014,850 $ 4,950$ 4,950$
Income Tax Liability $ 25,350
Income Tax Without Averaging $ 34,560 Income Tax With Averaging (25,350)
