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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.

The Wimpy Principle, I will gladly write off this equipment today and pay for it in the future.

Wimpy from Popeye was always promising to pay later. IRS rules on depreciation may have a Wimpy fan writing them. In many cases IRS rules allow you to purchase a capital asset today and write it off as if it was fully used up in less than its projected life time, even if you haven’t paid for it yet.

In the good years, many businesses, including farmers think, “I’m in money this year, so let’s go buy to avoid taxes.” The real question is “Does the operation need it?” and “Were you going to acquire it in the next tax period anyway?” Spending down is about a 3:1 ratio. For every $3 spent on the operation, the tax bill moves down about $1. And while you are not paying Uncle Sam or your state government that dollar, you are not having access to all three dollars.

While spending on inputs and the like is easy to expense off (as long as you don’t go over 50% of the total spend on the item for the upcoming year), spending on capital purchases like equipment takes a bit more maneuvering. That maneuvering is understanding depreciation, regular, accelerated, and bonus.

Depreciation recognizes the decline in the value of assets over their estimated useful lives. Under the new tax bill, farm equipment has a five-year useful life. Other things like buildings, fence and tile have different useful life spans. 

Once you have the lifespan established, it is then choosing what type of depreciation method is assigned to the property. Property can be written off equally over a period of years, accelerated with more write off in the early years and less in later years or it can be expensed all at once using IRS Code Section 179. 179 lets you expense capital purchases up to a set limit that varies by year but cannot be in excess of your operation’s net income. State law does not match up with the 179 limits and can create federal depreciation schedules that are different from state ones.

Additionally, if your operation purchases a BRAND NEW, not new to you, item up to 50% can be expensed off immediately. This also doesn’t match up with state rules.

When your income profile varies, accelerating expenses is dangerous dance. You still have to make money to pay the purchases if you are purchasing over time and that expense has already been consumed in a prior year. That means paying income tax on money that just gets turned over to the seller.

Finally, praying at the altar of no tax may come to bite you in later years. If you are only running a business/farm and have no tax payments in and do not have off farm income with social security withheld, you may be sorely disappointed when it comes to social security benefit statements. While that comment presupposes that Social Security benefits will remain available to you unchanged in your retirement years, those who pay very little or nothing into the system will find out that very little does the system return. And a wimpy return helps no one.

Too much, too little, and at the wrong time in any amount, water can fall into any of these categories. Ag operations need access to water as a basic input to their operations. In the Midwest, we are largely immune to water shortage and spend more time diverting water and complaining about rain than looking to the sky for an uncontrolled input essential to success.

Other areas of the country aren’t so lucky. Water allocations can make or break an operation. Using the government to supervise these allocations is a natural reaction, but sometimes involving the government can have unnatural results.

Louis and Darcy Charon have rights to take water from a Trinity County creek. In error, they reported the wrong amount to the state water board. They reported using a trillion-acre feet of water each year from 2009-2013. An acre-foot of water is about 326,000 gallons, which is enough to cover one acre one foot deep. The amount they reported is probably more water than is available on the entire planet. When they were asked to take another look, they reported 21,383 acre-feet a year. 21,383 acre-feet of water would be enough volume to cover 21 acres more than 1,000 feet deep. By comparison, a family generally uses about ½ an acre foot a year.

The Charon’s have a riparian water right, which means they have access to water that runs adjacent or through their property without a hard number associated with it. Riparian water rights must be reasonable and beneficial however. The play they may have been making is to develop a record of their consumption so that that level of consumption would be in the record in any future attempts to regulate use of the water. This would make the consumption level’s they reported a watery gold mine in the event of limited water.

The Charon’s have been fined $10,000 for overstating the amount of water they diverted and can have it reduced further if they hire someone to report how much water they are taking. So, in the end, the Charon’s, who have a non-numerically defined reasonable and beneficial use are being fined for not providing a numerical assessment of how much they used, despite having no requirement do to so associated with the actual water right.

Drop in the Furrow and Face the Fine

In September 2018, The U.S. Attorney's Office, Environmental and Natural Resources Division, in California announced that a Goose Pond Ag, Inc of Florida has agreed to pay $5.3 million in civil penalties and costs to perform work to repair disturbed streams and wetlands for deep ripping the property. The intent was to move the property from pasture rangeland into Walnut Orchards. The issue steamed from the depth of the rippers. While the farm operation claimed 4-7-inch rippers were used, the government asserted 3-foot-long rippers were used, averaging a 10-inch penetration of the soil. While farmers are generally exempt from Clean Water acts prohibition on materials clogging waterways, the government has taken the position that deep ripping is not allowed.

Medicare Planning and Farm Assets

The best bet to make sure that your farm assets are passed to the next generation and you are able to meet your medical needs as you age is to buy a crystal ball and determine when you will need nursing home care for you and your spouse, set aside five years’ worth of care (accounting for social security and fixed income streams during that time period, inflation in cost of care and medicine) for each of you and the spouse and give the rest away. This should provide five years’ worth of “Self-pay” for each person and when the 5 years are up, they can apply for title 19 support for care. You can order your crystal ball at www.amazon.com/tktk.

Mine has been on back order for quite some time. Failing that, we have several principles we can consider for Medicare planning and farm assets. These are different aspects that need to be considered when contemplating long term care.

Spend down.

The general rule is that you need to apply for the spouse in the facility to split the facility bound spouse assets with the spouse that remains out of living in the community. The yearly amount changes as to what exactly the community spouse can have for assets, but the spouse “in the wild” can retain a certain value of assets as theirs to live upon outside the care facility. At a minimum, the spouse in the community will have around $125,000 attributed to them that does not have to be spent down.

Once the excess resource amount is identified, spend it down. Resources can be used to benefit either the nursing home resident or the spouse in the community. Funeral plots and plans, tires, stoves, chairs, beds, roof repair are all valid spend downs. Encourage the community spouse not to skimp on essentials or amenities that they need to function, remembering that their long term partner in crime is no longer available to provide assistance to them.

Understand that once a spouse is made eligible for title 19 assistance, further income or asset collections in the hands of the other spouse are not eligible to be considered a spouses resource for care. That means that a wind fall post title 19 will not cause problems for the spouse in the facility. The “tab” that Title 19 is running will continue to accumulate and become payable when both spouses are deceased.

Specifically turning to Farm Assets. The residence and the surrounding farm ground is exempt from the spend down process. Non continuous chunks are not.

The forty 2 miles from the house is not as valuable as the 40 that touches the homes 120 acres. Consider marshalling assets and trading, swapping, acquiring adjacent ground to create a larger exempt chunk of property.

Gift and Wait.

Gifts made five years prior to the application for title 19 assistance do not count against the applicant. Gifts made within the 5 year period do count against the applicant and can make the applicant ineligible for assistance.

Example

Retiring farmer gave a $500,000 farm to her son 4.5 years ago, prior to entering a

nursing home. She has paid for her nursing home care since then, but

is now out of money. Will she be eligible for Medicaid?

Since the son is not disabled and there is no other exception to the

transfer of assets rules that apply, the retiring farmer will not be eligible since the

gift was within the five-year look-back period prior to her need for

Medicaid.

What is the solution? Son could pay for farmer’s care for another six months, then the

remaining part of the gift could be kept by him without affecting retired farmer’s eligibility. Not only that, but no state agency will get the chance to wax poetic on what the sale price was and whether it was fair in terms and prices.

So, what happens when the kid doesn’t pony up or give back the assets. The gift giver will need a hardship exemption. .A hardship exemption allows resident to be eligible despite a transfer that causes a penalty if:

  1. Penalty would deprive resident of necessities that would endanger

her life.

  1. Resident has exhausted all means to recover the resource, including

legal remedies.

  1. Remaining resources, excluding home, household goods, one vehicle and $4,000 in burial funds, are less than the monthly average cost of facility services.

No hardship waiver will be granted if resource was transferred to person handling the financial affairs of the resident, or to the spouse or children of the person, unless payments cannot be recovered from that person.

Turning back to our example, Retired farmer writes a letter to son and asks for the ground back. If it was a valid gift, that is all the effort retired farmer needs to make. The retired farmer then applies for a hardship waiver. However, the state will likely seek contribution from the son for the value of the asset. The son is foolish not to cover the short fall and now gets to interact with the state agency, which could lead to elder abuse charges in some circumstances.

Life Estates

Life Estates are an asset available to pay for care. For best results, dispose of them prior to applying for Medicare/Title 19. Sell the life estate through a real estate agent or auctioneer. If auctioning an asset, you must document attempts to sell at fair market value and that the auction is properly advertised to the public.

Otherwise, hire an actuary or other disinterested, knowledgeable third party to determine the value of the life estate and sell it at that value after obtaining the consent of DHS.

You can assert the homestead is the life estate and then the life estate value will be collected at time of death if the applicant is otherwise eligible.

Land Contracts

For Medicaid purposes, the seller’s interest in a contract is considered an asset.  The contract can be mortgaged or sold so it has value   Medicaid considers the land contract as personal property. The value of the contract is determined by identifying the value of the contract on the day it was signed and subtracting payments made on the contract, loans on the contract and valuation discounts.  This is the value of the contract.  The contract is an available asset unless:

  • the contract prohibits its sale

2) no one is willing to purchase the contract.  Evidence must be produced by obtaining a letter from at least one individual or organization that is in the business of buying land contracts to say they won’t buy it. 

The contract stays in existence and the buyer just shifts who the payments are made to.  The seller then has cash which can be used for cost of care, other items, or placed into another exempt Medicaid category

What about the payments?  The Medicaid handbook advises the workers to count the interest from land contract payments as unearned income.  The principal is not counted because that is a conversion of one asset to another (land to cash).  Expenses are allowed to be deducted.

The State will not have a lien on a property owned that is being sold with a land contract because the seller’s interest is considered personal property.  However, they may have a claim for the payments being made from the contract or if the contract is sold.  Collection could be difficult if there is no probate, but nevertheless, there may be an assertion for the right to receive payment. Also, in the event the contract if forfeited and title returns to the seller, a lien will attach.

Thieving Children

File a complaint with the DHS Elder Abuse Hotline, 1-800-362-2178.

The DHS staff should investigate the abuse, refer the abuse to the county attorney, who should then establish a guardianship and conservatorship to resolve the problem.

Under Iowa’s new elder abuse law, some counties have been very aggressive in pursuit of financial crimes against elders. It is broadly written and those serving as a POA should be careful to document what they do and avoid any implication that they are benefiting by the POA position.

A solution may be for the facility to petition for a guardianship and conservatorship to take charge of the elder’s finances and resolve the problem. The costs of the action would be paid from the Elder’s income and assets. The conservator could then use the legal system end

further looting and recover the misspent assets.

Unmarried Folks

If you are living together, unmarried and old, conventional wisdom says, you should stay unmarried to avoid having to pay for other’s care. However, if one has no assets and is healthy and the other has assets but is sick, they can get married, transfer the asset to the healthy one, apply for care and have the asset and maybe some of the income attributable to the person going into the facility (up to the limits) considered the asset of the spouse not going into the facility.

Tuesday, May 21, 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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