A2B-Lancast*r Fanning, Saturday, Fabruary 13, 1988
' BY KARL BERGER
Special Correspondent
“Are you electing not to capital
ize certain preproductive period
expenses?”
Forget about the loss of the capi
tal gains exclusion or the new lim
its on the use of prepaid expenses
to reduce taxable income. The
question that the Internal Revenue
Service poses on Schedule F of the
1987 tax return may be the most
important choice many farmers,
particularly dairymen, face this fil
ing season, according to several
tax specialists.
The new rules on preproductive
expenses are among the most con
troversial created by the Tax
Reform Act of 1986. Farm groups
across the country are crying foul
and lobbying hard to have them
changed. In the meantime, howev
er, individual farmers and their tax
preparers must wrestle with a com
plex calculation that could have
consequences for many years to
come.
The rules establish new capitali
zation requirements for assets,
such as dairy or beef cows, that
take more than two years to deve
lop. It’s also no longer possible to
slip in such livestock under the
two-year limit, because the IRS
has decided the preproductive per
iod begins at the time of breeding,
not birth.
Under the old tax code, most
farmers simply lumped feed, vet
erinary bills and other heifer
raising costs together with those of
the cow herd and deducted them as
expenses in the year in which they
occurred. The new rules require
dairymen to separate these costs
SCHEDULE F
(Form 1040)
Department of the Treasury
Internal Revenue Service
Name of proprietor
A Principal Product (Describe in one or two words your principal crop or output for the current tax year)
C Accounting Method
D Cash
E Did you make an election in a prior year to include commodity credit loan proceeds as income in that year 7 □ Yes □ No
F Did you "materially participate in the operation of this business during 1987’(See Instructions for limitation on losses ) D Yes □ No
If “No” and you have a loss on line 37, you must attach Form 8582
G Are you electing not to capitalize certain preproductive period expenses’(New rules apply to these expenses, see Instructions ) □ Yes □ No
Farm Income —Cash Method—Complete Parts I and II
(Accrual method taxpayers complete Parts II and 111, and line 12 of Part I)
Do not Include sales of livestock held (or draft, breeding, sport, or dairy purposes; report these sales on Form 4797,
Sales of livestock and other items you bought for resale
Cost or other basis of livestock and other items you bought for resale
Subtract line 2 from line 1
4 Sales of livestock produce, grains, and other products you raised
5 a Total distributions received from cooperatives (from Form 1099 PATR)
b Less: Nonincome items
Net distributions Subtract line 5b from line 5a
Agricultural program payments
a Cash
b Materials and services
Commodity credit loans under election (or forfeited)
Crop insurance proceeds If election attached to include in income in year following damage check here ► [Z3
Machine work (custom hire) income
Other income including Federal and state gasoline tax credit or refund (see Instructions)
Gross income Add amounts on lines 3, 4 6 and 7a through 11 If accrual method taxpayer enter
the amount from Part 111 line 52 ►
Farm Deductions —Cash and Accrual Method (Do not include personal or living expenses such as taxes, insurance,
repairs etc on your home )
13 Breeding fees
14 Chemicals
15 Conservation expenses (you must
attach Form 8645)
16 Depreciation and section 179 ex
pense deduction (from Form 4562)
17 Employee benefit programs other
than on line 26
18 Feed purchased
19 Fertilizers and lime
20 Freight trucking
21 Gasoline fuel oil
22 Insurance
23 Interest
a Mortgage (paid to financial institu
tions)
b Other
36 Total deductions from Part II Add amounts in columns for lines 13 through 35c
37 Net farm profit or (loss) Subtract line 36 from line 12 If a profit enteron Form 1040 line 18 andon
ScheduleSE line 1 If a loss you MUST go on to line 38 (Fiducianesand partnerships see Instructions )
38 If you have a loss you MUST answer this question “Do you have amounts for which you are not at risk in this
business’ (See Instructions )
lf Yes,” you MUST attach Form 6198 If No," enter the loss on Form 1040 line 18 and on Schedule SE line 1
For Paperwork Reduction Act Notice, Me Form 1040 Instructions
Taxes
(including an appropriate share of
overhead) and, generally, to set
them aside in a capital account that
can be depreciated when a heifer
begins to produce milk.
The option to continue deduct
ing these costs as a current-year
expense still exists for the vast
majority of farmers who use cash
accounting, but there is a major
catch. Doing so will force farmers
to use what the IRS calls the “alter
native depreciation system,” a
slower, straight-line method, on all
assets placed in service in 1987
and, probably, subsequent years as
well. Under this system, single
purpose farm structures, for
instance, will take 15 years to write
off rather than the seven years
allowed by the current rapid depre
ciation system known as MACRS.
Most machinery will take 10 rather
than seven years.
The choice, on both preproduc
tive expenses and, hence, depre
ciation, appears all but irrevocable
under current regulations, accord
ing to tax specialists. Farmers can
change methods only with the
written permission of the IRS, an
unlikelihood, they said.
The difference between the two
depreciation systems apparently is
enough to make many local dairy
men choose the capitalization
route. Donald Hull, who runs a tax
preparation service for farmers in
Carroll County, Md., said recently
all of the dairymen he’s helped to
date have opted to capitalize
despite the extra accounting work
involved and the reduction in
write-offs this year because
expenses are so much less. (After
several years, when the heifer
Farm Income and Expenses
► Attach to Form 1040, Form 1041, Form 1041 S, or Form 1065.
► See Instructions for Schedule F (Form 1040).
I I Accrual
Focusing In On Preproductive Expenses
24 a Labor hired
b Jobs credit
c Net labor hired (subtract line 24b
from line 24a)
25 Machine (custom) hire
26 Pension and profit sharing plans
27 Rent of farm pasture
28 Repairs, maintenance
29 Seeds plants purchased
30 Storage, warehousing
31 Supplies purchased
32 Taxes
33 Utilities
34 Veterinary fees, medicine
35 Other expenses (specify)
a
depreciation schedules now being
established are in full swing, this
difference should disappear,
according to the specialists.)
Actually figuring the cost of
raising heifers is a problem for
most farmers, who lack such
detailed records. However, the IRS
has okayed the use of two standard
inventory systems the farm
price method and the unit
livestock-price method
although farmers must be prepaid
to justify the figures they use.
Under the farm-price system,
the cost of raising a heifer is valued
at its market price less the cost of
trucking, commissions and other
marketing charges. To obtain
market prices, Dave Swartz, an
Extension agent in Chester Coun
ty, Pa., has suggested that farmers
simply can clip out several market
reports from a nearby auction.
Other advisors are more skeptical.
Under the unit-livestock-price
system, heifers can be grouped by
age and a standardized cost
assigned to each group, according
to Don Hummel, a tax specialist
with the Pennsylvania Farmers
Association’s Farm Management
Service. A farmer using such a sys
tem could assign $lOO, for
instance, as the cost of any heifers
between zero and six months old
on Dec. 31. He could add another
$l5O for those six to 12 months
old, $250 for 12-18 months and
$3OO for 18-24 months. The total,
$BOO, is within reasonable limits.
“We think it costs between $7OO
and $l,OOO, or maybe more, to
bring a heifer into production. If
you’re way off from that, you may
be in trouble,” Hummel said.
OMB No 1545 0074
liB7
Attachment
Sequence N<
Social tacurlty number (SSN)
B Agricultural Activity Code
(from Part IV) ► i
D Employer ID number (Not SSN)
I
IF
m/m
□ Yes □ No
Schedule F (Form 1040) 1987
Hull suggested an interesting
variation on this system. He’s been
advising his clients to calculate
their total heifer-raising days (as of
a Dec. 31 inventory) and then
simply multiply this figure by a
cost of $1 a day, a figure justified
by university research, he said.
Unfortunately, even the farmers
who choose not to capitalize must
be worried about these costs.
Many farm tax advisors, interpret
ing IRS fine print, say those who
expense these costs must be pre
pared to treat their animals as Sec
tion 1245 property when they are
sold, say as cull cows. Because this
section requires an estimation of
the amount that otherwise would
have been depreciated, these far
mers, too, must worry about
heifer-raising costs.
Choosing between the two alter
natives is proving to be a costly,
time-consuming accounting job in
itself. In general, farmers who
Livestock market
Indiana
Livestock
Homer City, Pa.
Thursday, February 11
Report supplied by PDA
CATTLE: 208. Couple High Choice
70.00 & 70.25; Choice 65.00-69.50; Select
61.00-64.50; few Standard 57.00-60.50;
Choice heifers 64.00-67.50; Select
59.0a62.50; few Standard 54.0a57.00;
cows Breaking Utility & Commercial
49.50-52.00.; Cutter & Boning
45.0a49.00; Canner* Cutter 41.0a45.50;
shells down to 37.00; few Select si. bul
locks 61.0a62.75; Standard 55.00-59.00;
YG 1 bulls 120ai950 lb. 55 0a65.00.
FEEDER CATTLE: Few Med. 1,
35a395 lb. steers 80.0a84.00; few Med. 1,
325-450 lb. heifers 67.00-77.00; few
50a650 lb. 63.0a67.50.
CALVES: 84. Few Choice
116.00- few Good 98.00-111.00;
Standar & Good 90-120 lb. 78.00-93.00;
60-85 lb. 71.00-89.00; hoi. bulls 90-120 lb.
111.00- few beef cross bulls and
heifers 80-110 lb. 90.00-114.00.
HOGS: 260. .50-1.00 higher, few low
1-2,220-250 lb. 48.50-49.25; 1-3,215-260
lb. 47.00-48.25; US 1-3,400-600 lb. sows
36.25-38.75; 2-3,400-690 lb. 32.75-36.00.
FEEDER PIGS: 10. No market test
SHEEP: 8. Few High Choice 77 lb. wool
lambs 89.00; few Choice 97 lb. 82.00; cou
ple si. ewes 32.00 & 40.00.
Jersey Shore
Livestock Market, Inc.
I I
Y//////M
Auction every Thursday
at 4:00 p.m.
Jersey Shore, Pa.
Report supplied by Auction
Thursday, Feb. 11, 1988
m
RETURN TO FARM CALVES
100.00-182.00.
GOOD VEAL 90.00-112.00.
COMMON VEAL 70.00-100.00.
CHOICE STEERS 68.00-73.75.
SELECT STEERS 64.00-69.00.
COMMON STEERS 57.00-63.00.
COMMERCIAL COWS 48.00-53.75.
CANNERS-CUTTERS 44.00-49.00.
SHELLS 38.00-43.00.
CHOICE HEIFERS 65.00-70.00.
SELECT HEIFERS 60.00-64.00.
COMMON HEIFERS 48.00-59.00.
GOOD FEEDERS 70.00-97.00.
COMMON FEEDERS 41.00-69.00.
BULLS 53.00-62.00.
GOOD HOGS 47.00-49.34.
HEAVIES 42.50-47.00.
SOWS 30.00-38.50.
Greencastle
Livestock
Greencastle, Pa.
Thursday, February 11
Report supplied by Auction
CATTLE: 304. Cows steady to 1.25
higher; few Select steers 61.25-65.25; few
Standard 54.50-56.75; few Utility
50.00-60.00; one Choice heifer 67.00; few
Standard 55.00-57.85; cows Breaking Util
ity & Commercial 48.00-54.25; Cutter &
Boning 47.00-52.00; Canner & Cutter
44.25-47.75, shells down to 40.00; YG 1
bulls 1160-2235 lb. 55.75-63.00; few Med.
1 heifers 300-500 lb. 72.00-82.00.
CALVES: 438. One Choice vealer
108 00, Standard & Good 70-100 lb.
89 00-97.00; Utility 60-80 lb. 78.00-90 00;
raise a lot of replacement heifers
and who plan on little investment
in new capital assets may be better
off not capitalizing, especially
with the Section 179 deduction
increased to $lO,OOO for 1987. The
reverse would be true for dairymen
in the opposite boat But the spe
cialists say that each individual
case is different
Complicating the task even
more is the possibility that Con
gress might change the rules (and
perhaps revoke the alternative
depreciation requirement for far
mers who didn’t capitalize this
year). Lobbyists for the National
Cattlemen’s Association, the
National Milk Producers Federa
tion and other farm groups are try
ing to have preproductive
expenses returned to their previous
status in a tax-correction bill now
working its way through Congress.
Although optimistic, officials such
as NMPF’s Jim Bair say there are
no guarantees.
laim calves steady; hoi. bulls 85-95 lb.
95.00-120.00; 95-130 lb. 120.00-170.00;
heifers 85-125 lb. 91.00-138.00.
HOGS: 63. No barrows & gilts; sows US
1-3,300-775 lb. 33.50-37.50; couple boars
21.50 & 25.25.
SHEEP: 7. Couple Choice 115 lb. wool
lamb 69.00.
East Coast Carlot
Wed, Feb. 10, 1988
Report supplied by USDA
EAST COAST CARLOT MEAT
TRADE DELIVERED PRICES (CAP)
BOSTON TO WASHINGTON AREA
INCLUSIVE.
COMPARED TO TUESDAY’S
CLOSE: CHOICE AND PRIME SPECIAL
FED VEAL GENERALLY STEADY.
GOOD AND CHOICE BONING VEAL
GENERALLY STEADY IN LIMITED
COMPARISON: INSHIPPED
UNTESTED. CHOICE AND PRIME
LAMB NOT ESTABLISHED, STEADY
TO WEAK.
VEAL CARCASS
HIDE-ON
CHOICE & PRIME
SPECIAL FED
250 HEAD
220-280 LBS. 190.00-196.00. GENER
ALLY STEADY.
GOOD AND CHOICE
BONING TYPE - HIDE ON
NORTHEASTERN SUPPLIERS
525 HEAD
65-75 LBS. 124.00-126.00,
GENERALLY STEADY.
55-64 LBS. 120.00-122.00.
45-54 LBS. 116.00-118.00.
35-44 LBS. 112.00-114.00.
34 LBS. DWN 110.00-112.00.
INSHIPPED
NO SALES REPORTED.
Central U.S.
Carlot
Pork Report
Wed, Feb. 10, 1988
Report supplied by USDA
CENTRAL U.S. CARLOT PORK
REPORT FOB OMAHA BASIS
INCLUDES MAJOR PRODUCTION
AREAS IN MIDWEST AS OF 3:00 P.M.
COMPARED TUESDAY’S 3:PM
CLOSE: FRESH PORK LOINS 14-18#
AND BOSTON BUTTS GENERALLY
STEADY; SKD HAMS 1.25-2.50 HIGH
ER; SDLS BELLIES 1.75-3.00 HIGHER.
TRADE SLOW TO MODERATE FOR
LIGHT TO MODERTE DEMAND AND
LIGHT OFFERINGS.
US #2 175 LB. HOG CARCASS
ADVANCED 1.32 TO $63.27 P/CWT.
LOADS PORK CUTS 48.00.
LOADS TRIM/PROCESS PORK 11.00
PORK CUTS
OMAHA BASIS
LOINS, REGULAR
FRESH
14-18 LBS. 14.5 LDS. 96.00-102.00, M
99.00.
18-22 LBS. 3.0 LDS. 93.00-96.00.
22/UP LBS. 74.00 D.
BNLS. CENTER
CUT LOIN
1.0 LD. 236.00-239.00.
TENDERLOINS
2/BAG 0.5 LD. 260.00-289 00
PICNICS
4-8 LBS. 51.00 A.
BOSTON BUTTS
4-8 LBS. 7.0 LDS. 59.00-64.00.