Episode 73: Year End Tax Strategies

In this episode of AgCredit Said It, host Phil Young discusses tax planning for the upcoming tax season with Alex Schomaeker from Shultz Huber & Associates. The conversation covers various tax-related topics pertinent to farmers and business owners, including changes in tax laws, depreciation deductions, capital gains, health savings accounts (HSAs), estate taxes, and common year-end tax planning mistakes. Alex provides insights into the impact of the 2024 tax changes, the importance of planning for tax deductions, and strategies for managing capital gains and estate taxes. The episode also touches on the beneficial ownership information (BOI) reporting requirements and the recent injunction affecting its implementation. 

Main Topics Covered

1. Tax Changes for 2024: Discussion on the lack of significant tax changes due to the election year, with a focus on depreciation deductions and the phase-out of bonus depreciation.  
2. Depreciation Strategies: Explanation of bonus depreciation and Section 179 deductions, including their impact on tax planning for 2024.  
3. Capital Gains: Overview of capital gains, strategies for deferring taxes, and the importance of planning with an accountant.  
4. Health Savings Accounts (HSAs): Brief discussion on the benefits and tax implications of HSAs for farmers.  
5. Estate Tax and Farm Transitions: Explanation of estate tax exemptions, upcoming changes, and the importance of planning for farm transitions.  
6. Year-End Tax Planning: Common mistakes and tips for year-end tax planning, including the importance of planning and potential deductions.  
7. Beneficial Ownership Information (BOI): Introduction to BOI requirements for business owners and the recent injunction affecting the reporting deadline.

Transcription

Speaker 1 (00:08):Welcome to AgCredit Said It, your go-to podcast for insights on farm finance and maximizing your return on investment. Join us as we talk to industry leaders, financial experts, and area farmers, bringing you skillful advice and strategies to grow your farm's financial future Ag credit setting where farm finance goes beyond the balance sheet.

Phil Young (00:38):Welcome back to another episode of AgCredit Said It where we take you beyond the balance sheet of Farm Finance. Tax season is right around the corner, so today we're diving into taxes, so you're prepared. Our expert guest is Alex Schomaeker from Shultz Huber, welcome Alex.

Alex Schomaeker (00:53):Hey Phil. How's it going? Thanks for having me today.

Phil Young (00:55):Good, good, good. Yeah, glad you're here with us. Yeah. I always start off, can you tell us a little bit about yourself and maybe a little bit about Shultz Huber?

Alex Schomaeker (01:03):Yeah, so Shultz, Huber and Associates here in Van Wert, and then also four other offices, so we're in a total of five. It'd be Van Wert, Defiance, Bryan, Archbold and St. Mary's, so really kind of covering that Northwest Ohio area, full service CPA firm working with a wide range of clients including the farming community, but just really a trusted advisor is kind of what we try to bring to the table at the firm. I am a supervisor, so I'm at that level and I primarily work with businesses and business owners on the tax side of things, including a little bit of farming. So that's just kind of a little bit about me and the firm.

Phil Young (01:48):Nice. How did you get started to taxes and being an accountant? Did you know that from high school or what's your career journey?

Alex Schomaeker (01:57):So it's interesting you say high school. So in high school you kind of have to go through a list of classes and things that you want to take. Accounting was a class that I actually took in high school and really enjoyed the teacher that I had, who's actually the football coach over at Ottawa Glandorf was the teacher, so that kind of got me interested in it. I always was kind of a math guy a little bit, but just kind of like a typical kid. You don't necessarily know what you want to do, so I didn't necessarily just throw a dart at a board, but accounting was something I was into and then actually came over to Defiance College for accounting. So that was just kind of how that all happened.

Phil Young (02:37):Nice. Have you been with other accounting firms or Shultz, Huber, the first accounting firm you've been with?

Alex Schomaeker (02:43):No, since I'm actually in our Defiance office, can't remember if I mentioned that, but with graduating from Defiance College and us having an office here right downtown, I was able to do an internship here at the firm while I was in school. At that point I was at Bowling Green doing my master's, but then yeah, one of the professors was able to get in touch with one of the partners here at the firm and that just kind of made the connection, was able to do an internship and then kind of stuck around and actually celebrated my tenure here this year. So I've been 10 years with the firm and it's been great.

Phil Young (03:21):Nice. Good. Well good. Well, we're happy to have you a part of the podcast, and so we'll kind of dive in here. Obviously with any business tax changes have a direct impact on businesses, bottom line, whether you're an agriculture or not. So what changes do you think our listeners can expect on their 2024 tax returns?

Alex Schomaeker (03:43):Right, so it was no secret. Obviously this year was an election year, so just a whole lot of uncertainty with the election time period, a lot of electioneering and a lot of promises, things up in the air, and what comes along with that is during the election year, things on the tax side are silent. So in terms of huge changes happening for the 2024 year, there's not anything crazy happening. It was just the anticipation for the election and all of that good stuff. But there were a couple things that were already in place that kind of either sunset or have a little bit of an impact for 2024. One of those topics is kind of depreciation deductions, whether it be bonus depreciation or section 1 79. So bonus depreciation, going back to the Tax Cuts and Jobs Act, it was kind of put on a schedule to where bonus depreciation was going to be a hundred percent for a certain amount of years, and then it would've eventually phase out.

(04:49):So the first phase out actually occurred back last year for the 2023 tax year to where it went from a hundred percent in 2022 down to 80% in 23. So that meant that instead of getting a hundred percent depreciation deduction for your asset acquisitions, it dropped by 20% and then that same path is going to happen for 24, so it's actually going to be at the 60% threshold for 2024. So knowing that a little bit, you can kind of pair this bonus in section 1 79 depreciation together a little bit, and you can kind of do some planning, which will be a theme today talking about planning and thinking about structuring items and how do we plan for certain things. But I can envision one of the bigger items we'll be looking at for this year and as we get into preparing filings for taxes and working with folks is going to be what should we do?

(05:44):Should we do bonus? Should we do 1 79? How should we make this make sense? Thankfully, you can have some strategies based on one or the other. I can see ourselves utilizing a lot more. Section 1 79 deductions, the max deduction for 1 79 for 24 is 1,220,000. But unlike bonus, which was kind of allowed to reduce taxable income, it didn't have so many restrictions on it. 1 79 has a couple of those thresholds. One of them being if you have for 2024, over $3,050,000 of acquisitions, certain thresholds start to limit that deduction. So if you're a person or a company or business who's kind of in that higher range of dollar amounts, you could run into some threshold limitations, but I would say for the vast majority of our clients, I guess that may not come into play, but with the farming side of things, that tends to happen when you get into some of those higher dollar values.

Phil Young (06:51):Can you, I guess backing up, I always like to educate people, so if someone's new to farming or maybe hasn't had or just business in general, can you walk through, I guess, what is a section 1 79 and then bonus depreciation and I mean they're similar, I think, correct, yeah. Yeah,

Alex Schomaeker (07:10):They're very similar type items and their net goal is similar, but when you talk about getting income and generating income, you're always thinking about, okay, how can I offset that income? And primarily that happens by way of deductions. So let's say I've made this money during the year, but I also purchased some equipment. Well, that equipment is not just a 100% direct write off. There's an idea here called capitalization. So you have to capitalize that to the balance sheet and then actually depreciate it over a set number of years, which for the tax side of things, depending on the category of the asset, there's a difference number of years based on what it is. So it could be 39 years for a building, it could be five or seven for equipment, whatever the case, and that's the amount of time that you're able to receive those deductions.

(08:08):In the case of bonus in 1 79, you can accelerate that going back to the a hundred percent, 80% and 60% in those years in which it was a hundred percent for bonus, you could utilize that 100% deduction in the first year and you wouldn't have to wait to years 2, 3, 4, 5, and six, since some of those thresholds are reducing. Now, obviously now in 2024, it's going to be 60%, so it's not quite as advantageous. It's still great, but you're not getting as much as you had in the past. And then section 1 79 is doing the same thing. It's accelerating those depreciation deductions. 1 79 doesn't necessarily have a percentage limit. The limits are just kind of that $3 million on acquisition threshold that I talked about. So if you're kind of under that threshold, especially for newer businesses, 1 79 for 2024 will probably be more advantageous because in terms of accelerating depreciation, you'll be able to get a hundred percent of it in many situations. It's just always an analysis, but which one do you want is more advantageous? Should we do bonus? Should we do 1 79? What is it looking like based on the tax year? What are the rules? So yeah, so a lot of planning comes into an effect with that. But really the idea here is kind of accelerating depreciation deductions.

Phil Young (09:38):Gotcha. And I know I think from and bonuses is not going away. It stopping at 60% or is it going to go away

Alex Schomaeker (09:47):Eventually? Think it phases down. I didn't, don't know. I think it phases down in 20% increments until it goes away.

Phil Young (09:54):

Does it? Okay.

Alex Schomaeker (09:55):I would envision with the new administration coming in, I would really be shocked if they didn't take a look at this because that was one of the big things the first go around was I this idea of a hundred percent bonus depreciation. So I'd really be looking forward to here in the coming months, probably in this next year, that could be a topic that's on the table to kind of reinstate bonus a little bit. I would really envision seeing at least something addressed on it.

Phil Young (10:25):Okay, nice. There's no tax rate changes or anything like that from your perspective changing?

Alex Schomaeker (10:32):So tax rate changes generally we have on the individual side, the different brackets. The brackets are not changing, but what changes is just kind of the income thresholds that usually just get adjusted for inflation every year and they just bump up a little bit. So in terms of those tax rate changes, it's usually just inflation adjusted and very similar to prior years.

Phil Young (11:02):Switching gears to capital gains is a topic that I kind of encounter on the lending side a little bit, and it's obviously a hot topic in the farming community. And from your perspective, can you kind of walk listeners through capital gains and maybe ways to dodge capital gains and how that can be done?

Alex Schomaeker (11:24):Yeah, so in terms of thinking about capital gains, thinking about different items that can trigger either a taxable event or what have you really, it's really about deferring is kind of the concept. Uncle Sam's always going to get his piece. It's just kind of the timing of it. In terms of planning, there's not a whole lot of things that you can just get rid of tax, but you can always try your best to defer it a little bit of in the farming community, this concept of 10 31 exchanges for land or real estate continues to be popular. And what we're doing there is saying if you have a piece of land that you're selling, which would trigger that capital gain, if you walk through the correct steps and go through that process, you have to have an intermediary, a third party kind of handle the funds.

(12:19):You got to make sure you don't kind of receive those funds personally. There's all these different triggers and things when you're doing a 10 31 exchange that you need to be aware of. But the idea there is that we can take that gain and maybe defer it later and kind of turn around and reinvest those dollars back into something else to kind of continue the process. So it's not really taking away the tax, you're just kind of pushing it down the line, which is great in certain items, but there's, in terms of capital gains, that's kind of the idea is let's take a look at it, let's plan about it or do some planning around it. And depending on your situation, there could be certain things that can be done to help mitigate some of those gains.

Phil Young (13:06):Okay. And I guess I know in the tax rate for capital gains, it's different based on income level, is that correct?

Alex Schomaeker (13:17):Yeah, so capital gains, if you're thinking individual 10 40 side, we've got the concept of ordinary income versus capital gain income.

(13:27):Ordinary income is usually the rates we talked about. Since we have the progressive tax system, those rates can go all the way up to 35, 37, whatever the top percentage is. And then there's different categories of income that are considered ordinary, and then the capital gains rates are lower than that, which is kind of in the 20 to 25% range. So in terms of what kind of gain do you want, you generally want a capital gain just because that results in kind of a lower percentage. But depending on the category of what we're talking about, it's generally either ordinary or capital in nature

Phil Young (14:08):Is the best thing. If you're thinking about doing like, Hey, I've got 50 acres I want to sell, and is it best to sit down with you, someone like you, your accountant and war game out, what this looks like and the trickle down effect for it, would you advise that?

Alex Schomaeker (14:23):Yeah, definitely. Anytime, even if you're thinking about something, if you can get in touch with your accountant or whoever your advisor is or whatever the case, the planning there is huge. Because if we've had some individuals come to us who didn't necessarily talk to us at the beginning and we're like, oh, shoot, you should have done this, or whatever. So

(14:43):The key there is not letting things get too far down the road to where you could be getting into a situation that you're either uncomfortable with or don't have the most expertise in. So being able to involve us in that process is always critical. And I would certainly advise individuals if they're thinking about it. Sometimes those things you're thinking about a year in advance, and even though they may not happen for a year, just you don't, don't even have to have a sit down, but just relaying as much as you can to know that we can plan for it is usually your best bet.

Phil Young (15:17):Yeah, it's always easier to say, Hey, let's tweak it. Versus like, oh no, you shouldn't have done that.

Alex Schomaeker (15:23):It's a lot harder to play catch up.

Phil Young (15:25):Yeah, right. Yeah, that I want to switch gears a little bit too on this one is I want to talk about health savings accounts, HSAs. I think a lot of farmers are starting to use HSA accounts. Is there anything that you can speak of on the HSA side or health savings accounts as far as people in agriculture and how to use them?

Alex Schomaeker (15:50):As far as on the accounting side, there's not a whole lot there. Again, HSA limits are those things that tend to just increase as inflation increases. So I think for 2025, as these items will start to kick in for everyone in this coming turn of the year, I think the limits are about 3% higher than they were in 24. So for individuals, I think that number is $4,300 and then families about $8,500. But yeah, hs. A plans are definitely popular with the ever increasing insurance costs and premium increases and all of these things that we see anytime that you kind of have that high deductible plan to where hs A is kind of accompany that those are a benefit. So on the accounting side and kind of the tax side, there's not a whole lot of changes except for those kind of normal bumps that we tend to see

Phil Young (16:51):May hs. Is that a writeoff situation where you can write that off or how does that work from how can you work that as a tax benefit?

Alex Schomaeker (16:59):So it's not necessarily a direct write off. HSAs have, depending on income thresholds and all of these other things, you have to go down the chart to see if there's any deduction related to it or if there's an offset to income here or there. So I'll just try to keep that high level, but you got to be able to work that through based on your income limits. And sometimes there's a benefit on the tax side and tax return, sometimes there's not.

Phil Young (17:26):Okay, gotcha. Farm transitions. So moving the farm to the next generation, I wanted to talk about estate tax, the exemptions for that, where they're at now and where do you think they're going to go in the future? And actually just walk through what it is, yeah, what the estate tax is and then how that applies in certain situations.

Alex Schomaeker (17:53):So estate tax is another item as we talk about big hitters of things that you need to start thinking about. So the whole idea of estate tax is again, planning, which is kind of a theme for today. There's called this annual exclusion or lifetime exclusion to where if you're looking to pass assets down or passing things down to the next generation, there's kind of this threshold that always kind of hangs out there that changes every year, but there's a limit. So if you're wanting to pass down assets, once you pass this limit is when you can start triggering taxes. And that limit historically has been for the average person, has been a pretty high dollar amount. Now, when we kind of correlate that, I'll tell you what that number is here in a second, but when we correlate that to farming, it's not so big it can get for farming, and you're talking about land and you're talking about appreciation and you're talking about generations of family farms. Historically that number has kind of hovered around 12 million or 13 million. I think for 2024, I have it here, 13 six is the number.

(19:11):So for myself, if I'm not in that type of a bracket, I can kind of pass my complete estate down and not have any taxes associated with it. But once you pass that threshold, then you have to have, you're triggering taxable events. So that's kind of the number is 13.6 million and depending on where your total estate or asset threshold is, that's the number that you got to be thinking about. So the big key though that is going to be happening later on is at the end of 2025. So at December 31st, another sunset provision was that that 13.6 number is going to get cut in half or more. So I think it's going to be around 5 million for individuals that are in that category. All of these estate taxes and all of these things that previously a lot of people didn't have to think about may have to start thinking about and planning for, because if you're looking to pass down a large amount of assets, taxes could come into play. So kind of a lot there, but there's really kind of a threshold to keep in mind. And then also in terms of just annual gifting, there's other items that come into play there.

Phil Young (20:35):Okay. So definitely another big item you need to talk to your accountant on. If you're thinking about doing this and eyeballing a transition and kind of putting a game plan together

Alex Schomaeker (20:47):In terms of those kind of annual gifting exclusions for 2024, that number was 18,000, and then for 2025, it's 19,000. The idea there is those are the exclusions. So if I wanted to gift somebody $18,000 after I got over 18,000, I would have to report that on a gift tax return. The exclusion is, it adds up over the course of the year per individual. So if you make multiple gifts to the same person, that's kind of a rolling number. But for 2025, that number is 19,000.

Phil Young (21:28):Okay, gotcha. Okay. Can you share some maybe common year end tax planning mistakes? We are always trying to learn from each other's mistakes, and I think it's a big part of this podcast is just to learn. So do you see some common mistake farmers make at year end or tax time that you can kind of give tips on?

Alex Schomaeker (21:53):Yeah, so one of 'em, which we've talked about a little bit, is just planning. Farmers really are pretty good planners, to be honest with you. They're always thinking about how the year's going. If it's an up year, if it's a down year, farmers are really good at planning. That typically begins kind of in October as we're kind of getting into the fourth quarter. But that one normally isn't necessarily a mistake per se, but that's just something obviously to continue to keep in mind. Another includes deductions. Again, not necessarily a mistake, but maybe something individuals can think a little bit differently about. We talked about ordinary versus capital gain income. Sometimes it's advantageous to pay tax at a lower rate. So oftentimes I hear with clients and individuals, where can I find deductions? How do I create deductions? All of these things. But there could be a point in time, like I said before, eventually you're going to have to pay some taxes.

(22:49):So if there's a situation that arises during a certain year to where you're falling into those lower rates, maybe it's a good idea to hold off on some of those deductions and maybe wait if we can, depending on what it is to push it into another year to where you might think you have more income next year if the outlook is looking a little bit better. So again, a kind of planning type item, but super important to walk through with your accountant to say, okay, maybe this is a year that we should start paying some of those taxes to kind utilize those lower rates if that's a situation we find ourselves in. So that's one item to think about. Another item, which is kind of on the table but not always applicable is farmers have this income averaging that is allowed to be applied, which you can, I'll keep this high level, but instead, because farming can be really plentiful in one year and it could be down on other years, but the IRS allows this income averaging to where you can spread that out over the course of time a little bit. So again, another item just to at least hear that and say, okay, well maybe I should talk about this with my accountant to see if it applies to me, would be income averaging.

Phil Young (24:09):Okay. Last question for you. Any specific types of business expenses farmers should consider accelerating before the end of the year here?

Alex Schomaeker (24:21):In terms of kind of accelerating things? Again, going back to it really just depends on what type of year you're in and if it makes sense to do so. A couple of those things going back to ordinary versus capital gain, anytime you can identify those ordinary items that you can repay and receive a deduction for in the current year would be those types of items you should think about. One of them would be interest deductions. So if you have a mortgage that, or some type of debt that you maybe pay on a quarterly basis or if you pay it on an annual basis and maybe make one payment a year. So if you normally make that payment in September on September 30th, well from September 30th to the end of the year, there's three months there that are basically accrued and you could go and make an interest only payment at the bank so that those dollars, those interest amounts were paid in the current year and apply to that year, but you're just kind of prepaying them sometimes that makes sense to do. Another one kind of in that same category would be real estate taxes, since those are paid either on a yearly basis or twice a year, the same concept would apply there that you could do some of those prepayments if you needed to utilize some deductions in the current year. That would just be another way to help do that.

Phil Young (25:45):Nice. Okay, Alex, any last minute tax advice or final thoughts you want to leave with listeners?

Alex Schomaeker (25:52):So the final thing that I would throw out there, some of your listeners may have heard this concept of BOI, which is beneficial ownership information. This was actually an item that kind of started maybe around the beginning of 2024. It's kind of been in the news a little bit if you've been following this type of stuff. But beneficial ownership information was something that FinCEN put together, which is government related for the financial enforcement crimes network, and it applied to business owners. So in specifically anyone or any business that was originated or started by filing documents with the Secretary of State and trying to keep a long story short, what was enacted for this year was that anybody or any business LLCs specifically that had beneficial owners needed to report this information to FinCEN. And that, like I said, kind of started in 2024. So what we saw over the course of the year was this kind of started out as an attorney question and kind of a legal matter because obviously accountants are not allowed to practice law. And that's kind of where this thing kind of started. Later on in the year, we found out that it wasn't necessarily a practice of law and accountants were able to assist with some of these items for folks. And really what it amounted to was FinCEN was requesting specific information of business owners, whether it be their name, address, and essentially a photo id.

(27:31):What ended up happening here recently actually was in the state of Texas, an injunction was put on BOI to where it was kind of a temporary injunction to where it wasn't necessarily considered constitutional or allowed what have you, but kind of the PSA or public service announcement for people is to kind of think about that a little bit. If you're an LLC owner, if you're part of a business, and if you've never heard of this, this is just kind of a PSA to get in touch with your lawyer or your accountant to kind of see what that means for you. There's a lot of questions surrounding this topic. The initial date to make all of this happen. The deadline was December 31st or January 1st, 2025. So we're really approaching that date rather quickly. And really, it just kind of comes down to a lot of questions. So really wanted to bring up BOI kind of at a very high level just to make sure everyone's kind of aware of it, and it's really going to come down to what kind of happens here towards the end of the year, but just so that people have it on their minds and that they can talk to their advisors to make sure everything's on the up and up.

(28:45):Just wanted to make sure everyone was aware.

Phil Young (28:48):Yeah, it's been a topic we've been bringing up with borrowers and I think end of November, beginning of December I think is when this injunction got put in place. And before that, I mean if you had the deadline was, I think, yeah, January 1st or December 31st here at the end of the year to get filed. There were some hefty fines attached to it if you didn't do it by the deadlines. So like you mentioned, but the injunctions in place so that maybe the scariest of those fines has kind of gone away until stuff gets sorted out in the courts. But yeah, definitely the

Alex Schomaeker (29:23):Fines for this thing was massive. And if I would encourage everyone, you can always go out to Fence Ends website and they've got different alerts out there and you can read through different things and just kind of get an idea. There's not a whole lot out , but there are a few things on FINCENs website just to try to, like I said, just make sure everyone's aware.

Phil Young (29:46):Yep. Ohio Secretary of State website has a good page on it too. But yeah. Good. Last minute thought, Alex. Appreciate it. Yeah, so thanks for joining us today and thank you to our listeners for tuning into another episode of AgCredit Said It. I think we can all take away some useful information today from this conversation, so I know I did. So thank you, Alex.

Alex Schomaeker (30:07):Yeah, appreciate you guys and to everyone out there, merry Christmas and Happy New Year.

Phil Young (30:11):Good, good. This will do it for our 2024 episodes. We'll talk again in the new year. Thank you guys.

Speaker 1 (30:24):Thank you for listening to AgCredit Said it. Be sure to subscribe in your favorite podcast app or join us through our website at agcredit.net so you never miss an episode.