Going into business for tax deductions

[Qs Laptop]

So, if I got into the cattle business on shares,

What does this mean? You're going to buy shares in an existing business and be a partner?

I would buy the cattle

OK, so the cattle would be considered inventory and not an expense? Am I right? If so, there goes your largest outlay of cash and it's not something you can expense for tax purposes.

and someone else would run them

So, you'd have employees?

and would most likely break even or not break even in most years.

Again, are there multiple shareholders? Depending on the business structure, any losses would be proportionally divided amongst them. Or not.



The first thing to determine is what kind of business structure are you going to be involved with? Sole proprietorship, S-corporation, LLC, or C-corporation? The type of structure will largely determine what kind of expenses you can count as personal losses.

I suggest talking to a tax attorney that specializes in business startups. It sounds like you've got a lot to learn about and frankly, your scenario sounds a lot like what OldShooter described.

 

[calmloki]

We purchased a farm house and lived there several years. ....
. These cattle were huge. The breed sounded like "Sharley" though I have no idea on the spelling. That's a big animal.

.... YMMV

Charolais. They are a cream colored French beef animal highly regarded for production and meat quality. Not as pretty to my eye as a Hereford, but big for sure with serious hindquarters.

 

[Koolau]

Charolais. They are a cream colored French beef animal highly regarded for production and meat quality. Not as pretty to my eye as a Hereford, but big for sure with serious hindquarters.

Oh, my, big is right. When I saw that "little" girl out there whacking those beasts on the behind, I was sure she was a goner. But the big old cows simply knew where to go and went.

I did like that cream color.

 

[pb4uski]

... OK, so the cattle would be considered inventory and not an expense? Am I right? ....

Cattle are capitalized and depreciated and in the old days were subject to investment tax credit and investment tax credit recapture if not held long enough. One of my first clients had six-figure high butterfat milk cows for breeding in the late 1970s.

Semen is inventory.

 

[Qs Laptop]

Cattle are capitalized and depreciated and in the old days were subject to investment tax credit and investment tax credit recapture if not held long enough. One of my first clients had six-figure high butterfat milk cows for breeding in the late 1970s.

Semen is inventory.

Yes, that makes sense. I knew cattle would show as an asset on the balance sheet and would not be an expense.

I know there has to be a joke about the inventory, just can't think of anything right now.

 

[Texas Proud]

My first question would be what is your tax rate? Unless you are way up there the benefits are minimal...


Also, how much money are you talking about deducting? Again, if not way up there the benefits are minimal...


How long will it take to raise the livestock in order to sell? I would assume you will want to sell at a profit and that means you MIGHT get a deduction this year but income next..


Way back in the early 80s I did taxes and there was this cattle deduction scheme sold to very high tax bracket people... all it did was move some income from one year to the next... so they did it again the next year but got no benefit as they were now just covering the gain they made on the sale of cattle..

 

[street]

What does this mean? You're going to buy shares in an existing business and be a partner?



OK, so the cattle would be considered inventory and not an expense? Am I right? If so, there goes your largest outlay of cash and it's not something you can expense for tax purposes.



So, you'd have employees?




Again, are there multiple shareholders? Depending on the business structure, any losses would be proportionally divided amongst them. Or not.



The first thing to determine is what kind of business structure are you going to be involved with? Sole proprietorship, S-corporation, LLC, or C-corporation? The type of structure will largely determine what kind of expenses you can count as personal losses.

I suggest talking to a tax attorney that specializes in business startups. It sounds like you've got a lot to learn about and frankly, your scenario sounds a lot like what OldShooter described.

I know many ranchers and I would buy some cattle and he would run them on his place. I would pay expenses for my 50 head, and he would just keep them and winter them. No employees but him and me and I might spend a week to 10 days helping during the year. I could run them on my place, but I don't have watering in that high country. I'm not going to go through that, and a drilling truck couldn't get to most of it.

 

[street]

My first question would be what is your tax rate? Unless you are way up there the benefits are minimal...


Also, how much money are you talking about deducting? Again, if not way up there the benefits are minimal...


How long will it take to raise the livestock in order to sell? I would assume you will want to sell at a profit and that means you MIGHT get a deduction this year but income next..


Way back in the early 80s I did taxes and there was this cattle deduction scheme sold to very high tax bracket people... all it did was move some income from one year to the next... so they did it again the next year but got no benefit as they were now just covering the gain they made on the sale of cattle..

First year getting bought in about 100K than sell calves in fall and repeat selling and culling out and sell the next year.

Like you said it could put me into a higher bracket or not give me enough tax credit to be worth any real benefit for me.

Thanks

 

[pb4uski]

I know many ranchers and I would buy some cattle and he would run them on his place. I would pay expenses for my 50 head, and he would just keep them and winter them. No employees but him and me and I might spend a week to 10 days helping during the year. I could run them on my place, but I don't have watering in that high country. I'm not going to go through that, and a drilling truck couldn't get to most of it.

So I don't see the play or where the tax benefits come from. You would get a depreciation tax benefit but that is just your money and you would get deductions for your expenses like vet bills, feed if any, etc. and have income for cattle sold, slaughtered for beef, etc.

OTOH, if you don't make money every so often then the IRS could come in and claim your cattle operation is a hobby and deny all past deductions.

And if you make money... proceeds from sales of calves exceed depreciation and expenses... then it is taxed. So where are the benefits?

 

[street]

So I don't see the play or where the tax benefits come from. You would get a depreciation tax benefit but that is just your money and you would get deductions for your expenses like vet bills, feed if any, etc. and have income for cattle sold, slaughtered for beef, etc.

OTOH, if you don't make money every so often then the IRS could come in and claim your cattle operation is a hobby and deny all past deductions.

And if you make money... proceeds from sales of calves exceed depreciation and expenses... then it is taxed. So where are the benefits?

yep!!! Thanks for your tax experience knowledge.
Like I said, you don't always make a profit in the markets just like cattle markets. Expenses vary and so does income through the years. My thought it might benefit me on those thin years in tax. Like you said it may be just a wash from good to bad years.

If I made money that would be a good thing.

 

[Koolau]

yep!!! Thanks for your tax experience knowledge.
Like I said, you don't always make a profit in the markets just like cattle markets. Expenses vary and so does income through the years. My thought it might benefit me on those thin years in tax. Like you said it may be just a wash from good to bad years.

If I made money that would be a good thing.

Heh, heh, or you could just put the money in 5% CDs that you can now find. Sit on your front porch, gaze out over your land and (dare I say it) relax!

Not suggesting that is better, but it would be safer and you just might make more money.

What ever you do, keep us posted, street.

 

[Texas Proud]

So I don't see the play or where the tax benefits come from. You would get a depreciation tax benefit but that is just your money and you would get deductions for your expenses like vet bills, feed if any, etc. and have income for cattle sold, slaughtered for beef, etc.

OTOH, if you don't make money every so often then the IRS could come in and claim your cattle operation is a hobby and deny all past deductions.

And if you make money... proceeds from sales of calves exceed depreciation and expenses... then it is taxed. So where are the benefits?

Not always... cattle and farming are a bit different... it matters if there were an anticipation of profits as the business is fickle...


My old boss has 125 acres with cattle and had not made a profit for a number of years (back when w@rking, like 2014)... the cost of hay went through the roof and he had to buy from Georgia... and beef on the hoof prices plunged for a number of years.. he culled his herd to what he thought was a minimum he needed to keep his ag exemption to limit his loss... but he had losses for a good number of years.. never questioned about it being a hobby...



Then there is the other side... back when I did taxes there was a very rich guy who bred hunting dogs.. he had a few thousand acres... his sales of dogs were over $1 million a year (back in the early 80s)... but he spent so much on them that the IRS claimed it was a hobby.. at the time the dogs lived in a better place then I did ...

 

[all4j]

I know many ranchers and I would buy some cattle and he would run them on his place. I would pay expenses for my 50 head, and he would just keep them and winter them. No employees but him and me and I might spend a week to 10 days helping during the year. I could run them on my place, but I don't have watering in that high country. I'm not going to go through that, and a drilling truck couldn't get to most of it.

I would suggest you find out from some of these ranchers who does their taxes & then bounce this around with them. Above explanation would not get you many, if any, deductions. Although there are still some missing holes, that would affect things. Some cattle are capitalized, some are not. Depends on intent of use -- breeding, fattening/selling, etc. The holding time to determine long vs short cap gains, depreciation schedules, etc are different for livestock than buildings, etc. 10 days a year means your income would be passive, not active. That is another set of differences

Btw, this is an interesting time to get into the business. Beef cattle herds are shrinking due to drought, feed prices etc. At some point, that'll reverse of course. Forgot to say, there are also differences between beef & dairy...

 

[ivinsfan]

First year getting bought in about 100K than sell calves in fall and repeat selling and culling out and sell the next year.

Like you said it could put me into a higher bracket or not give me enough tax credit to be worth any real benefit for me.

Thanks

So you're going to buy expensive cows, get the babies, sell the babies and pay someone to do all the work. As a note money you get from selling babies will be taxes as ordinary income. You deduct the cost as it occurs. Raised animals have zero cost basis. As for paying for expensive breeding stock unless you are committing long term or can do specialized sales not much point in buying pricey breeding stock. or you are going to buy feeders and feed them out, I can't tell what your plans are. I don't think you know enough to make this work, no insult intended.

 

[street]

So you're going to buy expensive cows, get the babies, sell the babies and pay someone to do all the work. As a note money you get from selling babies will be taxes as ordinary income. You deduct the cost as it occurs. Raised animals have zero cost basis. As for paying for expensive breeding stock unless you are committing long term or can do specialized sales not much point in buying pricey breeding stock. or you are going to buy feeders and feed them out, I can't tell what your plans are. I don't think you know enough to make this work, no insult intended.

People run on shares here in this area all the time. They pasture cattle for others and calve out in the spring and fall they sell. Nothing complicated about it just basically paying rent with a share of the calf crop.

 

[ivinsfan]

People run on shares here in this area all the time. They pasture cattle for others and calve out in the spring and fall they sell. Nothing complicated about it just basically paying rent with a share of the calf crop.

I'm talking about the tax end of it...

 

[bada bing]

I have worked as a commercial fisherman in Alaska since I was a teenager. It was a sideline business using vacation time during my "real" career. I still do it now that I'm retired. It isn't the same as cattle, especially passive cattle, but the tax consequences are probably similar.

It was a good sideline with some tax benefits while I was working a job. I legitimately deducted several $1Ks per year in office expenses and travel. I always had paid my FICA cap from regular employment, which is a pretty big deal if your business income is "earned". Now that I'm retired, my self employed earned income gets dinged with self employment FICA tax for absolutely no benefit (I've paid the 35 years FICA at the cap). My present earned income is also over the wage cap for SS before FRA, which isn't an issue for me, but it could be.

I do it because I like it and it doesn't get in the way of "retirement". But tax bennies aren't really an incentive and the taxes are more hassle than it would be worth if there wasn't other draws.

 

[street]

I have worked as a commercial fisherman in Alaska since I was a teenager. It was a sideline business using vacation time during my "real" career. I still do it now that I'm retired. It isn't the same as cattle, especially passive cattle, but the tax consequences are probably similar.

It was a good sideline with some tax benefits while I was working a job. I legitimately deducted several $1Ks per year in office expenses and travel. I always had paid my FICA cap from regular employment, which is a pretty big deal if your business income is "earned". Now that I'm retired, my self employed earned income gets dinged with self employment FICA tax for absolutely no benefit (I've paid the 35 years FICA at the cap). My present earned income is also over the wage cap for SS before FRA, which isn't an issue for me, but it could be.

I do it because I like it and it doesn't get in the way of "retirement". But tax bennies aren't really an incentive and the taxes are more hassle than it would be worth if there wasn't other draws.

Thaks for your sharing your experience. A sideline also did help me when working full time but now like you said it may be not worth it.

I still might buy a small herd and do it for the simple pleasure of having them and being able to work help. I was raised around livestock so some of it is missing the part of my life. It doesn't really matter if I make or lose and might not make a difference if tax deductions.

 

[hotwired]

Two cents

I did not read all of the replies so forgive me if I'm being redundant. It's always good to understand what it means to get a tax deduction. You can always tell somebody who doesn't understand this when they say things like "You can just write it off", and you just know deep inside that to them that means the expenses somehow free. I'm not lumping the op into this category I'm just giving an example of how few of us have a global grasp of this subject.

Getting a deduction means basically that you get a discount roughly equal to your tax rate including, often, self-employment tax.

Of course it's easy to miss the forest for the trees, I say this because I've done it at least 500 times! What you don't want to do is spend money that you wouldn't have spent anyway to get the deduction. So you wouldn't want to go into business just to generate tax deductions if that business wasn't going to be making a profit worth your time and whatever risk you're taking.

Real estate is kind of cool in this way, specifically rental real estate. You get to write off temporarily the depreciation on the property, while in reality the property may actually be appreciating.

My personal view is that I'd be hard-pressed or hesitant to go into business to generate those deductions but I would certainly consider staying in business. For example, we've owned rental properties and I own a small web design business. I plan on holding that web design business forever as long as I can generate something with it. It gives me a home office deduction, I get to deduct part of my cell phone and internet expense, etc. Really nothing grandiose but it's a little something and the business is actually marginally profitable! So it's worth it for me to keep it literally into my '80s.

I may have failed to come to the point but I hope these meanderings and ramblings give you some extra guidance.

 

[street]

I did not read all of the replies so forgive me if I'm being redundant. It's always good to understand what it means to get a tax deduction. You can always tell somebody who doesn't understand this when they say things like "You can just write it off", and you just know deep inside that to them that means the expenses somehow free. I'm not lumping the op into this category I'm just giving an example of how few of us have a global grasp of this subject.

Getting a deduction means basically that you get a discount roughly equal to your tax rate including, often, self-employment tax.

Of course it's easy to miss the forest for the trees, I say this because I've done it at least 500 times! What you don't want to do is spend money that you wouldn't have spent anyway to get the deduction. So you wouldn't want to go into business just to generate tax deductions if that business wasn't going to be making a profit worth your time and whatever risk you're taking.

Real estate is kind of cool in this way, specifically rental real estate. You get to write off temporarily the depreciation on the property, while in reality the property may actually be appreciating.

My personal view is that I'd be hard-pressed or hesitant to go into business to generate those deductions but I would certainly consider staying in business. For example, we've owned rental properties and I own a small web design business. I plan on holding that web design business forever as long as I can generate something with it. It gives me a home office deduction, I get to deduct part of my cell phone and internet expense, etc. Really nothing grandiose but it's a little something and the business is actually marginally profitable! So it's worth it for me to keep it literally into my '80s.

I may have failed to come to the point but I hope these meanderings and ramblings give you some extra guidance.

Very well stated and a normal understanding of how it does work. Thank You for your insight.