By Len Green
Editor’s Note: Today’s column on equine tax planning is the first in a new regular series in the TDN, presented by Keeneland. It is written by Len Green of The Green Group and DJ Stables, who won the Breeders’ Cup Juvenile Fillies this year with Jaywalk.
As is often heard in the horseracing industry, “The race is not over until the horse crosses the finish line!”
The same is true with maximizing your tax deductions and minimizing your taxes.
For those, who think it is too late to save on your 2018 taxes, we are here to tell you it is not.
With over 35 years of experience saving our clients taxes along with our knowledge of the new tax laws, we are confident the following information will help you as you approach the 2018 home stretch and allow you to hit the wire a winner.
What Does the 2017 Tax Act Do to Assist You?
First, the recently enacted Tax Act contains favorable developments for depreciating and expensing yearlings, breeding stock, farm equipment and other property.
Bonus Depreciation: An increase in bonus depreciation allows a write off to increase from 50% to 100%. Accordingly, you are now permitted to fully expense purchases in the first year for yearlings, breeding stock and farm equipment. Used property can now qualify also. A few weeks still remain for 2018 asset additions with the potential benefit of a full tax write-off.
IRC §179 Deduction: The maximum amount that may be expensed has been increased from $500,000 to $1 million. The phase-out threshold has been increased from $2 million to $2.5 million.
Farm Equipment: The useful life has been reduced from seven years to five years and the 200% declining balance method can now be used.
Race Horses: Certain Thoroughbred horses can still be depreciated as 3-year property. Even if business equipment or horses are purchased before year end, they still qualify for these tax benefits.
Maximize the Pass-Thru Business Income Deduction: An entirely new tax saving deduction allows certain taxpayers to deduct 20% of their qualified business income. To maximize the deduction, you should take action steps to qualify your taxable income so it is below this new provision’s phase-out thresholds. If your taxable income (not adjusted gross income) is less than $157,000 for single taxpayers or $315,000 for married filing jointly, you may be eligible for this new pass-through deduction. The deduction phases out at $207,000 for individuals and $415,000 for married filing jointly. In some cases, the deduction may be limited to 50% of wages paid. Accordingly, one strategy would be to convert your independent contractors to employees to boost the 20% deduction.
Set Up a Retirement Plan: You may be eligible to establish a retirement plan before year-end (or beyond). Contributions to a Keogh plan or a one-person 401(k) plan can be significant and save you significant 2018 tax dollars if set up before December 31, 2018. A SEP-IRA is another flexible alternative. A SEP can be set up before the filing date of your 2018 tax return, yet still provide you with a 2018 deduction.
Required Minimum Distributions: If you are age 70 ½ or older, please remember to take your required minimum distribution from your retirement plan in order to avoid a harsh penalty.
Child Tax Credit More Available: Under prior law, the child tax credit was phased out for taxpayers with modified adjusted gross income of more than $75,000 for single taxpayers and above $110,000 for joint filers. Those thresholds have been increased dramatically, up to $200,000 for single taxpayers and $400,000 for couples. In addition, the credit, which is for each child under age 17, has been doubled to $2,000.
Gifting: For those of you inclined to make gifts still in 2018, keep in mind that the annual gift tax exclusion is $15,000 per recipient or $30,000 if married. With the Federal estate tax exemption scheduled to return to the 2017 amount of $5.5 million after 2025 (from the 2018-2025 threshold of more than $11 million), an opportunity is available for high net worth individuals to transfer substantial assets tax-free now to family members or trusts.
Charitable Deductions: There is still an opportunity to make contributions before year end. A tax saving technique is to donate appreciated securities to qualified charities and receive a tax deduction at the appreciated amount and avoid the capital gains you would have paid if you sold the securities and donated the cash.
Tax Preparation Fees: The 2017 Tax Act eliminated itemized deductions for individuals where this was previously deducted in prior years. To the extent that the tax preparation fee includes work done on your horse business, that would be properly deducted on Schedule C, Schedule F or on your LLC.
You should review the applicability of these recommendations with your tax professional or take advantage of the fact that readers of this column receive a one-hour consultation with our firm.
To contact The Green Group, please visit http://www.greenco.com/ or call (732) 634-5100.