FBM Chapter 8 - Taxes
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Questions and Answers

What is the self-employment tax based on?

  • The total income from the farm business
  • The total expenses of the farm business
  • The net earnings from the farm business (correct)
  • The gross earnings from the farm business

How much self-employment tax did Roy pay?

  • $4,664
  • $60,964
  • $9,327 (correct)
  • $66,014

How is the self-employment tax paid?

  • When filing the income tax return (correct)
  • Through a separate tax form
  • Withheld from wages
  • Quarterly estimated tax payments

What is the minimum net earnings required for a child to be considered self-employed?

<p>$400 (B)</p> Signup and view all the answers

What is an example of an independent contractor?

<p>A farmer who hires a professional electrician to repair a well pump (C)</p> Signup and view all the answers

Who is responsible for paying Social Security taxes for an independent contractor?

<p>The independent contractor (A)</p> Signup and view all the answers

What is the role of Schedule SE (Form 1040) in self-employment tax?

<p>It is used to calculate the self-employment tax. (C)</p> Signup and view all the answers

What is the percentage used to calculate net earnings from self-employment?

<p>0.9235 (C)</p> Signup and view all the answers

Which of the following is NOT a factor that contributes to the depreciation of a farm asset?

<p>Inflation (A)</p> Signup and view all the answers

What is the primary purpose of depreciation in accounting for farm assets?

<p>To reduce the cost of the asset over its useful life (D)</p> Signup and view all the answers

Which of the following is an example of a farm asset that is subject to depreciation?

<p>Farm buildings (B)</p> Signup and view all the answers

Which of the following is NOT included in income reported on Schedule F — Profit or Loss from Farming?

<p>Gains from the sale of land (B)</p> Signup and view all the answers

What is the relationship between depreciation and income taxes?

<p>Depreciation decreases income taxes by reducing the taxable income. (B)</p> Signup and view all the answers

Why is it important to have the undepreciated value of an asset reflect its resale value?

<p>To ensure that the financial statements accurately reflect the true value of the business (C)</p> Signup and view all the answers

What is the primary purpose of a net worth statement in the context of farm assets?

<p>To determine the value of the farm business for lending purposes (B)</p> Signup and view all the answers

Which of the following best describes the accounting treatment of current costs in farm operations?

<p>They are expensed in the period they are incurred. (C)</p> Signup and view all the answers

Which strategy involves delaying the payment of bills?

<p>Postpone expenditures until after the next tax year (D)</p> Signup and view all the answers

What is one approach to decrease taxable income?

<p>Postpone some sales to the following year (B)</p> Signup and view all the answers

Which method may not be used to increase taxable income?

<p>Utilizing deferred sales contracts (D)</p> Signup and view all the answers

How can a cash method taxpayer delay taxable income?

<p>Use deferred sales contracts (D)</p> Signup and view all the answers

Which strategy helps level tax obligations across years?

<p>Utilizing three-year farm averaging (D)</p> Signup and view all the answers

What effect does postponing expenditures have on taxable income?

<p>Increases taxable income for the year (D)</p> Signup and view all the answers

What is the primary purpose of FICA taxes?

<p>To provide retirement, disability, and survivor benefits (C)</p> Signup and view all the answers

Which of the following strategies is recommended for cash method taxpayers?

<p>Use the five-year net operating loss carry-back (D)</p> Signup and view all the answers

Which activity is most likely to reduce current taxable income?

<p>Deferring sales to the next year (B)</p> Signup and view all the answers

How do FICA taxes differ for wage/salaried employees and self-employed individuals?

<p>Self-employed individuals are responsible for both the employee and employer contributions. (A)</p> Signup and view all the answers

What is the full retirement age for individuals born before 1938?

<p>65 (B)</p> Signup and view all the answers

Which of the following is NOT a benefit provided by Social Security?

<p>Unemployment benefits (A)</p> Signup and view all the answers

What is the significance of "Medicare" as mentioned in the text?

<p>A government program that provides healthcare for individuals over 65. (C)</p> Signup and view all the answers

What is the maximum amount of income subject to FICA taxes?

<p>The maximum amount varies each year. (B)</p> Signup and view all the answers

Which benefit provided by Social Security is available to the family of a deceased individual?

<p>Survivor benefits (C)</p> Signup and view all the answers

What advantage do self-employed farmers have with regards to FICA taxes?

<p>They can deduct half of their self-employment tax as a business expense. (C)</p> Signup and view all the answers

Which of these is NOT a common tax benefit for farmers and ranchers?

<p>Lower tax rates on farm income (A)</p> Signup and view all the answers

Which of these is NOT a reason why tax laws for agriculture are complex?

<p>The need to protect farmers from economic hardship (C)</p> Signup and view all the answers

What does the text refer to as "a manufacturing plant" in the context of farming?

<p>A brood cow raised from calf (C)</p> Signup and view all the answers

What does the text suggest about the relationship between the tax benefits and the definition of "farmer" or "rancher"?

<p>To benefit from the tax laws, one must demonstrate that they are engaged in farming or ranching for gain or profit. (B)</p> Signup and view all the answers

What is a key characteristic of the business of agriculture as described in the text?

<p>High investment requirements and low returns (A)</p> Signup and view all the answers

What is the purpose of IRS Publication 910, "Guide to Free Tax Services"?

<p>To list available free tax publications and index tax topics (D)</p> Signup and view all the answers

What is the main idea presented in the paragraph about the tax laws for agriculture?

<p>Farmers and ranchers face a complex tax system with specialized rules uniquely tailored to their industry (A)</p> Signup and view all the answers

Based on the information in the text, which of the following is a true statement about farm income?

<p>Farm income is taxed according to the same rules as other types of income, but farmers receive specific benefits that can reduce their tax burden. (C)</p> Signup and view all the answers

Which type of farm business ownership allows for a business owner to deduct self-employment taxes as an expense?

<p>Sole Proprietorship (B), Partnership (D)</p> Signup and view all the answers

Which type of farm business ownership has the potential for earnings to be taxed twice: once as part of the corporation's earnings and again as personal income to the shareholder?

<p>Subchapter C Corporation (B)</p> Signup and view all the answers

Which type of farm business ownership offers the benefit of having operating losses offset other income for the owner/owners?

<p>All of the above (D)</p> Signup and view all the answers

What is the main distinction in how federal income tax is handled between an S Corporation and a Subchapter C Corporation?

<p>Undistributed earnings in an S Corporation are taxed only once, while undistributed earnings in a Subchapter C Corporation are taxed twice. (A)</p> Signup and view all the answers

Which type of farm business ownership requires both the corporation and its employees to pay FICA tax, with the employer’s share being a deductible expense?

<p>Subchapter C Corporation (A), S Corporation (B)</p> Signup and view all the answers

Which type of farm business ownership allows operating losses to be carried over to offset corporate income?

<p>Subchapter C Corporation (D)</p> Signup and view all the answers

What is the primary tax implication for state income tax in a Subchapter C Corporation compared to other types of farm business ownerships?

<p>Subchapter C Corporations pay state income tax on distributed earnings (dividends) to shareholders, corporate income, and franchise taxes. (D)</p> Signup and view all the answers

Which type of farm business ownership involves owners paying self-employment taxes?

<p>Sole Proprietorship (B), Partnership (D)</p> Signup and view all the answers

Which type of farm business ownership involves distributing earnings to shareholders, who then pay personal income taxes on those earnings?

<p>S Corporation (A), Subchapter C Corporation (D)</p> Signup and view all the answers

Which type of farm business ownership provides the ability to deduct the employer's share of FICA tax as an expense?

<p>S Corporation (C), Subchapter C Corporation (D)</p> Signup and view all the answers

Flashcards

Farmer or Rancher

A business that involves cultivating, operating, or managing a farm or ranch for profit.

Special Accounting Methods in Agriculture

Special accounting methods used by farmers and ranchers due to the high cost of inventory and low return on investments.

Special Capital Expenditure Deductions

Tax benefits for farmers who purchase farm equipment and buildings.

Livestock as a Capital Asset

How livestock is treated as a business asset.

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Treating Livestock as a Manufacturing Asset

A way to treat a livestock as a manufacturing asset.

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Operating Expenses in Farming

The expenses of operating a farm or ranch.

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Returns from Farming

The amount of money earned from selling farm products.

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Investment in Farming

The costs involved in setting up and running a farm or ranch.

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Schedule F

A tax form used to report income and expenses from farming activities.

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Depreciation

The process of gradually deducting the cost of a long-lasting asset over its useful life.

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Useful Life

The amount of time a long-lasting asset is expected to be useful.

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Depreciation Allowance

A decrease in an asset's value due to regular use, wear and tear, or becoming outdated.

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Capitalized Costs

Costs that are spread out over time and reflected in the value of an asset.

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Current Costs

Costs that are used to produce goods or services and are deducted from revenue in the same year.

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Net Worth Statement

A financial statement that shows the value of an asset at a specific point in time.

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Depreciating an Asset

The process of deducting the value of a long-lasting asset over time, based on factors like wear and tear or obsolescence.

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Cash method taxpayers

Taxpayers who use this method recognize income when they receive payment and deduct expenses when they pay them.

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Postponing expenditures and investments

A strategy used by cash method taxpayers to delay income until the next tax year.

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Selling marketable grain and livestock before year-end

A strategy used by cash method taxpayers to speed up income recognition.

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Working with suppliers to pay after the beginning of the next tax year

A strategy used by cash method taxpayers to delay expense deductions.

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Avoiding expensing options

A strategy used by cash method taxpayers to keep more income in the current year by avoiding tax benefits for depreciable property.

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Off-farm or custom work

A strategy used by cash method taxpayers to generate additional taxable income.

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Farm averaging and net operating loss carryback provisions

A strategy used by cash method taxpayers to reduce taxable income in a high-income year.

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Postponing sales and using deferred sales contracts

A strategy used by cash method taxpayers to delay income recognition and reduce income in the current year.

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FICA

A type of tax paid by both employees and employers, contributing to Social Security and Medicare.

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Social Security

A government program that provides retirement, disability, and survivor benefits.

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Medicare

A government program that provides health insurance for people over 65 and those with certain disabilities.

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Full Retirement Age

The age at which you become eligible for full Social Security benefits.

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Social Security Income Limit

The maximum amount of income subject to Social Security taxes.

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Medicare Income Limit

The maximum amount of income subject to Medicare taxes.

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FICA Contributions

Payments made by individuals and employers to Social Security and Medicare.

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Self-Employment FICA

The portion of FICA taxes paid by self-employed individuals, which includes both the employee and employer share.

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Sole Proprietorship

A type of business ownership where the owner's earnings are taxed as personal income and operating losses can be used to offset other income.

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Partnership

A type of business ownership where partners distribute earnings to each other, and operating losses can be used to offset other income.

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S Corporation

A type of business ownership where earnings are distributed to shareholders, and operating losses can be used to offset other income for shareholders.

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Subchapter C Corporation

This is a separate legal entity that pays corporate income tax on its earnings, with dividends to shareholders taxed again as personal income.

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Net Operating Loss (NOL)

A business profit or loss can be used to offset income or losses from other sources during the same year.

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Self-employment Tax

A type of tax that applies to self-employed individuals and is calculated on both your earnings and self-employment income. It includes Social Security and Medicare taxes.

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FICA tax

A type of tax that applies to both employers and employees, funding Social Security and Medicare.

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State Income Tax

The state income tax on earnings from a business varies based on the state's tax laws and the type of business structure.

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Franchise Tax

A tax levied on a corporation when the corporation is formed.

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Dividends

Profits distributed by a corporation to its shareholders, which are taxed as personal income.

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Independent Contractor

Someone who works for themselves, providing a service for a fee, and assuming control over the work. They typically employ their own workers, pay their own taxes, and handle their own legal responsibilities.

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Net Earnings From Farming

The profit remaining after subtracting all business expenses from revenue generated by a farm or ranch.

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Schedule F (Form 1040)

The form used to report income and expenses from farming activities on a federal income tax return, helping farmers calculate their tax obligations.

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Schedule SE (Form 1040)

A form used to calculate self-employment tax on net earnings from self-employment activities, including farming.

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Adjusting Income for Self-Employment Tax

The process of setting aside a portion of a farmer's self-employment tax liability, often half, to be paid later as an adjustment to income.

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Minimum Net Earnings for Self-Employment Tax

A requirement for self-employed individuals to have a minimum level of net earnings to qualify for self-employment tax benefits.

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Self-Employment for Children in Agriculture

The potential of children involved in agricultural activities, like 4-H or FFA projects, to be considered self-employed if they meet the minimum earnings threshold.

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Study Notes

Taxes

  • Farm business managers must consider taxation's impact on operations.
  • Tax laws are constantly changing; rely on current legislation.
  • Consult a tax professional for specific tax management problems.

Income Taxes

  • Farm families should understand available tax strategies.

  • Aim to maximize after-tax income, not just minimize tax liability.

  • Income tax planning is ongoing, balancing financial and personal goals.

  • Effective tax planning requires personal goals, accurate records, and future income projections.

  • Tax planning can involve deferring tax payments or reducing the overall tax amount.

  • Examples of income tax planning include splitting income between spouses or using specific business structures.

Tax Help

  • Tax professionals can help farm and ranch managers.
  • Many government publications provide income tax information, such as Form 1040 Instructions and the Farmer's Tax Guide.
  • Individuals can get help with taxes via the IRS website, in person, or by phone.

Who is a Farmer or Rancher?

  • Agriculture includes diverse enterprises.
  • Agricultural enterprises require significant investment with relatively low returns.
  • Tax laws for agriculture are specialized.
  • Farmers/ranchers need to materially participate in farm operation for tax law benefits.

Tax Records

  • Accurate income tax returns require detailed records.
  • Keeping records is necessary to track farm business progress, prepare financial documents, identify receipts, and document deductible expenses.
  • Record-keeping systems like journals, ledgers, receipts, and supporting documents are essential.
  • Records are needed to measure the farm's financial performance, especially concerning asset records and determining the gain or loss on an asset sale.

Income Tax Estimate Worksheet

  • Income Tax estimate worksheets help estimate annual tax liability.
  • The worksheet requires up-to-date records and information including farm receipts, receipts from sales, costs of purchased items, farm expenses, depreciation records, and asset records.

Income Tax Management Strategies

  • Strategies can be used to match income in various years.
  • Timing of expenses and investments can affect the level of income tax owed.
  • Income tax strategies should align with sound farm management practices.

Strategies to Increase and Reduce Taxable Income

  • Techniques to increase taxable income include delaying expenses, selling items before year-end, and working with suppliers to delay payments.
  • Strategies for reducing taxable income include delaying sales, using deferred sales contracts, purchasing supplies before the tax year end, utilizing depreciation, and adjusting advance feed and fertilizer purchases timing.

Estate Taxes

  • Taxes on transferring property or assets to designated heirs.
  • Estate planning accounts for controlling assets during and after an individual's life.
  • Objectives of estate planning focus on income, asset distribution and property minimization upon death.

Estate Planning Considerations

  • Estate planning is ongoing; review and adapt to tax laws and life changes.
  • Consult with estate-planning professionals to establish tax-minimizing strategies, assess family income, and ensure fair treatment of heirs.

FICA Taxes (Federal Insurance Contributions Act)

  • FICA is a federally mandated tax to support Social Security and Medicare benefits.
  • Employers and employees share the FICA tax burden.
  • FICA taxes are determined based on amounts earned; relevant regulations vary annually.
  • Self-employed individuals are responsible for both portions of the FICA tax.

Agricultural Labor Defined

  • Agricultural labor encompasses farm or ranch work related to soil cultivation or raising of livestock.
  • Farmers are responsible for paying FICA taxes for employees meeting specific conditions;
  • Independent contractors aren't subject to the same FICA tax requirements as employees.

Employers of Agricultural Labor

  • Employer responsibilities include obtaining an Employer Identification Number (EIN), maintaining employee records, withholding taxes, and reporting to the IRS.
  • Tax rates and income limits for FICA taxes change periodically; therefore, consulting relevant IRS guidelines or a tax professional is advised.

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Description

This quiz covers essential tax strategies and planning concepts for farm business managers. It emphasizes the importance of understanding current tax laws and effective tax planning to maximize after-tax income. Additionally, resources for obtaining tax help are provided to assist in navigating this complex area.

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