Download De Minimis Expensing: Purchased Livestock

December 9, 2015
De Minimis Expensing: Purchased
Livestock
Last week we sent a Farm Tax Network release informing
of the increased de minimis expensing limit, moving from
$500 to $2,500 effective for costs incurred in tax years
beginning on or after January 1, 2016. This release
responds to several subscriber questions regarding using
the new $2,500 de minimis amount for purchased
livestock.
Feeder Livestock
Many farm producers will purchase young feeder pigs and feeder cattle for fattening and resale.
Even though the unit price per animal may be under $2,500, the regulations specifically prohibit the
use of the de minimis safe harbor election for property that is held as inventory for resale [Reg.
1.263(a)-1(f)(2)(i)].
Breeding and Dairy Animals
Purchased livestock held for productive use, such as breeding or dairy animals, qualify for the de
minimis safe harbor election, assuming the per-unit price as listed on the invoice is $2,500 or less.
However, there could be a significant disadvantage to claiming these purchases as an ordinary and
necessary business expense under the expanded de minimis safe harbor. The regulations hold that
property to which a taxpayer applies the de minimis safe harbor is not treated upon sale or other
disposition as a capital asset under Sec. 1221 or as property used in the trade or business under Sec.
1231 [Reg. 1.263(a)-1(f)(3)(iii)]. As a result, the entire asset upon disposition must be reported as
ordinary income, with no Sec. 1231 gain that qualifies for capital gain rates. Further, the lack of Sec.
1221 and Sec. 1231 status requires that this ordinary income must be reported on the business
schedule, incurring SE tax if the producer is a proprietor or partner.
As an example, a hog producer purchases a number of gilts at $150 per head and uses the de minimis
safe harbor deduction to claim a Schedule F deduction. Two years later, these animals are culled at a
sale price of $200 per head. The sale proceeds must be reported entirely as Schedule F ordinary
income. The proceeds are subject to SE tax due to the reporting on Schedule F, and Section 1231
capital gain treatment is not allowed for the $50 gain per animal. This suggests that the de minimis
safe harbor election is not advantageous for livestock producers purchasing young breeding animals
that will be sold in later years for more than original cost.
Commentary
The SE and ordinary income sale aspects of the de minimis safe harbor election may be uniquely
detrimental to livestock producers who will sell the animals at the end of breeding use. The dollars
collected from those sales may be significant, with the result that the SE tax cost and ordinary
income reporting make the de minimis safe harbor unattractive. Other low cost assets that are
expensed under the de minimis safe harbor, such as inexpensive equipment items and small tools,
are often not sold but instead junked. Or if they are sold, it is an isolated situation of a single asset
sale that results in a small amount of revenue. In summary, it may be beneficial to avoid the de
minimis safe harbor for livestock producers, especially where the Sec. 179 deduction can bring the
same first year deduction. If Section 179 is used, there is no SE tax on sale, and the ordinary income
recapture is limited to the original cost of the animals.
Andy Biebl & Chris Hesse