As a farm or ranch operating as a sole proprietorship or partnership, the sale of business property can significantly impact your income taxes. Business property is considered to be any asset that is used on your farm or ranch operation, and qualifying property includes equipment and machinery; buildings, land and trees; and draft animals and breeding livestock. This income is reported in a tax return on a separate form, typically Form 4797.
To determine how this income will affect your taxes you must calculate whether you have realized a gain or suffered a loss. Beginning with the property’s cost basis, add the cost of any improvements made and subtract its depreciation to determine the property’s adjusted basis. The total adjusted basis combined with selling expenses will then be compared to the selling price of the property. If the adjusted basis is greater than the selling price, the loss will be subtracted from the business’ income. When there is a gain, this additional income will be subject to tax. All or part of the net income will be subject to ordinary income tax and a portion of the gain may be subject to tax at the capital gain rate.
Though the formula above provides a basic way to determine whether you have a gain or loss, there will always be rules or exceptions that can affect different types of property. For example, when dealing with real property, certain fees or expenses paid are included in your cost basis. Also, keep in mind that depreciation recovery rules need to be considered. Recapture rules vary depending on the type of property, so it is important to consult your tax advisor when determining the appropriate way to calculate this for your business.
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column by STEVEN E. CRISMAN
BIO: Steven Crisman is the managing partner of Cross, Fernandez & Riley, LLP’s (C/F/R) Winter Haven office and leads their Agriculture Practice Group. He primarily serves the agriculture, manufacturing, warehousing, and distribution industries. He has specific experience with citrus growers, cattle ranchers, citrus and other horticultural nurseries, citrus harvesters and other support industries as well as watermelon, blueberry and other growers. In addition, Steve provides comprehensive tax and estate planning, attestation and business succession planning services.
