Tax Pointers for Farmers and 

 Landowners in 1995 



P. Geoffrey Allen 



Department of Resource Economics, University of Massachusetts 



Tax advice given below is intended as general 

 advice and is believed to be correct. It does not sub- 

 stitute for a detailed review of the circumstances of 

 an individual taxpayer by a professional tax practi- 

 tioner For more details, you and your tax adviser 

 may wish to consult the sources referenced in the 

 square brackets [thus] (see footnote) . 



New Tax Legislation 



No new federal tax legislation was passed in the 

 last year. The most important tax bill, H.R. 1215, 

 passed the House on April 5, 1995. Portions of the 

 bill may appear in the final Budget Reconciliation 

 Act. The main proposals of the bill are well known 

 but may not become law in their original form. For 

 example, the proposed $500 tax credit for each 

 dependent child may be modified or eliminated. 



In terms of planning, it seems reasonable to 

 expect that capital gains taxes (except on corpora- 

 tions) will be reduced in that 50% of long-term capi- 

 tal gains will be deducted from income. Long-term 

 losses will be deductible at a rate of $2 for each $1 

 of ordinary income up to an annual limit of $3,000 

 of ordinary income. Capital gains may or may not 

 be indexed. There is some remote chance that the 

 effective date of the change will be backdated to 

 1995, but the confusion for taxpayers and the need 

 to file amended returns makes backdating earlier 

 than January 1, 1996 unlikely. If you can delay a 

 sale that will subject you to capital gains or losses, 

 the best advice is to wait until legislation is passed 

 into law. 



H.R. 1215 also contains provision for the Sec- 

 tion 179 deduction to be increased in steps up to 

 $35,000 in 1999 ($22,500 in 1996). While this is 

 unlikely to alter your planned capital investments, 

 you may want to consider the hint in the next sec- 

 tion. 



The Commonwealth of Massachusetts has 

 passed a bill to permit the setting up of Limited 

 Liability Company (LLC's) and Limited Liability 

 Partnerships (LLP's) (H. 4045, signed by the Gov- 

 ernor, as Chapter 281 of the Acts of 1995 on Novem- 



ber 28, 1995). Only one state (Vermont) has still to 

 pass similar legislation. From January 1, 1996, ex- 

 isting business entities and new ventures will be 

 able to set up as LLC's or LLP's. Owners gain the 

 protection of limited liability and the flexibility of 

 partnerships in making distributions and allocations 

 of income and assets. For an existing partnership, 

 conversion to LLC or LLP limits the liability of the 

 general partners. For an existing corporation, the 

 advantages of conversion are less clear. There will 

 be federal tax consequences for existing corpora- 

 tions (subchapter C or subchapter S) who choose to 

 convert to an LLC. Partnerships generally should 

 have tax-free conversion assuming all assets and 

 liabilities are transferred to the LLC, the LLC con- 

 tinues the activity or business and the partners have 

 the same ownership. The advice of a qualified tax 

 practitioner and of an attorney should be sought if 

 you are considering LLC or LLP status. 



Repair or Improvement? 



Taxpayers and the IRS often have different 

 views about whether an expenditure on an existing 

 building or machine is a repair or improvement. 

 Taxpayers would like the immediate deduction of 

 repair expense and the IRS would like to see the 

 expense depreciated over a number of years. A capi- 

 tal expense; adds to the value of the land, building 

 or machine, or substantially prolongs its life, or 

 adapts the property to a new or different use, or 

 restores the property. A repair: does not materially 

 add to the value of the property, does not apprecia- 

 bly prolong its life, and is an expense that keeps 

 the property in efficient operating condition [Treas. 

 Reg. 1.263 (a) and (b), 1.264]. Hundreds of tax court 

 cases have further refined the distinction. For ex- 

 ample, replacing a broken transmission in a tractor 

 with a used transmission is a repair. Rebuilding an 

 existing transmission using new or rebuilt parts in 

 place of existing worn parts is an improvement. 



If the transmission rebuilding was relatively 

 inexpensive, you might claim that it did not mate- 

 rially add to the value of the tractor. For peace of 



14 



Fruit Notes, Winter, 1996 



