As I write this article, the elections have not yet occurred. Much of my recent conversations with our clients, many of whom are horse and farm owners with other operating businesses and/or significant investment portfolios, have focused on “what ifs” – e.g., what happens to income tax rates or the lifetime gifting exemption if there is a change of political party control in Congress and/or the White House. Perhaps by the time you are reading this article, we will know who our next President is and which political party controls each chamber of Congress. In the meantime, this article includes a few tax planning items that may be helpful as year-end approaches. The items discussed below are current as of September 14, 2024.
Let’s first focus on some year-end income tax planning items. If the goal is to accelerate deductions this year, then consider purchasing and placing in service (meaning the asset is ready to be used for its intended purpose) assets that qualify for the 60% bonus depreciation by 12/31/24. Qualifying assets, which must be used predominantly in the United States, include equipment, fencing, land improvements, barns, and most horse purchases (with some exceptions). In addition to the above favorable depreciation write-off, many horse and farm owners qualify to use the cash method of accounting when filing annual tax returns. If you are cash-basis, consider pre-paying expenses by year-end. Please note, however, that you should have a non-tax reason for doing so. Non-tax reasons may include bulk or early payment discounts obtained for expenditures such as feed, supplies, or advertising or for access to a particular stallion.
The above commentary assumes your horse operations are conducted as a business and you are either an active participant under the material participation rules (a description of which is beyond the scope of this article) or have enough other passive activity income to offset these losses. You should also be aware of the excess business loss limitation, which may limit the amount of net business loss claimed on your individual tax return and convert the excess into a net operating loss carryover available in future years.
For individuals who are charitably inclined, cash contributions made to qualified public operating charities (NOT including donor-advised funds, however) by year-end may offset up to 60% of your 2024 adjusted gross income. For C corporations, these contributions may offset up to 10% of 2024 taxable income.
In addition to year-end income tax considerations, it may be prudent to address estate planning matters. One of the most effective ways to do this is via lifetime gifts. First, a few basics regarding gifting – Annual gifts of $18,000 may be given to US citizens free of gift and generation-skipping tax (GST) in 2024. In addition to this annual gift limit, the 2024 lifetime gift and GST exclusion is $13.61 million per person. If the lifetime threshold is exceeded, then the gift is taxable to the person who makes the gift at a 40% gift tax rate and a 40% GST rate (if applicable). The GST is charged in addition to the gift tax if gifts are made to a person who is more than 37.5 years younger than the person making the gift, the intent being to capture the additional tax on gifts that may skip a generation (the most common of which may be gifts to grandchildren).
Under current law, the lifetime gift and GST exemption is scheduled to be at an increased level through 2025 (amount adjusted annually for inflation). In 2026, this lifetime exemption is scheduled to revert to the 2017 limitation of $5 million (plus subsequent inflation adjustments). If you have not previously taken advantage of this increased exemption over the past few years, I recommend discussing this now with your advisors.
An ideal asset to gift is property that is expected to appreciate in value. If you gift something worth $100,000 today and it appreciates to $500,000 at your death, then you’ve gotten $500,000 out of your estate and only used $100,000 of lifetime gifting exemption. On the other hand, if that $100,000 gift depreciates to a $40,000 value, then you’ve potentially wasted $60,000 of lifetime gifting exemption.
Equine assets may also be included in your gifting plan, albeit some equine assets may be more effective than others. Horses are tricky with regard to gifting as it certainly can be difficult to determine whether or not they will appreciate in value. If you want horses to be part of your gifting plan, consider stallion shares from an already profitable stallion (which produces cash-flow) or a broodmare interest versus younger racing prospects. Of course, the person receiving this gift will then be responsible for care of the horses, so that ongoing expense should be considered. Farms, on the other hand, tend to be held long-term which hopefully will lead to appreciation over time.
To maximize the gift, assets are often contributed to a pass-through entity (holding company) by parents or grandparents. Non-controlling interests in this holding company are either gifted or sold at a discount to the children or grandchildren (or trusts for their benefit) with the voting interest retained by the original owner.
As the saying goes, nothing is certain in life except death and taxes. The first is unavoidable, but exposure to the second may be managed via effective tax planning, some of which is mentioned above. It will be interesting to see what impact, if any, the results of the election have on tax planning.
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