Stock inventory for taxation

k mac · 06-08-2020 2:12pm #1

Has anyone experience of a practice that I think is called stock inventory. It is used when someone is reducing stocking numbers. I think the purpose is for tax, that you get some relief on the income accrued from reducing stocking rates when you are not restocking to the same level (could be wrong).
Anyone here have any experience of it, pros and cons. I think once you go on it you have to stay on it forever, so if you are increasing stock numbers some time in the future it might not be ideal.

patsy_mccabe · 06-08-2020 3:13pm

I've come across this before a few times. I'm not an accountant, but this is my understanding of it.
Every financial year, you have Opening (1st Jan) and Closing (31 Dec) stock values for cattle on your farm. If you decide to reduce cattle numbers, you will have extra 'Cash On Hand' on 31 Dec as a result. Remember this is not profit, so you don't have to pay income tax on it. You simply carry this 'Cash On Hand' over to the following year.
If in the future, you decide to buy in cattle, you use this Cash On Hand to do so.

If you decide to take that Cash On Hand out of the farm business, I don't know if it is treated then as income. Maybe someone else will know.

Some info here;
https://www.agriculture.gov.ie/agri-foodindustry/agri-foodandtheeconomy/agri-foodbusiness/agri-taxation/indicativelistofagri-taxmeasures/incometaxmeasures/#:~:text=in%20brief%20here.-,25%25%20General%20Stock%20Relief%20on%20Income%20Tax,and%20above%20the%20opening%20value.

k mac · 07-08-2020 10:19am

So you can carry the cash in hand for years to come and it is available if you increase stock numbers again. I don't really see any downside in this so.

patsy_mccabe · 07-08-2020 10:31am

Put it this way, the company APPLE are carrying $93 billion 'Cash on Hand' at the moment.

https://www.macrotrends.net/stocks/charts/AAPL/apple/cash-on-hand

You need to discuss all this with your accountant.

lakill Farm · 07-08-2020 10:53am

Is it stock relief your asking about really?

k mac wrote: »

Has anyone experience of a practice that I think is called stock inventory. It is used when someone is reducing stocking numbers. I think the purpose is for tax, that you get some relief on the income accrued from reducing stocking rates when you are not restocking to the same level (could be wrong).
Anyone here have any experience of it, pros and cons. I think once you go on it you have to stay on it forever, so if you are increasing stock numbers some time in the future it might not be ideal.

k mac · 07-08-2020 10:59am

lakill Farm wrote: »

Is it stock relief your asking about really?

Sorry I am not sure as I said I only really heard about this second hand, am not even sure if it is called inventory. Where I am coming from I suppose I hope to cut back in stock numbers and do not want to have a big tax bill to pay for the extra income generated from selling stock and not buying in more to offset that as I usually do. I do know I was told by the person that is in this, that you have to stay on it after going on it. Is that stock relief?

lakill Farm · 07-08-2020 11:02am

k mac wrote: »

Sorry I am not sure as I said I only really heard about this second hand, am not even sure if it is called inventory. Where I am coming from I suppose I hope to cut back in stock numbers and do not want to have a big tax bill to pay for the extra income generated from selling stock and not buying in more to offset that as I usually do. I do know I was told by the person that is in this, that you have to stay on it after going on it. Is that stock relief?

Are you on income averaging or just standard ?

Does your accounts show Opening and closing stock values ?

How many years were you planning to reduce stock over?

k mac · 07-08-2020 11:39am

lakill Farm wrote: »

Are you on income averaging or just standard ?

Does your accounts show Opening and closing stock values ?

How many years were you planning to reduce stock over?

Not sure I pay paye as well, I presume standard. Not sure if the accounts show opening and closing stock values, would have to check with the accountant. I was planning if I sold the cattle this year and did not buy any until next year and from then on just kept them for the 7 months each year.

patsy_mccabe · 07-08-2020 11:45am

I print off my Herd Profile from Agfood for 31 Dec every year in *.pdf form and send it to my accountant.

lakill Farm · 07-08-2020 12:24pm

k mac wrote: »

Not sure I pay paye as well, I presume standard. Not sure if the accounts show opening and closing stock values, would have to check with the accountant. I was planning if I sold the cattle this year and did not buy any until next year and from then on just kept them for the 7 months each year.

even though your PAYE you could be on income averaging or standard

Yes check them details

I would suggest doing 2020 management accounts in October/Early November and deciding then how many of the cattle to sell this year that wont effect your tax to much

You may have unused s381 or 392 coming forward

trg · 07-08-2020 1:21pm

patsy_mccabe wrote: »

I've come across this before a few times. I'm not an accountant, but this is my understanding of it.
Every financial year, you have Opening (1st Jan) and Closing (31 Dec) stock values for cattle on your farm. If you decide to reduce cattle numbers, you will have extra 'Cash On Hand' on 31 Dec as a result. Remember this is not profit, so you don't have to pay income tax on it. You simply carry this 'Cash On Hand' over to the following year.
If in the future, you decide to buy in cattle, you use this Cash On Hand to do so.

If you decide to take that Cash On Hand out of the farm business, I don't know if it is treated then as income. Maybe someone else will know.

Some info here;
https://www.agriculture.gov.ie/agri-foodindustry/agri-foodandtheeconomy/agri-foodbusiness/agri-taxation/indicativelistofagri-taxmeasures/incometaxmeasures/#:~:text=in%20brief%20here.-,25%25%20General%20Stock%20Relief%20on%20Income%20Tax,and%20above%20the%20opening%20value.

There's no way this is right is it?

If you sell the animals you pay tax on them less the opening stock value.

Stock Relief is on the difference between closing and opening stock. If you sell the animals and money is in the bank then there'll be no stock relief at all that year.

patsy_mccabe · 07-08-2020 1:45pm

Stock Relief relates to the opposite scenario, an increase in stock numbers.

From the Revenue website;

Stock relief is available only to farming trades and is a relief given in respect of
increases in the value of farm trading stock. It is calculated by reference to the
increase in value of the stock between the beginning and end of an accounting
period.

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-23/23-02-02.pdf

patsy_mccabe · 07-08-2020 2:01pm

Put it this way, a simple example.

A farmer buys and sells 100 cattle every December. He buys for €500 and sells for €1000. His expenses for the year are €30,000. So his farm income is €20,000.
(100x(1000-500)) minus 30,000.

Lets say he gets sick after selling his cattle but can't buy in. He now has no cattle on 31 Dec. His sales are €100k, expenses €30k. So €70,000. Do you really think that revenue will treat this €70k as income for that year?

Panch18 · 07-08-2020 2:41pm

patsy_mccabe wrote: »

Put it this way, a simple example.

A farmer buys and sells 100 cattle every December. He buys for €500 and sells for €1000. His expenses for the year are €30,000. So his farm income is €20,000.
(100x(1000-500)) minus 30,000.

Lets say he gets sick after selling his cattle but can't buy in. He now has no cattle on 31 Dec. His sales are €100k, expenses €30k. So €70,000. Do you really think that revenue will treat this €70k as income for that year?

yes

TooOldBoots · 07-08-2020 2:45pm

Here's a more simple explanation of stock relief

Jan 1st farmer has 25 cows valued at €1000 each so €25000 worth of stock in total.
By the end of the year those 25 cows have calved and the calves are worth ~€800 each so €20000 worth of calves.

So on the 31st of December that year the Farmer now has stock to the value of the cows and calves which equal €25000 + €20000 = €45000
That's an increase in stock value of €20000
The farmer can now claim 25% increase stock relief which is 25% of €20000 = €5000

So now the farmer has a Taxable gain of €15000

(and I know the reality is the farmer will have a shed load of other expenses so he's hardly going to have 15k profit)

minerleague · 07-08-2020 3:37pm

Did my own accounts for about 12 years, whether you buy less or more cattle in the year doesn't make a whole lot of difference, its accounted for in the change between opening and closing stock values. ( if you sell less cattle your closing stock will be higher) Stock relief was something to help farmers trying to increase production.

KAMG · 07-08-2020 3:54pm

patsy_mccabe wrote: »

Put it this way, a simple example.

A farmer buys and sells 100 cattle every December. He buys for €500 and sells for €1000. His expenses for the year are €30,000. So his farm income is €20,000.
(100x(1000-500)) minus 30,000.

Lets say he gets sick after selling his cattle but can't buy in. He now has no cattle on 31 Dec. His sales are €100k, expenses €30k. So €70,000. Do you really think that revenue will treat this €70k as income for that year?

Yes, that's how it is treated. Hence why Income averaging for farmers is such a handy thing to be allowed to avail of. It smoothes out profits over 5 years. In the example above, if the farmer hopefully gets better and buys in 100 cattle the following year, he will have a loss more than likely if he doesn't sell the 100, so, again averaging will smooth it out.

minerleague · 07-08-2020 4:03pm

patsy_mccabe wrote: »

Put it this way, a simple example.

A farmer buys and sells 100 cattle every December. He buys for €500 and sells for €1000. His expenses for the year are €30,000. So his farm income is €20,000.
(100x(1000-500)) minus 30,000.

Lets say he gets sick after selling his cattle but can't buy in. He now has no cattle on 31 Dec. His sales are €100k, expenses €30k. So €70,000. Do you really think that revenue will treat this €70k as income for that year?

This farmer opening and closing stock are 50000, most years zero diff. In the scenario where he buys nothing in closing stock less opening stock is -50000 (Thats the way I did it anyway

) income averaging is more to do with value of sales increasing/ decreasing ( ie milk price volatility)

K.G. · 07-08-2020 11:44pm

my take on it
afarmer expanding has 10 k more in cattle on hands at the end of the ye
ar therefore he will have to pay tax on the extra 10 k in stock.however the next year he loses land and has to destock so he sells the 10 k in cattle and his stock goes down by 10 k.he does not have to pay tax on these sales as the 10 k in sales is negated by the 10 k decrease in closing stock so in there fore no tax is liable.feel free to correct me

minerleague · 07-08-2020 11:57pm

K.G. wrote: »

my take on it
afarmer expanding has 10 k more in cattle on hands at the end of the ye
ar therefore he will have to pay tax on the extra 10 k in stock.however the next year he loses land and has to destock so he sells the 10 k in cattle and his stock goes down by 10 k.he does not have to pay tax on these sales as the 10 k in sales is negated by the 10 k decrease in closing stock so in there fore no tax is liable.feel free to correct me

in first part yeah, he has put 10k money( profit) into cattle instead of holding it in cash so pays income tax on this (stock relief of 100% for young trained farmers would have negated this)
In second part again correct closing stock has reduced so no tax ( but if he sold them for more than they were valued at in opening stock some liability would accrue!)

trg · 08-08-2020 12:18am

patsy_mccabe wrote: »

Put it this way, a simple example.

A farmer buys and sells 100 cattle every December. He buys for €500 and sells for €1000. His expenses for the year are €30,000. So his farm income is €20,000.
(100x(1000-500)) minus 30,000.

Lets say he gets sick after selling his cattle but can't buy in. He now has no cattle on 31 Dec. His sales are €100k, expenses €30k. So €70,000. Do you really think that revenue will treat this €70k as income for that year?

You're forgetting opening stock there.

Sales 100k minus opening stock 50k minus expenses of 30k = taxable profit of 20k.

He still has 70k in the bank to buy his stock when he recovers. All going well then the year after he'd have 12,500 stock relief (50k x 12.5%)

richie123 · 08-08-2020 2:50pm

KAMG wrote: »

Yes, that's how it is treated. Hence why Income averaging for farmers is such a handy thing to be allowed to avail of. It smoothes out profits over 5 years. In the example above, if the farmer hopefully gets better and buys in 100 cattle the following year, he will have a loss more than likely if he doesn't sell the 100, so, again averaging will smooth it out.

Is income averaging something you can only use once Ina given period of time or how does that work ?

Donald Trump · 08-08-2020 6:10pm

Can someone please explain this interesting concept that I have heard a few times before and some have mentioned it on thread.

Everyone keeps mentioning something called "profit".

Donald Trump · 08-08-2020 6:19pm

So how does the stock relief work in terms of eventually disposing of the stock.

Suppose you start with an empty place and whatever income you make from other endeavors, you buy stock. Assume you can live on fresh air
Year 1 you made 20k and you use that to buy 20 cattle @1k each. So overall your farm has 0 profit
Year 2 you make another 20k and you use that to buy 20 more cattle @1k each. The year 1 cattle increase in value to 1.20k or a total increase of 4k for their value. Total value of stock at end of year 2 is then 44k
Year 3 you retire and sell your 40 cattle for 1.5k each so make 60k income. You don't make anything else.

So am I right in saying that in Year 1, you have to pay tax on 25% of the increase in stock value which would result in an "income" of 5k.
Then in year 2, your income is effectively 25% of 24k

What happens in year 3? Are you paying tax on the 16k book "profit" or on the 60k income?

MIKEKC · 08-08-2020 6:22pm

Donald Trump wrote: »

Can someone please explain this interesting concept that I have heard a few times before and some have mentioned it on thread.

Everyone keeps mentioning something called "profit".

With what people are paying for stock at the minute they must be making loads of it

Donald Trump · 08-08-2020 6:25pm

MIKEKC wrote: »

With what people are paying for stock at the minute they must be making loads of it

I don't know about that. Feed and water a beast for 30 months and when you take your expenses out of whatever you get for them, what's left isn't going to get you too far with the oul' coke and hookers.

minerleague · 09-08-2020 11:23am

Donald Trump wrote: »

So how does the stock relief work in terms of eventually disposing of the stock.

Suppose you start with an empty place and whatever income you make from other endeavors, you buy stock. Assume you can live on fresh air
Year 1 you made 20k and you use that to buy 20 cattle @1k each. So overall your farm has 0 profit
Year 2 you make another 20k and you use that to buy 20 more cattle @1k each. The year 1 cattle increase in value to 1.20k or a total increase of 4k for their value. Total value of stock at end of year 2 is then 44k
Year 3 you retire and sell your 40 cattle for 1.5k each so make 60k income. You don't make anything else.

So am I right in saying that in Year 1, you have to pay tax on 25% of the increase in stock value which would result in an "income" of 5k.
Then in year 2, your income is effectively 25% of 24k

What happens in year 3? Are you paying tax on the 16k book "profit" or on the 60k income?

Stock relief is/was a tax break where you can write off increases in stock value against tax ( was 100% for young trained farmers 25% otherwise) same as any normal farm expense
If you retire I think there are special arrangements in place ( dont know what exactly)

patsy_mccabe · 09-08-2020 11:27am

So nobody can give a definitive answer to the OP' s original question.

MIKEKC · 09-08-2020 12:05pm

Donald Trump wrote: »

I don't know about that. Feed and water a beast for 30 months and when you take your expenses out of whatever you get for them, what's left isn't going to get you too far with the oul' coke and hookers.

What it costs the producer to rear the animal is irrelevant. The person buying has to decide what he can pay, and leave a profit

J.O. Farmer · 09-08-2020 12:13pm

MIKEKC wrote: »

What it costs the producer to rear the animal is irrelevant. The person buying has to decide what he can pay, and leave a profit

Well said Larry, the beef farming charities get the animals to slaughter weight.

Donald Trump · 09-08-2020 1:10pm

MIKEKC wrote: »

What it costs the producer to rear the animal is irrelevant. The person buying has to decide what he can pay, and leave a profit

You said there must be profit what with the current prices that are being paid for stock.

You can't say the costs are irrelevant to that.

Unless I am misunderstanding are you are saying something else.

Stock inventory for taxation

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