Additional De-Minimis Election Update

Yesterday, we posted on how making the $2,500 de-minimis election may not make sense in certain cases, especially if the farmer is purchasing many assets costing less than $2,500 that will appreciate in value (such as young breeding stock).

We mentioned in the post that the gain was ordinary, but forgot to mention that this gain is also subject to self-employment tax for sole proprietors and partners.  The Regulations specifically state that these assets are not capital assets or Section 1231 assets.  A Section 1231 asset is property used in a trade or business.  Typical assets are equipment, which when sold are never subject to self-employment tax.  Therefore, since these assets are specifically excluded from Section 1231 status, then by default they are subject to self-employment tax and are reported as other income on Schedule F or Schedule C.

Therefore, if a sole proprietor farmer or rancher purchases a large amount of assets that individually cost less than $2,500 AND these assets are likely to appreciate in value, it may be better to not make the de-minimis election for that year.  Remember that this election is an annual election.

Paul Neiffer, CPA