Partial Interest in Cattle

Technical topics regarding tax preparation.
#1
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Client has purchased a partial interest in several cattle used for breeding. Cannot find any information regarding whether this constitutes a partnership type relationship, since the entire interest is not being purchased. Client has stated that this is a common practice in this type of business.

Additionally, how should this partial interest be recorded for depreciation purposes? Should this be listed on the depreciation schedule as “Cattle (1/2 interest)” or something similar? Would the inclusion of the “1/2 interest” verbiage be a red flag to the IRS in any way?

Thanks
 

#2
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I think you need to examine the agreement and literature to determine tax treatment.

There is not enough information presented here to make that determination.
 

#3
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There is no documentation in place in this case. It’s an informal agreement that the income from the offspring that’s sold from these breeding cattle will be split according to the % interest originally purchased. So for example, if the cow costs $10,000 total and they have a 50% interest, they pay $5,000 up front to purchase the cow and then if it generates offspring and they sell it for $7,000 total, they would get $3,500 of the proceeds.
 

#4
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Who pays the operating costs? Food, medicine, etc?
 

#5
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Apparently all split with the other individual according to % interest
 

#6
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Apparently?

So he gets a bill regularly?
 

#7
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If one of them pays for something in full that corresponds to that particular cow, the other reimburses based on the % they own.

But it’s not just one cow. Some cattle have been purchased at 100% ownership, some have been purchased at partial interest with one individual and some at partial interest with another individual.
 

#8
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As a matter of practicality, I think it's best just to do a Schedule C if the activity level rises to a trade or business. I agree that the cost to buy the cows would be capitalized and depreciated. Bonus would be available?
 

#9
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Well the core business itself is actually organized as a partnership. Didn’t want to complicate the scenario even more by saying “partnership of a partnership”. But I understand what you’re saying. Schedule C equivalent for partnership (1065). That’s how this has been prepared thus far. Just confirming that assumption was correct before filing.

It sounds like it may be best when capitalizing to leave off the “1/2 interest” verbiage so as not to raise any red flags.

Thanks for taking the time to respond!
 

#10
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Joint venture = general partnership = no partner escapes SE tax.

Schedule C isn't technically correct but it's a practical solution to a messy situation. I doubt you'll be able to get a cattle ranch operation to pay someone enough to do this correctly. They probably don't understand how complicated it is from a tax compliance standpoint and are fine with their "tax guy".
 

#11
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Right, schedule F was where the activity was reported in this case, and all of the loss reported as SE loss to both partners on their respective K-1.

Haha, yeah no doubt. The structure of some of these businesses can certainly be complicated and the tax law is not always clear on how it should be reported accurately.

Thanks again for your help.
 

#12
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I've seen this a lot, not saying handled correctly. I don't understand why schedule C is being mentioned here though and why even if partial interest it wouldn't be on Schedule F. I've seen "1/2 cow" "1/4 cow" on depreciation schedules a lot.
 

#13
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Yes, you're right. Sch F.
 


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