Death of Accrual Taxpayer

[Jiggers]

Taxpayer died. He used the accrual method of account for his cattle Farm. All cattle (calves, cows, bulls, heifers) were valued using the accrual method. He raised cattle. His estate passes to his spouse in a community property state. All assets obviously will receive a step up in basis to FMV at date of death. Can his spouse use the cash method of accounting, and depreciate the breeding cows and bulls, instead of using the accrual method of accounting? I know other assets used on the farm: pens, barns, tractors, pickup, etc. receive a full step up in basis and I will depreciate them. I was just concerned about the breeding cows and bulls. Under the accrual method they were just included in inventory and never depreciated. And, all were raised as all purchased cows and bulls have either been sold or died.

[Ballscientist]

Do they sell the cow and bulls in the farm? If yes, it is inventory. Otherwise you can treat them as Fixed Asset.

I believe that it needs to be depreciated, not deduction.

Real Estate and law Term: Community Property

Can that state "will" the property to his spouse?

[Jiggers]

Raised cattle

Wouldn't the basis be zero for all the raised animals. Might as well leave them in inventory.

All assets used in the production of income on a farm get a stepped up in basis on the death of the taxpayer, including raised cows and bulls. Not calves, hay, field crops, and other items raised, as those are income in respect of the decedent.

You can start depreciating raised cows that are inherited.

[jainen]

working hard enough

>>His estate passes to his spouse in a community property state. All assets obviously will receive a step up in basis<<

There is nothing "obvious" about that. Much if not most marital property in community property states is titled separately or in joint tenancy, NOT as community property. Furthermore, nowadays business or farm property is commonly if not usually held in a trust or corporation. I just have to comment that if you think ANYTHING in this business is "obvious," you aren't working hard enough for your clients.

[Jiggers]

Death of Accrual Taxpayer, II

What I am looking for is changing from the Accrual Method of Accounting for the Schedule F for the husband to the Cash Method for the wife. Can you do it?

[Bees Knees]

A farm is a sole proprietorship. Assuming this husband and wife team was not operating as a partnership, the wife inheriting the farm and then going into business for herself as a farmer for the first time should be allowed to choose her accounting method. She can choose the cash method of accounting for her first year in business, provided the cash method is otherwise allowable under the circumstances.

I think the issue you need to consider here, however, is whether or not she is really starting a new business. I’ve never heard of a farm operation where the husband and wife did not jointly run things, especially when the wife continues the farm operation after her husband’s death. Reality is, they were both running the business, and she is not starting up a new business. I could see where IRS might rule you need to stick with the accounting method unless you apply for a new one with IRS. I guess I would advise going through the change of accounting method procedure just to play it safe. It isn’t that hard to do.