With the end of 2009 less than three weeks away (where does the time fly), I thought I would post a year-end tax planning update for farmers.  Most of this information applies to non-farmers also, but wanted to give you something to plan for.  Again, make sure to review this with your tax advisor before implementing any of these recommendations.

• Required minimum distributions from individual retirement accounts were waived for 2009.  Also, if you are turning 70 1/2 this year, remember that you must take out your first distribution by April 30, 2010, however, if you wait till 2010, you will be required to take two distributions, one for 2009 and one 2010.  This may put in into a larger tax bracket.  Check this out before deciding to take next year.
• Review the expected tax rates for 2010 and 2011 to determine how much income or expense to record in 2009.
• Vehicle sales tax are deductible for those who do not itemize.  Limit is based upon a purchase of up to $49,500.
• If you are planning on larger charitable contributions, you may want to consider a direct transfer from your IRA.  This can save taxes on your social security income, if applicable.  This applies to people 70 1/2 and older.
• If you are selling land on an installment contract, you may want to consider electing out of the installment method.  Capital gains rates are probably as low as they will be for the next several years.  It may make sense to pay taxes now (CPA do not say that too often).
• There is a $8,000/$6,500 homeowner’s tax credit for home purchases through April 30, 2010.  You can claim the credit in 2009 even if the house is purchased in 2010 by that date.
• College education credits are enhanced.  It now has a larger credit, higher income limits and 40% of the credit is refundable even if you owe no tax.
• Review your Roth IRA conversion opportunities for 2010.  In 2010, you can convert any amount with-out worrying about any income limitation and the amount converted is reported as income 1/2 in 2011 and 2012.
• You can give $13,000 to any individual without filing a gift tax return.  This is also true for the spouse.
• Remember that 50% of new equipment purchases can be deducted immediately.
• Remember that Section 179 expense for 2009 is $250,000.
• Most farming equipment is now deprecated over five years instead of the old seven year life.

I was traveling over the last couple of days to the Mid-West.  I spent part of my time driving from Kansas City to Davenport, Iowa and then from there to Hannibal, Missouri and then back to Kansas City.

 While on this trip, I noticed that there was still a lot of corn that was not harvested.  Most of the farms that I saw with un-harvested corn appeared to be smaller farms since the combines were much older and only had a 4 or 6 row head.  With the weather delays, this does make sense to me since the newer larger combines can harvest a lot more acres in a day than the older machines. 

This seems to confirm the recent USDA report that indicated the corn harvest was only 88% complete.  This means that about 12% of the crop still needs to be harvested.

I am guessing that harvest will not get finished until sometime in early 2010.  I have a feeling this will go down as one of the latest harvests ever.

The IRS just announced the mileage rates to be used for 2010 and most of them are lower than 2009 (even though gas is higher now than last year at the same time)

For regular mileage, the reimbursement rate will be 50 cents per mile which is about 9% lower than last year’s rate of 55 cents per mile.  For medical miles, the rate has been reduced from 24 cents to 16.5 cents which is a 31% decrease.

The rate for charitable miles remains the same at 14 cents per mile.

Remember, that you can use these rates in lieu of keeping track of all of your costs related to auto usage, etc.

In the latest issue of Business Week magazine is a very good article on the farm land rush that is occurring in Africa and other under-developed countries around the world.

There are many issues surrounding these investments in third word farming enterprises.  Although it may provide jobs for these people, it also is disturbing the economic and social structure of these societies.  It appears that with Africa being more than three times larger than the US and with lots of good farmland that has never been aggressively farmed, that this may be last land available to be developed on a large scale basis.

In the first half of 2009, more than $2 billion was raised to invest in farmland, according to Agcapita, a Calgary based ag fund.  A lot of this money will be invested into Kenya, Sudan, Tanzania and Ethiopia.  In June, 2009, the first annual Global AgInvesting was held which brought together these fund managers and investors looking to invest in farmland.

Although $2 billion sounds like a lot of money, it would only purchase about 400,000 acres of land in Iowa at $5,000 per acre.  This would be equal a county with about 625 square miles.

I personally think that we will see more of these investments over the next several years as we continue to add world population.  We have been the most technologically advanced farming country in the world, but these technologies change quickly and Africa can catch up.  However, it may take several decades.

Please read the article and let me know what you think of the issues raised.

The University of Illinois had a recent October article on how land prices for Illinois had held steady from January 1, 2008 to January 1, 2009.  Prices for both years were slightly more than $4,500 per acre.  This contrasts with prior year increases.

Between 2003 and 2008, the average price per acre grew by $2,120 or about an 87% increase.  According to a surver of professional farm managers and rural appraisers in the state, prices for all of 2009 are still expected to remain steady primarily due to the expectations of cash land rents not dropping this year or next year.

These stable cash rents indicate an average of about $170 per acre in cash rents.  Just in the last three years, this average has gone up by about $38 per acre or a 29% increase.  These high cash rents may be leading to a net return to a farmer of almost zero based on a fully costed operation.  These returns compare to over a $50 per acre return in 2007 and 2008, which were considerable above average.

These low returns suggest that cash rents should drop, however, there is usually a year or two delay in this drop.  If the net return remains low for 2010, then we should expect that cash rents for 2011 and resulting land prices may drop and this drop may be dramatic.