Scott Heintzelman of The Exuberant Accountant has a very good post on the new rules coming for 1099 reporting for all businesses starting in 2012.  In one of my previous posts, I had indicated that these rules were coming, but Scott does a very good job of highlighting the changes.

One thing that needs to be stressed on these rules that most of us probably have ignored is that if we do not comply properly with the rules, two bad things can happen.

First, if you do not report the transaction to the IRS, they can assess a penalty of $50 per form 1099 not reported up to a current maximum of $100,000.  Under the current rules, if you missed one or two 1099s that should have been reported, the total penalty might be less than $500.  Under the new rules, if you are required to issue form 1099 to all businesses that you purchase goods and services from, the penalty could add up very fast.  For example, if you deal with 100 vendors that you paid more than $600 to during 2012 and do not report any of these transactions on form 1099, then your potential penalty is at least $10,000.

Second and perhaps more important is that if you do not provide your federal identification number to your customers, they may be required to perform backup withholding on payments to be transmitted to you.  This backup withholding is usually 20% of the total sale.  Therefore, if you sold grain for $250,000 to your local elevator and backup withholding applies, the elevator would only give you a check for $200,000 and send $50,000 to the IRS.  You would be able to get this $50,000 back when you file your return, but that means you have to wait until the following year to get your money.

Under current rules, backup withholding does not apply to  the sale of farm products, but it is my opinion that with the new rules, backup withholding will probably apply on the sale of any product including farm products.  Therefore, it will be very important to provide your EIN to any customer you sell products to.

I would strongly suggest that you review your current accounting system and Trprocedures to make sure that you are ready for 2012.  As the scientist Carl Sagen would say, the IRS is about to get Billions and Billions of form 1099 starting in 2012.

It is projected by 2019 that Russia may become the world’s largest wheat exporter and Russian, Ukranian and Kazakhstan (RUK) wheat exports collectively may double the United States wheat exports according to the June 2010 issue of Amber Waves.  This growth in wheat exports may help mitigate global food security concerns and help offset the the shift in US acreage to corn, soybeans and other more profitable crops.

USDA is projecting that wheat exports by there three counties could increase by about 50 percent to over 50 million metric tons by 2019 or about 1.9 billion bushels.  The region may account for over half of the increase in wheat exports and could supplant the US as the “wheat breadbasket of the world”.

The US has been in second place since World War II but could easily slip to second place especially if the trend to more corn and bean acres at the expense of wheat production continues.

The US share of wheat exports may drop from the current 24 percent range for 2001-09 to an estimated 16 percent by 2019.  The European Union, Canada and Argentina will also lose market share while Australia is expected to remain flat.  The three former Soviet Union counties should see their market share go less than 20 percent to over 33 percent by 2019.

There are two main reasons why RUK have become larger wheat exporters.

1. The region’s transition from planned to market-orientated economies that began with collapse of the former USSR in the early 1990s.  During the late Soviet period of 1987-91, the USSR imported 35 mmt of grain, while in 2009, the former USSR nations exported nearly 55 mmt.  This is a turnaround of over 90 mmt or about 3 billion bushels of grain.  Also, the large contraction in the livestock sectors led to market driven importation of meat and exports of grain.
2. The region’s yield has risen steadily during the 2000s.  During the 1990s, wheat yields actually decreased primarily due to bad weather and a lack of inputs, especially fertilizer.  However, during the 2000s, wheat yields have risen about 32 percent in Russia and about 25 percent in Kazakhstan.  A lot of this increase is due to the large vertically integrated enterprises that are in charge of the crop from the very beginning to the final wheat sale.

If the world market for grain was expected to remain steady, this increase in Soviet production could lead to much lower prices, however, the world will add another 750,000 or so people over the next 10 years and they will eat a lot of wheat so wheat prices may actually rise over this period.

The American Jobs and Closing Tax Loopholes Act of 2010 is expected to be passed in the next week or so.  In this tax act, there is a provision that states all ordinary income earned by S corporation from professional services (such as accounting, consulting, medical and other related professions) will be subject to self-employment taxes.  Currently, an S corporation is required to pay appropriate salaries to owners that are active in the business, but any income earned above the salary is not subject to any self-employment tax.

Now, for those businesses that are affected, all ordinary income will either be subject to self employment tax or normal payroll taxes on salaries paid.  It may now make sense not to pay any salaries for these owners since the income would not be subject to any state or federal unemployment or worker’s compensation taxes.  This provision is effective for years beginning after 2010.

This provision will not apply to most farmers, however, in many situations, a farmer will set up a corporation that they will list as being in the consulting business.  You need to make sure to list the corporation as a farmer and therefore, the current tax situation on these earnings still should be in effect.

Also, this is probably the first step to making all ordinary income from S corporations subject to self employment taxes sometime in the future when Congress needs to raise more revenue.

Please note this Tax Act has not yet passed, however, it is expected to become law by the end of May.

I thought I would update the readers on my so-called motorcycle trip.  As you know, I was planning on riding my motorcycle to Omaha, however in looking at the long-range weather report, it showed rain for four of the days that I was to be in Omaha, so I decided to fly there.  I am glad I did since it rained hard on Monday and rained on and off from Tuesday to Thursday.

I was scheduled to fly home on Friday evening, but my business was done quicker than I thought, so I went to the airport to fly standby since the agent on the phone indicated there were plenty of seats available.  You guessed it, another flight was delayed which caused all of the seats for the day to get filled up.

I decided to rent a car and make a quick trip up to Sioux Falls, SD and really enjoyed seeing that part of the country.  My father was from northern South Dakota and I had never really seen this part of the state.  I got back to the airport, dropped off the car, and checked in for my flight.  You guessed it again, the plane had “mechanical issues” and since I could not make my connection to Spokane, I got to spend another night in Omaha.

The good thing is that they bumped me to First Class and the trip home on Saturday had no issues.

Now, I am getting ready to drive to Los Angeles and was planning on taking my bike (shown in the picture), however, as I look out the window, rain is imminent and the weather forecast calls for rain today, Tuesday, Thursday and Friday.  Needless to say, I am driving a car down.

I actually hope to get a good ride in when I know there is no rain.  My bike is fun to drive, but it does not like the rain (or maybe I should say the driver does not like the rain).

The Federal Reserve Bank of Kansas City issued their quarterly report on agricultural credit conditions for the first quarter of 2010.  They indicated farmland values rose due to strong demand and the rebound in livestock prices.  Both farmer and non-farm demand appears to be very good.  Looking ahead, they expect farmland values to hold steady.

However, most district bankers reported that farm income fell slightly in the first quarter, however, they expect higher levels in the second quarter with the year being steady.

Farmland values for the quarter rose about 2% with Nebraska having the highest gains of about 6%, however, Oklahoma and the mountain states were lower for the quarter.  This was the strongest gain in over a year primarily due to the livestock rebound.  Interest rates edged down slightly, averaging 6.6 percent.

In reviewing the long-term chart shown in the report, there have only been 3 quarters that have been negative since 1990.  Two quarters were in late 1990 when the Internet bubble was at its highest and one quarter last year.   Owning farmland has been a very good investment over the last 20 years.  We all hope the trend continues for the next 20 years.

I have been in Omaha all week on business and have not had much time to write a post or two.  Most of the corn is planted here and for all week it has been raining on and off.  This will help get the corn up, but may delay the bean planting.

I have noticed that the USDA reports show the corn crop carryover going down which has caused a decent rally in corn prices.  On a seasonal basis, corn and beans do tend to top over the next month or so.  You need to make sure that you have updated your budgets for this year to determine if the current prices are covering all of your input costs.  If so, consider start locking in some of these decent prices.

I strongly urge all readers to have a good marketing plan in place since this can be (and usually is) the difference between showing a profit and showing a loss.

I was planning on taking my motorcycle back here, however, with the rain, I left my bike home.  Next week, I go to California and plan on taking my bike then.  I hope planting season is going good for everybody.

The April 29, 2010 issue of Bloomberg Businessweek had a good article on how the seed companies are developing drought resistant corn seed that may expand the corn belt farther into Kansas, Nebraska, and Oklahoma.

Another benefit of the seed is a reduction in the amount of irrigation that is needed.  This can lead to reduced crop insurance premiums and can boost the value of this crop land.  Also, the article states that agriculture accounts for 70% of global freshwater use and the single biggest issue facing agriculture is the availability of water.  By creating seed that uses less irrigation water or requires less natural water, a farmer can increase their net income, and in some cases, substantially.

Dupont indicates that in their test trials, the new seeds are creating yields that about 6% better than the old seeds.  Syngenta is aiming for a 10% increase in yields.  The seed companies believe that by 2020, over 55 million acres of corn will be planted with the new drought resistant seed. 

If a farmer’s old corn yield was 120 bushels per acre and they can create a 10% yield increase at $3.50 bushel price, this would increase the net bottom line by about $42 per acre less any increase in seed cost plus any reduction in irrigation costs.  This can be a substantial increase to the bottom line.

Congress recently passed the Hiring Incentives to Restore Employment (HIRE) Act.  This act provided a couple of new credits that in a lot of cases will help our farmers.

The first credit is basically a direct reduction in the 6.2% employer FICA cost for new employees hired who have been un-employed after March 18, 2010 and before the end of the year.  This credit will be claimed on your form 941 (or in most cases, the form 943 filed by farmers at the end of the year).  In order to claim the credit, you must get a Form W-11  from the employee that states they have not been employed for the previous 60 days.  This credit can add up fairly fast.

For example, assume a dairy farmer hires three new employees making $3,000 per month who were un-employed.  For the nine months ended December 31, 2010, they would have been paid $81,000 in wages and the employer’s FICA portion would have been $5,022.  This cost is completely eliminated by the Act.  This also allows you not to have to make this deposit during the year.

The IRS has a nice question and answer page regarding this new credit.

The other credit is a general business credit of up to $1,000 per employee hired that you can claim on your 2011 tax return.  To claim this credit, you must have retained the employee for 52 consecutive weeks and the credit is equal to the lessor of $1,000 or the 6.2% of wages paid.  If you pay wages of at least $16,129, then you will qualify for the maximum credit.  Again, this is a business credit, so you are not guaranteed an immediate benefit and you will need to reduce your wage deduction by the amount of the credit.

Again, the IRS has a question and answer page on this particular credit.