I was not sure if I would be able to write this post a month ago, but Congress and the President came through with some very good changes to the estate law.  Beginning in 2011, the top rate will fall to 35% from 55% and estate will only be come taxable $5 million up from $1 million.

Another great addition is allowing spouses to transfer their pre-deceased spouse’s unused exemptions.  This allows couples to easily escape a $10 million estate from being taxed at the federal level.  However, in most cases, states will continue to tax some estate tax on estates under these values.

Now for the drawback to the changes.  It is only for TWO years.  We will most likely be back in the same situation in late 2012 (of course an election year) and who knows what it will look like then.

We will keep you posted.

Roth and Company out of Des Moines, Iowa has a great Tax Update Blog that Joe Kristan writes on daily.  I try to touch base with his blog each day and he has been running some year-end tax tips that I thought I would pass on to you.

For today, I want to remind our farmers that if they have an S corporation, and they anticipate a loss for the year, it is very important to make sure the farmer has enough “basis” to absorb the loss.

Basis is equal to the amount of cash or property contributed to the corporation plus any income less losses and distributions.  The farmer is also allowed to have basis for the loans made directly to the corporation.  Simply guaranteeing a loan gives you NO basis in the S corporation.

With the new 100% bonus depreciation rules in place, you may find that this deduction will create a loss in your S corporation with no basis available to pass that loss onto your personal return.  However, in some cases, you may want to limit the amount of loss passing through to you this year to take advantage of the 15% tax bracket, etc.  So, in both cases, it is extremely important to know your S corporation tax basis before year end.  Here are some ways to increase your basis:

Contribute cash or capital to the corporation – Contributing cash increases the basis in an S corporation.  Another option is to contribute other assets such as equipment, etc. to the corporation.  This will increase the basis by the amount of the tax basis in that asset.

Loan money from personal funds to the corporation - These loans should be documented with a promissory note and there is a catch if the loans are paid back before the corporation earns back the losses.  In that case, the repayment will trigger taxable income to the farmer.

Borrow money from a third-party and loan it to the corporation -  These can be effective if borrowed from unrelated third parties.  If you borrow from a related party, this can be disastrous to your planning.

If you have multiple S corporations, be careful in loaning any money between these corporations to create basis.  In all cases, review this with your tax advisor before year-end so you know if you can deduct it and if not, what you need to do to deduct it.

From a farm tax standpoint, one of the biggest trends for 2010 is the expansion of the Section 179 deduction to $500,000 and the introduction of 100% bonus depreciation for new assets bought after September 8, 2010 and before January 1, 2012.

With these two new rules, almost all farmers who purchase new and used equipment during these time periods will be able to completely deduct the purchase if they so chose.  In many cases, the extra deduction may get them little or no tax benefit and cost them money in future years, so it is very important, to try to optimize your tax savings from these two deductions.

Also, for those farmers building ag specific buildings and structures, you will most likely be able to deduct 100% of these costs on your return.  Again, you may not want to do this fully, so it is important to review these rules with your tax advisor.

We had a reader ask the following question:

“Can you defer crop hail insurance proceeds to the next tax year the same as you can the CRC payments if you normally sell more than 50% of the crop in the year after it is produced? “

Based on the facts presented in the question, the answer should be yes.

Crop insurance proceeds are normally reported in the year of receipt.  However, if a farmer meets the following three conditions, they can defer the revenue to the next year:

• The farmer uses the cash method of farming.
• The farmer receives the crop insurance proceeds in the same tax year the crops are damaged.
• The farmer can show that under their normal business practice, the farmer would have included income from the damaged crops in any tax year following the year the damage occurred.

We are assuming that the farmer in the question meets the first two conditions, i.e., cash method farmer and the proceeds received are for the current crop year.

The IRS has ruled that a farmer who can established a history of reporting more than 50% of their crop sales in the year after harvest would be allowed to defer any crop insurance proceeds for the current crop into 2011.

In order to make this election, the farmer should attach to their income tax return describing the facts of the crop insurance proceeds such as the following:

• A description of the crop destroyed and when it occurred.
• Under the normal business practice of the farmer, the income derived from the crop would normally be reported in the following tax year.
• A description of the crop insurance proceeds as to who paid it, the amount and the timing of the receipt, etc.

Remember, if the crop was damaged in 2010 and you receive the crop insurance proceeds in 2011, you can not defer the income till 2012.

Also, if you do elect to report the income from the crop insurance proceeds in the current year, you may be able to dramatically reduce the tax by using farm income averaging.

I think one of the major trends for 2010 and going into 2011 is the continuing high level of commodity prices for most grains, livestock, sugar, cotton, etc.  In 2008, we had high level of prices in the grains, however, the pricing for livestock was much lower and cotton was close to a $1 cheaper than it is now.

For 2011, it appears that these trends may continue and may even accelerate to higher levels.  As farmers, I think we sometimes assume that these prices will be there for much longer than actually happens.  I would suggest at least looking at locking in some of these high prices for your 2011 crops and then still participating in some upside potential by using some out of the money options as cheap insurance.

Anytime you can lock in over $1,200 of gross revenue on good corn acres, you should make an excellent return on your crop input investment.

We will be posting each day this week a top 5 trend or item for 2010.  It may be related to taxes or other items that have affected farmers either in 2010 or looking forward to 2011.

Our first top 5 item is Obama Care.  This is actually the result of two bills that were passed earlier in the year.  Unless you are a farmer with more than about 50 employees, these two bills will most likely affect you in a positive way for 2010 and 2011.  If you are currently paying health insurance for your farm employees and have fewer than 10 employees making $25,000 to $50,000 on an annual basis, you will be entitled to a credit for up to 35% of what you pay on your income tax return.  Remember that a credit is usually a dollar for dollar offset to your tax.

However, beginning in 2012, under the current law, all farmers will be required to start issuing form 1099 for all purchases to vendors that total more than $600 per year.  Right now, you are required to issue these forms only for services to non-corporate taxpayers.  Beginning in 2012, this will be required for all goods and all types of taxpayers.  There is a very good chance that this will be repealed this year, but it is the law right now.

Another area that had some controversy was the reporting of health insurance paid on employees form W-2.  The requirement is that the amount of health insurance paid for the employee be listed on Form W-2, but not included as part of wages.  This was originally required for 2010 W-2s, but the IRS has postponed this to 2011 W-2s.

We are seeing the fight in Congress now on how to fund Obama Care and I am sure that 2011 will have major changes to it.  We will keep you posted.

One of our readers asked the following question:

“If I purchase a (used) tractor by the end of this year what percentage will I be able to write off? “

This is one those questions where the answer is: IT DEPENDS.

When purchasing a used tractor, the farmer must first decide if they want to take the Section 179 deduction on the tractor.  This deduction for 2010 can be as high as $500,000 and it applies to both used and new equipment.  There are two limitations on the deduction:

1. The farmer must have taxable income from farm operations and other businesses at least equal to their planned Section 179 deduction (including most wages that they earn), and
2. They must not purchase more than $2 million in equipment for 2010.  Purchases above this amount start to reduce the Section 179 deduction dollar for dollar.

In the case of this farmer, as long as the farm is profitable and net income from farming and after other depreciation is more than the cost of the tractor, then the farmer will be able to completely deduct the cost of the tractor in 2010.  Any amount not deducted under Section 179 will be depreciated over 7 years.

One of our readers asked the following question:

“Self employed health insurance deductions: does is apply to schedule F, schedule 1040 or both? Will I be able to deduct my health insurance on both my 1040 AND my schedule F or will I have an option of either schedule, or is it schedule F only for 2010.”

The Small Business Jobs Act of 2010 added a new provision for 2010 allowing the cost of health insurance premiums for farmers and other self-employed persons to be deducted against self-employment tax.  However,the Act did not change how the health insurance premiums are deducted for regular income tax purposes.  I have reviewed the instructions for Schedule F and they state that these health insurance premiums are still deducted on page 1 of form 1040 on line 29.

However, I have not seen the new schedule SE which is where I believe the actual deduction on line 29 of form 1040 will flow through as a deduction to offset your SE tax.

Therefore, to answer the question, the actual health insurance premium allowed as deduction will be recorded on line 29 of form 1040, but not on schedule F or C, etc.  Any allowed deduction should then flow to the schedule SE to be allowed as a deduction against SE tax.  You will only report the deduction once against actual taxable income.  You will not be allowed to claim the premiums twice as a deduction and they do not go on Schedule F.

Just wanted to wish all of our readers a Merry Christmas and we at Farm CPA Today.com appreciate your readership throughout 2010.  Just last week, we had our largest number of unique visitors for one day and we just want to thank you for your support.

Again, Merry Christmas and have a very good 2011.

The Federal Reserve Bank of Kansas City publishes several good Ag related articles each year.  They recently did a quick snapshot of the US Ag Economy and one of the slides represented the current corn production for the world. 

The graph showed the actual production for 2009 and the anticipated production assuming each country would use our corn technology. 

Current world production for 2009 was slightly greater than about 27 billion bushels.  If each country could adopt our corn technology, it is projected that corn production would be about 50 billion bushels.

Sub-Saharan Africa could go from about 2 billion bushels of production to over 12 billion bushels alone.

Therefore, even though the world’s population will continue to grow, it should be able to handle the growth for many years by just taking advantage of the technology that we have now.