We had a reader ask the following question:

“Is there an order in which I have to take depreciation? One of your explanations indicated taking section 179 first then bonus depreciation and then regular depreciation. I am wanting to take the 100% bonus depreciation on all new items and not section 179 due to the fact I would not have to recapture section 179 depreciation if I later traded or sold the asset before the life of the asset ran out. Is there any reason not to take the bonus rather than the section 179? Do I have to make a special election?”

The Section 179 deduction is an election that a farmer makes when filing their tax return each year.  The farmer is not required to take Section 179 on any asset, but rather, has the option to take as much Section 179 on the asset as they want. 

If you purchase a combine for $300,000, you can “elect” to take Section 179 of $1 up to $300,000 (assuming you meet the income limitation and overall asset purchase limitation).

Therefore, in this question, the farmer can make an election to not take the Section 179 on the new assets and simply have 100% bonus depreciation apply on new assets.  However, if it is a used asset, they can only take Section 179 on the asset, 100% bonus depreciation does not apply.  

The election is made on form 4562 where you will list each asset with the name, purchase price, etc. and then how much of the asset you want to take Section 179 on.

Although the farmer will not have Section 179 depreciation recapture on the later sale of the asset, they will still report that same amount of gain on form 4797 whether they took Section 179 on the full asset value or wrote off the asset using 100% bonus depreciation.  It will be reported differently, but the gain will be the same amount.

The first presentation at the Top Producer seminar today was done by Sterling Liddel, a vice president of economics at Rabo AgriFinance.  The slide that stood out to me the most was the long-term mean price for corn over the last 80 or so years.

For about the 40 years before the Russia price shocks of the mid 1970′s, the long-term price trend was around $1.00 to $1.50.  Over time, as yields and efficiencies increase, the long-term price tends to trend down slightly.  From the mid-1970′s until a couple of years ago, the long-term trend price was about $2.50 to $3.00 with much more volatility around the mean price. 

We may now be in a new long-term trend at higher prices.  We probably do not know what these new trend price might be, but we must remember that the market will efficienty strive to bring that price back down to provide a normal mean return to the farmer.  The market will generally allow an excess return for only a few years, but eventually this market will get those prices back to this long-term trend.

We were discussing this with some farmers around the dinner table tonight and this worries them that most pricing assumptions made by newer or younger farmers is building in the “new normal” returns and that they will continue for a long time.  If you are making land purchase decisions based upon an average of $5 corn and $11 beans, you need to also run your numbers at $3 corn and $8 beans.  If you can fund those prices without stressing your operation, then it may be OK to make the purchase.  However, if those prices stress the rest of your operation, it will probably make more sense to hold off and build up your working capital to allow a purchase later on.

Believe or not, more farmers go broke when prices are high than when they are low.  They try to leverage up to get those additional acres and lose out when the margins they built into their assumptions evaporate.  Be careful in your assumptions.

I am in Chicago this week attending both the Top Producer conference and yesterday I attended the Tomorrow’s Top Producer and also gave a brief talk on income tax changes for 2011.  There appears to be about 100 of tomorrow’s best farmers attending the conference and at lunch time, my wife and I were talking with 4 college senior man from Northwest Missouri University who all live in Southwestern Iowa and will be going back to the family farm soon.

As my wife said, what outstanding young men and I think that American farmers will be well represented by these young men (plus they also laughed at my jokes).

There were several good presentations on what it takes to be an efficient manager of a farm operation both as a young producer and laying the groundwork for when they are no longer young.  If you are a young farmer, I would highly recommend attending this conference next year.

I will try to provide a daily update of the conference over the next few days.

We had a reader send in the following question:

“I really got my-self confused by reading to much.  I need some clarification on the new upcoming requirement on filing 1099’s.  I know that it goes into effect for tax years after 12-31-2011.  Where I am confused is CCH say it is for amounts paid after 12-31-2011 so the 1099’s will be filed in 2013.  I just read a article in the Kiplinger Tax Letter that say this new law effects 1099’s filed in 2012, so that means for amounts paid in 2011 .  Is this correct or is it for amounts actually paid in 2012.”

The new law passed early in 2010 requires businesses to start filing form 1099s for all transactions where the total purchases to one vendor during the year reaches or exceeds $600.  This law is effective for purchases made after December 31, 2011 or the calendar year 2012.  This means that the form 1099 will need to be sent to the vendors in January 2013 and reported to the IRS usually by February 28, 2013.

So the bottom line answer that this new rule is for purchases made in 2012, and filed in 2013.

There is much speculation that this law will be repealed this  year.

We had a reader ask the following question:

“My wife and I built a new home in 2010. We moved in on June 24,2010. Can we take the residential energy credit for insulation, windows, & doors on form 5695 for this house on our 2010 tax return? Thanks, Dave”

I am afraid that we do not have good news for Dave.  The nonbusiness energy credit that he is asking about is normally claimed on form 5695 as he states, however, the type of costs that Dave is describing are restricted to existing homes.  The credit is designed to help offset the cost of retrofitting an existing home with energy saving devices.

However, if Dave and his wife had put in any of the following devices:

• Qualified solar electric
• Qualified solar water heating
• Qualified small wind power
• Qualified geothermal heat pump
• Qualified fuel cells

Then Dave would claim those credits on form 5695, but it does not appear that these costs were incurred in their new house.  These type of costs are allowed as a credit on both new homes and existing homes.

So, the bottom line is that the credits for the typical insulation, windows, doors, etc. must be on an existing home, not on a new home.

We had a reader ask the following question:

“Is it true that for 2010 we can reduce our net self-employed income on Schedule SE line 3, by deducting the amount of our self-employed health insurance from line 29 of Form 1040? My husband and I farm side by side so will only his half of the self-employed health insurance qualify for this deduction as his name is the one listed on the top of Schedule SE or can we deduct the total amount that we have listed on line 29 of Form 1040?”

There are several questions from the reader.

First, for 2010 only (unless Congress extends the law), a farmer is now allowed to deduct the self-employed health insurance deduction shown on line 29 of form 1040 in arriving at net self-employment income for self -employment tax purposes.  This means that for most farmers who have health insurance premiums ranging around $10,000 for them and their family, the self-employment tax savings would be around $1,500.

On the second question, the amount allowed as a deduction against SE income is the amount shown on line 29 of form 1040.  If the health insurance premiums are in his name and covers him, his spouse and the family, then normally the whole amount would be allowed as a deduction against SE income.  However, if the premium is only for him and there is a separate premium for the spouse and the spouse is not employed by the farm, then her premium MAY not be deductible against his SE income.  It is hard to tell from the question which fact pattern is correct, however, our discussion would cover most of the options.

A way to correct this is for the farmer to pay wages to the spouse and then the premiums for her would be deductible as an employee benefit on the farm’s schedule F.  If the net income of the farm is under the wage base of $106,800 for 2010, then the only extra payroll tax would be the possible FUTA tax on her wages.  To take advantage of this, the spouse must be performing actual services for the farm and a bona fide arrangement.  The IRS has challenged several of these arrangements, losing some cases and winning others.

These situations must be discussed with your tax advisor since the interplay of tax rules can be complex.

We had a reader ask the following question:

“I’m thinking of purchasing a farm acreage with 3 newer farm equipment buildings and some old grain storage buildings. Could I take advantage 100% depreciation since they are new buildings to me and will be used for my farm in 2011?”

On the bonus depreciation rules for farm equipment and buildings, the rule is that the property must be new as in the first time that this property is put into use.  For example, when a farmer buys a new tractor, if it came directly from the dealer and had not been used in production ever before, then this is new property that qualifies for the 100% bonus depreciation.  However, if the farmer bought a “new” combine from the dealership that had been used for 20 hours by another farmer before being traded in, this is not new equipment.  Even though it is new to the farmer, it is not new to farming (since it had been used previously).

In the case of the question, even if the farm buildings were only two months old, since they were in use by the previous owner, they will not qualify for the bonus depreciation. 

One rule of thumb is that anytime you purchase farmland from another party, it is VERY unlikely that any of the property purchased will qualify for bonus depreciation.  Some will qualify for the Section 179 deduction, but none of it should qualify for 100% bonus depreciation.  As in all cases, you would need to review this with your tax advisor.

We had a reader ask the following question:

“I’m thinking of putting up a farm shop and storage building this year (2011). Can I take the bonus depreciation on only half of the cost of the building and depreciate the remaining amount over the 20 year period?”

Now based on my heading, you are probably assuming that this farmer can do this.  The answer, however, is no.  On all assets of the same asset type and class such as all new farm buildings put in service during the year, you must either take 100% bonus depreciation on ALL assets in this class type OR elect to take normal depreciation on all of the assets in that class.

However, the option that you can choose is to take bonus depreciation on one type of assets such as farm buildings and elect not to take it on another class such as farm equipment.  by making this election, you can more optimize your farm taxable income to reflect your best planning opportunities.

Here is an example of how this might work.  Let say the farmer puts in a new farm shop that costs $250,000 and buys new farm equipment that costs $300,000.  The farm normally makes about $350,000 from operations after other depreciation.  The farmer knows that if they take the full bonus depreciation on both assets, then the taxable income for the year will be a loss of around $150,000.  The farmer does not want to show that much loss, so they make the election to only take bonus depreciation on the farm shop of $250,000 and depreciate the farm equipment over 7 years.  This gets their net farm income down to about $50,000 which might be more preferable to them.

You have several options on how you take the bonus depreciation and remember that farm equipment is still available for the Section 179 deduction, so even if you elect out of bonus depreciation, you still may be able to optimize your farm income by using Section 179.

My normal preference would be to take bonus depreciation on all 20 year property such as farm buildings in 2011 since you can get an immediate deduction for these assets, however, every farm situation is different, so you must review this with your tax advisor.

We seem to be getting quite a few questions regarding what farm buildings qualify for the 100% bonus deprecation for 2011 (and the period after September 8, 2010).  Our latest question is as follows:

“Is there any bonus depreciation on machine sheds in the year 2011?”

For any new farm building placed in service during 2011, all of these buildings will qualify for 100% bonus depreciation since they are considered 20 year property or less for federal income tax purposes.  This includes a machine shed, mobile home for employees, hay shed, house owned by a C corporation, etc.

Therefore, any new building on a farm will qualify for 100% bonus depreciation.  However, only single purpose agricultural structures such as a hog confinement facility or greenhouse, etc. will also qualify for the Section 179 deduction which means it can be a used building in that case.

Remember, only new farm buildings placed in service between September 9, 2010 and December 31, 2011 qualify for the 100% bonus depreciation.

I spent all of last week attending the TEPAP conference in Austin, Texas.  This intensive 7 day conference is put on by Professor Danny Klinefelter of Texas A & M University.  Each day’s session would normally have two different topics covered by some of the best presenters in the farm business.

I would highly recommend that any farm operation attend TEPAP in the future.  Even if you have a smaller operation, the information that you will receive should pay for itself many times over.  Each of the presentations give you many choices on how to improve your farm’s operation and more importantly, the friendships that you will develop with other farmers from around the country can be even more important.

The only drawback from the conference is eating too much of the good food provided.

Again, I would highly recommend this conference for any farmer or farm related operation.