My wife and I rode our motorcycle from Yakima to Lewiston on Thursday with a stop in Walla Walla.  Normally this time of year, wheat harvest would be in full throttle, however, I noticed very little harvesting going on that day.

I visited with my Uncle and Aunt at their house on Thursday and spoke with my cousin.  Usually wheat harvest would start around the 15th of July (some years around the 4th even) but this year, they will be starting their first field for harvest sometime next week.  This is by far that latest harvest that I can remember for this area.

The good news is that the average yield should be on the high end, but a lot of wheat is down on the ground and it will be harder to harvest.  One of my least favorite things growing up on the farm was harvesting downed wheat.  Usually this wheat would have high yields unless it went down too soon, then it would not finish filling out.

I will be driving combine around the 10th of August and will let you know how the fields look.

My wife and I spent the night in Lewiston and then headed down to Enterprise and Joseph, Oregon which has some of the prettiest scenery in America.  This area is called the Alps of America and if you ever get out this way, you need to check it out.  I noticed several combines harvesting grass seed over in the LaGrande area and based upon the straw I saw, the yields look good there, but you never know for sure with straw.

Then as we got closer to home along the Columbia River, the onion harvest was in full swing and when you are on a motorcycle, you can really smell that harvest.

I grew up in the Walla Walla area and several farmers are now producing Garbanzo Beans on about a 1,000 acres for the fresh frozen market.  Normally, garbanzo beans are held to maturity and harvested dry and then shipped around the world.  The Middle East is a large consumer of these beans and in the US they are primarily used in soups and salads.

Work started in 2000 to come up with the method to freeze the beans for the fresh market.  They have just now perfected the process and you will be able to buy fresh garbanzo beans in a market near you.

The beans are harvested using the normal green pea combine (which cost over $500,000 new) and then chilled to about 36% near the Walla Walla airport.  After chilling, the beans are then transported to Ellensburg, Washington about 150 miles away to be frozen and then shipped to customers.  I am impressed that they can get these things harvested with a green pea combine since the plants are only about a foot tall, but the picture in the article indicates they can get most of the plant into the combine.

On a personal note, the farmer Ron Filan quoted in the story is my cousin.  Here is the article.

The IRS in Notice 2011-70 has extended the time that an innocent spouse can request equitable relief from the current two year limitation to the amount time remaining under the statute of limitations for collection procedures.  This is a very nice change from the IRS since they had recently won a couple of court cases mandating that the two year period was valid.

I believe that the IRS realized that there were many cases where a spouse had been wronged in the filing of income taxes and extending the time period was not just warranted, but good policy.  The innocent spouse provisions allow a spouse whose husband or wife has filed a joint tax return with major errors or other issues to get equitable relief.  With out the innocent spouse provisions, by signing a joint return, the innocent spouse would be subject to paying taxes, interest and penalties that were really the other spouse’s responsibility.

These provisions allow the innocent spouse to request relief from these taxes, interest and penalties.  This is a good change.

USA Today just ran an article on how John Deere is leading the fight against Lightsquared plans to put up more than 40,000 new cell towers in rural America.  John Deere is worried that the spectrum that Lightsquared want to use will bump the GPS spectrum and lead to farmers having issues running their GPS on tractors and combines.

Since this is most likely a political fight, it may make sense for farmers to let their representatives know how important precision farming is.

Another nugget from the article is how flush farmers appear to be with cash right now.  The John Deere Finance arm is having a hard time drumming up business since more farmers than in the past can pay cash for their equipment.

I grew up on a wheat farm near Walla Walla, Washington and one of my next door neighbors was Batman, Adam West that is.  As a young child, one of my favorite shows growing up was Batman (however, as I got older, the show got a little cheesier).  Adam West, who was Batman, grew up on a wheat farm not t00 far from where I lived.

Here is an article describing his career and note the reference to his farm background.

The Federal Reserve Bank of Kansas City just published their National Trends in Farm Lending for the second quarter of this year.

Due to the increase in input costs, operating loan levels have increased dramatically from the second quarter of 2010, up nearly 36%.  The number of livestock loans dropped slightly from the year before, however, the average loan amount almost doubled, pushing the volume of livestock loans more than 25% higher.

Capital spending on the farm for machinery and equipment seems to have cooled during this quarter.  Loan volumes for farm machinery and equipment plunged from a first quarter spike and were 36% below the year-ago levels.  I have a feeling that the 50%/100% bonus depreciation enacted late last year has soaked up a lot of the demand for new equipment and these types of sales may remain low until year-end.

The average borrowing rate on operating loans fell from 5.3% to 4.7%, however, the rate for equipment loans did incur a slight uptick to almost 5.4%.

We had a reader ask the following question:

“I’m thinking about selling a tract of timber on land that was gifted to me 7 years ago. What can I expect the tax consequences to be? I’m a self-employed farmer.”

We have done a couple of posts lately on capital gains treatment of the sale of equipment and other farm business property.

We thought it would be good to review the rules of Section 1231 since they apply to most of these sales.  Section 1231 governs how the sale of business assets is reported and taxed.  It is actually a fairly nice feature in that any Section 1231 gains are usually treated as capital gains and any losses are treated as ordinary and immediately deductible losses.

For example, lets assume a farmer sells a tractor for $25,000.  They paid $20,000 for it ten years ago and have fully depreciated it.  The first $20,000 of cost basis is considered Section 1245 recapture and is always treated as ordinary income.  The excess $5,000 gain is considered Section 1231 and will enjoy capital gains treatment.

Now lets assume the farmer sold the tractor for $15,000 and they had just purchased it for $20,000 and had not taken any depreciation.  In this case, the $5,000 loss is considered a Section 1231 loss and will be ordinary and immediately deductible.  The reason for it being ordinary is that the law assumes the taxpayer had not yet been able to take the full depreciation allowed to get it down to its actual value at the time of sale.

There is one negative to Section 1231 gains and that is the five year look-back recapture.  If, during the last five years, the farmer had net Section 1231 losses reported on their return and they have a Section 1231 gain this year, part or all of this gain would be ordinary. 

For example, assume a farmer had reported a Section 1231 loss in 2008 of $5,000 and had a Section 1231 gain this year of $10,000, then $5,000 would be ordinary and $5,000 would be capital gains.

For our reader, since it appears this tract of timber was gifted as an investment, the gain on the sale should be treated as a capital gain and subject to a maximum federal tax of 15%.

We had a reader ask the following question(s):

“Paul, in regard to the capital gain question-we are in the process of purchasing a new corn planter. If we sell the old one for cash, how much will the capital gains tax be on it?  15% or normal income tax rate?  It was gifted to us many years ago from my father. So the basis would be zero dollars. The new purchase would be section 179.”

When a farmer acquires a piece of equipment in the form of a gift, the basis to the farmer is the lower of fair market value or the basis in the hands of the person making the gift.  In most cases, the equipment has been fully depreciated before gifting it away, therefore, the basis is zero.  However, the person receiving the equipment must determine what the original cost of the equipment and accumulated depreciation since the equipment is still considered to be Section 1245 property (even if the person receiving the equipment is not farming).

This means that when the farmer sells this gifted property, the sales proceeds up to the original cost is ordinary income and any proceeds over original cost would be capital gains (subject to certain look backs for Section 1231 losses taken in the last five years).

So, the bottom line answer for our reader is that the sale of the equipment will be ordinary income up to the original purchase price and capital gains on any excess.  If the farmer is self-employed, the sale of the equipment will not be subject to self-employment taxes and the Section 179 on the new piece of equipment will reduce self-employment taxes.

We wrote a post a couple of weeks ago about the possible late filing of form 2290 to report the excise tax owed on semi-trucks owned by farmers for the period ended June 30, 2011. 

The IRS has just issued release 2011-77 indicating there is an automatic three month extension until November 30, 2011 to file the return.  The IRS is also indicating that no payments should be remitted until after November 1, 2011.

The release also indicates that the states are required to accept the schedule 1 that was stamped by the IRS for the previous year’s return.  This will allow farmers to register their trucks with the state or local authority.

I am going to hazard a guess that at least 90% of our farmers are in what I call the first level of farm accounting.  This is the old tried and true favorite – Cash basis of accounting.  Most farmers report farm net income on their tax return using this method of accounting.  Income is recorded as cash is received and expenses are recorded as they are paid.  Most of these farmers use this method for their management of the farm business which does not accurately reflect the net income of the business.

The second level of farm accounting builds on cash accounting by at least recording the fair market value of crop inventory (crop harvested, but not yet sold) and possibly the value of the cost of growing crop.  This amount is usually booked at year-end and is used for the financial statements presented to the bank.  If the farmer is not doing these statements, we know that the banker is for sure is doing it and you should get a copy from them.  This method of accounting gives a better picture of your overall farm profitability, but only when you book the fair market value adjustments (which is usually at year-end).

The third and highest level of farm accounting is using accrual accounting on a real-time basis.  This means that as you purchase input costs for the farm, they are booked to a cost of growing crop inventory account and once the harvest is completed, these accumulated costs are then transferred over to a harvested crop inventory account and deducted as the crop is sold.  This gives you the truest picture of what your actual profit is at any point in time. 

The most successful farmers are at least in level two and most are making the changeover to level three.

What level are you at and what steps are you doing to get to the third level.