The IRS announced this week the new standard mileage rates for 2012.  Most of the rates remained the same as the last six months of 2011.  For regular business use, the rate is still 55.5 cents per mile (don’t ask me where they came up with the half cent).  For charitable purposes, the rate is 14 cents and for moving and medical expenses, it is 23 cents per mile.

You can use these rates to reimburse your employees for their business miles and or deduct businessuse of your personal vehicles on the farm.

Here is the announcement.

We had a reader ask the following question:

“If I purchase and take delivery of a tractor in December 2011 but do not want any of the depreciation until 2012 can I still get the section 179 and bonus depreciation in 2012?”

In order to depreciate equipment such as this tractor in 2011, the farmer must both purchase the tractor (either for cash or financing it) and place the tractor in service.  Generally at year-end, the tractor needs to be delivered to the farm and available for use on the farm.  The farmer does not have to actually use the tractor in the field before year-end, but it must be available for that use.

If the farmer meets both of these tests, then the tractor is depreciated in 2011 either using bonus depreciation, if new, or using Section 179 and regular depreciation on the remainder, if used.

Now, if this farmer does not want to depreciate it in 2011, then he can purchase the tractor, but not place it in service.  He may simply have the tractor delivered to the farm after year-end and this would make it eligible for bonus depreciation and Section 179 in 2012.

However, the farmer needs to understand that bonus depreciation in 2012 is only 50% not 100%, and Section 179 is only available on $139,000 of assets, not the $500,000 available in 2012.  Now, these numbers may change and go back to the 2011 amounts, but this is not law yet.

We had a reader ask the following question:

“President Obama’s proposed Jobs Act includes an extension of 100% bonus depreciation through 2012 however excludes qualified real property. Does this include farm buildings?”

 First, I think there is a very good chance that we will see 100% bonus depreciation sometime in 2012.  However, we are dealing with politician in Washington DC and this decision may not get made until after next year’s election.  This is what happened in 2010.  For planning purposes, we currently have 100% bonus depreciation for 2011 and 50% for 2012.  Those are the numbers I would use for now.

For the second question, the qualified real property relates more to retail lease space and restaurant property, etc.  All farm buildings have either a 20 year life or perhaps a 10 year life for structures such as a hog confinement building.  Under the Section of the Code dealing with bonus depreciation, all assets with a life of 20 years or less qualifies for bonus depreciation.  So, the bottom line answer is that farm buildings would qualify under President Obama’s proposal.

I have already written a previous post on one of the first sessions at DTN AG Summit yesterday, but here is my recap of the rest of the day.

The president of International Farming Corporation gave a presentation on their efforts to both create long-term value to their investors and their tenant farmers.  This is a company that has raised about $250 million in funds to be invested in farms around the US with I think the ultimate goal to turn it into a publicly traded REIT.  The management of this company has been involved in farming for about 150 years and has a very long-term focus on farming.  I think we will see more funds like this in the future.

My first break-out session dealt with cash rent versus flexible rent versus crop share rent.  Much discussion was held in this group and sometimes it did get a little bit emotional.  The idea of a flex rent almost brings cash rent back to the equivalent of a good crop share rent.  Another point of the session leaders was that over time, the market will drive profits to farmers to be approximately zero.  This does mean that the farmer will be entitled to return on their investment for machinery and technology and their overhead for management plus some profit on it, but in the long-run cash rents will tend to drive the other profit to zero.  Farmers can either embrace this in their operation or not, but in the long-run, that is where market economics will take it.  Another important point was to be proactively involved in communicaiton with your landlord. 

The last break-out session dealt with the proper use of crop insurance, options and marketing.  I especially enjoyed the farmer on the panel with his discussion of how the integration of crop insurance and options locked in a certain minimum profitable sales price no matter what the production or actual sales price was.  Remember, this is a business and anytime you can lock a good profit with the upside potential of call options should not be overlooked.

Today, I am only at the Summit for about an hour and then head home for our Christmas office party.  Since I have been on the road since Monday, I will be happy to get home.

Two speakers from Kansas State Univeristy indicated that overpaying for land in their analysis was more likely to be more harmful to a farm operation than having too much leverage.

Their bottom line objectives for their land buying decisions in 2011 is that the perceived land rent value should be at least 4.50% of the amount paid. If it ends up being lower than 3.50%, then the farmer most likely pass on the purchase.

If 2011 is like 1981 in values and returns, under all their scenarios, all farmers would have a negative return over 20 years, however, it is very unlikely it is like 1981, but it might be.

Just make sure you use consistent decision making in your land purchase decisions.

I attended most of the afternoon session of the first day of the DTN AG Summit in Chicago. There appeared to be around 600 Agri-business leaders there of which about half were farmers.

The potential slowdown in economic growth in China may negatively affect the American farmer in 2012. Although growth of 4-5% would be great in America, it is not so good in China or India.

Another session was a presentation by the largest Brazilian farmer. By 2015, it is likely this company will be farming over 1 million acres. There costs per acre are not lower than other smaller farmers in BrZil, however, there yields are higher, therefore, there per-unit costs are lower. Also, more than high of their revenue for the current crop year is from cotton, not soybeans.

They also indicated that unless bean prices are higher than about $12 per bushel, the Brazilian farmer will not plant more beans.

That’s my recap for day 1. I will keep you posted on day 2.

We had a reader ask the following question:

“Do I have to take 100% of the cost of  property when oping for the section 179 depreciation, or am I also allowed to take any % less and then use normal depreciation for the remainder? Also if it is placed in service in 2011 and paid for in 2012 is it all reported on the 2011 taxes?”

You are not required to take 100% of the cost of an asset for Section 179.  Section 179 is an election that a farmer can make.  By using the election, the farmer will list the asset that they want to take the deduction on and how much of a deduction they want to take.  For example, if you purchase a tractor for $175,000, you can elect to take Section 179 of anywhere from $1 to $175,000 (depending on your income limitation).  The remaining amount after the Section 179 deduction will be depreciated normally.  For 2011, if the tractor is new, then the remaining amount will be 100% bonus depreciation and if used, it will normally be depreciated using a seven year life.  If you purchase new equipment, we would normally suggest just taking the 100% bonus depreciation for this year.  Reserve Section 179 for any used assets.

For the second question, as long as the equipment is placed in service before the end of the year and the farmer has incurred a debt (to be paid after year-end), the equipment is available for Section 179 or 100% bonus depreciation if new and Section 179 if used.

Most farmers automatically assume that it is always better to trade-in their farm equipment to save on income taxes.  However, for 2011, if your total farm equipment purchases is going to be less than $500,000, then in most cases it would almost always be better to sell your farm equipment for cash and then buy equipment for full face value from a tax standpoint.  I will explain here, however, in many states (such as Washington), you are not subject to sales or use tax on the trade-in value.  In these states, the savings on not paying sales tax may outweigh the income tax savings.  You would need to review this in each situation.

Let’s say we have a farmer who is self-employed and has earned $100,000 for the year and has a tractor currently worth $100,000.  The tractor is fully depreciated.  The farmer can trade it in for a tractor costing $100,000 or he can sell the tractor for $100,000 and use these proceeds to purchase the newer tractor.  If the farmer trades the tractor in, he recognizes no gain on the tractor and has no additional depreciation to take.  If he sells the tractor for $100,000, he recognizes a gain of $100,000 on form 4797 and he can take Section 179 or bonus depreciation, if a new tractor, of $100,000 on his Schedule F to bring the net bottom line income back to the same as the trade-in. 

Now most farmers are asking “What’s the difference”?  The difference is that with the sale of the tractor, this income is not subject to self-employment tax.  If the farmer had made $100,000 on his schedule F, he has now converted this income to $100,000 on form 4797 and zero income on Schedule F.  During normal years, the self-employment tax savings would be close to $15,000 (in 2011, it would be about $2,000 less).  All the farmer has done is move $100,000 of income from Schedule F to Form 4797 and save about $15,000 in self-employment taxes.

If the farm is operated inside of a corporation (either C or S), there would be no material tax savings.  This really only applies to a sole proprietor or partnership where the farmer would be under the maximum self-employment base of approximately $107,000.  If the farmer exceeds this amount of net self-employment income, then the savings would be slightly less than 3% of the trade-in value.

Also, remember that the sales tax cost may outweigh the income tax savings, so you must review this with your tax advisor to see if it applies to your situation.

A new tax credit for farms that hire unemployed veterans is in effect now the President Obama has signed the legislation officially eliminating the 3% withholding on government contractors that was scheduled to begin in 2013.  I think I have seen more laws get initiated and eliminated in the last 3 years than I ever saw in my first 20 years of being a CPA.

The credit amount varies with how long the veterans have been unemployed.  It’s 40% of the first $14,000 of wages for vets ($24,000 if disabled) who have been jobless for six months or more in the year before they were hired, and 40% of the first $6,000 of wages for vets who’ve been out of work at least four weeks but less than six months.

The credit applies for eligible veterans starting work after November 21, 2011 and before January 1, 2013.

40% of $14,000 is $5,600 which can be a good size credit plus we are helping get those veterans back to work after serving our country.  This can be a win/win for both the farmer and the veteran.

After a long flight home Friday night, I have had a couple of days to reflect on the the First Annual Conference for Executive Women in Agriculture and here are my conclusions:

• American Agribusiness should be proud of the women who are active in running a farm or an agribusiness.  Based upon the women that I met at the conference, these farms are in very capable hands.
• Management of a farm operation from a women’s perspective seems to be more about active communication between management and the employees.  In my observations of most farm operations, one of the things most lacking is communication.  Farm management still requires there to be a boss, but equally important is letting the employees know what the boss needs to happen and these women can do a better job of this, however, if us men engage our right side of our brain more often, we can catch up.
• The newer generation coming up is very comfortable with having a woman as a boss and for a lot of our younger male farmers and employees out there, the idea of work-life balance is extremely important.  The days of expecting our male employee/managers to work the hours that us “older” management workers are used to and expect are most likely gone.  We find this to be true in our CPA firm also.
• From a speaker standpoint, I found the conference very enjoyable since the women attending my two breakout discussions were extremely competent with their questions and actually asked them.  I have spoke at a couple of conferences where there were only male attendees and there were times when I was not sure if I would get any questions (although if I am talking on taxes and farming, I always get questions).  It was very easy to get feedback from the women and this helps maintain a very vibrant give and take.

In conclusion, American Farmers should be proud of the women that attended and I look forward to next year’s conference.