The Kansas City Federal Reserve just issued a paper on the Nebraska economy and I found a couple of the pages in the paper interesting.  First, to equal a 1980s income shock, current farm revenue would need  to drop by 21.4% and the value of total farm production would need to decrease by 15.7%.

Now 21.7% may not sound that high, but lets assume you are a farmer who raises corn that yields 175 bushels per acre and expects around $6 per bushel.  Your cash rent is $275 and other total expenses are another $700 per acre.  Your gross income is $1,050 and cash expenses are $975.  You are netting about $75 per acre.

Now if your gross farm income was to decrease by 21.7%, it would fall to about $822 per acre of gross income and if all other expenses remained the same, then you now have a net loss of $153 per acre.

The paper also estimated that crop prices would need to drop to the following prices:

• Corn – $3.49 per bushel
• Wheat – $3.96 per bushel
• Soybeans – $9.00 per bushel

One more slide showed the debt-to-asset ratio for 1979 to 2010.  The perception is that most farmers in 1979 were more highly  leveraged than now.  For Kansas farmers, the percentage of farmers with a debt to asset ratio greater than 40% was 19.4% in 1979, but for 2010 it is 6 points higher at 25.6%.  The debt-to-asset ratio of farmers with levels greater than 70% is almost 6% now versus less than 2% in 1979.

Since Kansas has a higher concentration of livestock producers than many other corn belt states, it is my guess that this tilts the analysis a bit, but there are many farmers with high levels of leverage that may not survive a “1980s” income shock.

How does your operation stack up?

Paul  Neiffer, CPA

The IRS announced today in Release 2012-72 that they have extended the period for replacing livestock sold due to drought for another year.  Normally, if a rancher is forced to sell their breeding, draft or dairy livestock  due to drought, any extra sales caused by drought is allowed to be deferred for up to four years. 

This release extends this for another year if the rancher’s county was in a drought situation for at least one week during the period September 1, 2011 to August 31, 2012.  This primarily gives relief to ranchers who had to sell their livestock in 2008 since their four year period would be ending December 31, 2012.  They now have until December 31, 2013 to replace these sales.

In some cases, it may apply to years before 2008 if they were in an extended drought that had lasted until at least 2011.

IRS Notice 2012-62 lists those counties that were in this drought situation. 

Paul Neiffer, CPA

The IRS today posted Revenue Ruling 2012-26 which lists the applicable interest rates  (go to page 3 of release for the actual ruling) available if an estate elects Special Use Valuation in valuing farmland.  Special Use Valuation allows an estate comprised primarily of farmland (or other qualified business property) to elect to value the farmland by capitalizing the net cash rent income generated by the farmland.

In brief, you take the average of gross cash rent income for the last five years, subtract the related average property taxes for this period  and divide by the applicable interest for the year of death.  Since these interest rates have decreased dramatically over the last several years, the potential savings from this election may have diminished.

For example, assume the net average cash rent for Iowa farmland has  been $200, $225, $250, $300 and $350 for the last five years.  The average gross rent is $265.  Assume average property taxes have been $10.  The resulting net rent of $255 would be divided by the applicable interest rate using the table provided by the IRS in Rev. Rul. 2012-26.  Iowa is served the AgriBank, FCB and this interest rate for 2012 is 5.61%.  After dividing by this number, we get a special use valuation of about $4,545 per acre.  If the appraised fair market value of the farmland is greater than $4,545, the estate may save estate taxes by using this lower amount.  The proper amount of cash rent, etc. can get very technical, so these elections must be done by an experienced preparer.  This example is for illustrative purposes only.

The IRS has reduced the number of reporting FCB districts from five to four by dropping U.S. AgBank, FCB.  The four districts left are AgFirst, AgriBank, CoBank and Texas.  All 50 states plus the District of Columbia will fall into one of these four districts.  The lowest interest rate for 2012 is CoBank at 5.15% and the highest is AgFirst at 6.19%.

If Special Use Valuation is applicable, up to slightly more than $1 million in farm land value can be deducted from the estate.  Up to about $350,000 in estate tax savings can result.

Paul Neiffer, CPA

One of our local newspapers – The Tri-Cities Herald –  is running a 29 part series on the various types of crops that are grown in the Columbia Basin region of Washington and  Oregon.  So far, they have run about 10 parts, but it is an excellent review of the various crops grown in the part of the country.

It is my estimate that only California will most likely grow more types of crops than our Columbia Basin.  The newspaper has set aside a specific section of their web-site for this series so I think you would enjoy reading some or all of the articles.

Many of the farmers listed in the article are clients of our firm and we are very proud to see them listed.

Paul Neiffer, CPA

Many multi-generation farms have the parents totally immersed in the finances of the operation while the children may be more focused on the actual farm production activities.

Since this is a time of year (right after harvest) to do your year-end tax planning, try to get the kids more involved this year in the actual finances of the operation.  Have them meet with your tax or financial advisor.  Many times, they will see things in a little different bent that may spotlight something financially that should be changed or altered.

When I get a new piece of technology (such as a new “smart” phone), I get my young sons to help me, it may make sense to get the younger generation more involved and there is no better time than now.

Paul Neiffer, CPA

I was reading an article in Accounting Today (yes, there are magazines about the accounting profession) about how publicly traded companies are rounding up their earnings more than normally expected.  For example, the authors reviewed the earnings announcements for over 330,000 positive earnings announcements from 1995-2009.

With that big  of a sample size, you would  expect rounding up and down to be almost exactly 50/50.  However, they found (surprise/surprise) that about 53% were rounded up and only 47% were rounded down.   When earnings per share were 20 cents or less, they found 59% rounded up.

They were able to identify approximately 320 companies who had a history of  consistently rounding  up and one company had rounded up every quarter for 42 straight quarters.

We, as accountants, normally have a materially level that can be either very small or larger based on the situation, but these  examples of companies rounding up were abusing the trust of their readers and investors.  They were trying to make their earnings look better than they really were.  Any reader of the financial statement could calculate the actual number, however, the company knew that the  general public normally does not do this.

The bottom line is that a penny can matter in many situations.

 Paul Neiffer, CPA

This post has our final mistakes to avoid in doing lifetime giving:

• If you are doing Medicaid planned gifts, remember that all transfers for less than FMV are subject to a lookback period of 60 months.
• Avoid gifts of installment contracts to anyone other than a spouse.  A disposition, which a gift is, will result in immediate gain recognition for the different between fair market value and the tax basis in the note.  Even though you are not getting any cash, you get to pay the tax.
• Be aware of issues in transferring any IRA or other retirement plans.  A gift of an interest in these plans is considered a distribution from the plan and may be subject to the 10% premature penalty tax if the owner is less than 59 1/2.
• Gifts of income producing property into trusts may cause more of the income to be taxed at the highest tax rate.  Trust income is subject to the maximum federal tax rate at about $12,000 of income.  This may cause unintended extra taxes if care is not taken.

Lifetime giving is well worth the effort, however, there are several mistakes that can occur.  Discussing your plan with your tax advisor makes sense now and in the future.

Paul Neiffer, CPA

We continue our series on mistakes to avoid in lifetime giving:

• Be aware of the Generation-skipping Transfer tax on any gifts that may involve your grandchildren.  These gifts can subject you to additional gift taxes that you may not realize apply when you make the gift.  Any gifts in excess of $13,000 to these beneficiaries should be discussed with your tax advisor ahead of time.
• Watch out for gifts where the donor still retains the right to use the property or have other certain powers.  In many cases, this asset will be included in their estate even though they “gifted” it away during life.
• If you gift life insurance policies, may sure not to delay.  If the person making the gift dies within three years of this transfer, the proceeds will be included in their estate.
• Be very careful with appointing yourself the trustee of any trust.  If the agreement is not worded properly or you retain too many powers over the trust, the trust value can be included in your estate.
• If a farmer wants to take advantage of the special use valuation on their farmland and their percentage is too low, consider making current gifts of cash or other assets to make your farmland qualify.

More to come ……

Paul Neiffer, CPA

Lifetime giving of appreciating assets is one great tool to use to prevent unnecessary estate taxes.  However, if done incorrectly, these gifts can prove costly.

I will do a multi-series post on some of the mistakes to watch out for in the next few days:

• If you will pay for someone’s education or medical costs, do not make the payment to  them.  Instead, make the payment directly to the college or medical provider.  You are allowed to make unlimited gifts for these items as long as they are made directly.  None of these  gifts will count either toward your annual or lifetime gift exclusion amount.
• In separate property states, don’t overlook using gift-splitting with your spouse.  This allows one spouse to make one payment of $26,000 and they can elect to split the gift on their gift tax return.  However, if you do not want to file a gift tax return, it is better to write one check from each spouse for $13,000  (Note, gifts of community property are automatically considered to made 50% by each spouse, and no gift-splitting consent is required).
• Avoid giving highly appreciated property shortly before a donor’s death.   This will cause the donee to lose the value of the step-up to fair market value when they sell the property.  Instead, the lower basis will carry  over and that is their cost basis when they sell.
• Avoid gifts of mortgaged property where the mortgage balance exceeds the adjusted tax cost.  The excess will be taxable income to the donor.  Also, due care must be taken when partnership interests are gifted when large amounts of liabilities are inside the partnership.

More to come later…..

Paul Neiffer, CPA

A recent US Tax Court case summarizes how a taxpayer who tried to save a few dollars on Federal Express shipping services most likely cost them thousand of dollars.

In the court case, the taxpayer had received a deficiency notice from the IRS on April 8, 2011.  The taxpayer had until July 7, 2011 to mail the appeal to the tax court.  The taxpayer mailed the appeal using Federal Express “Express Saver Third business day” option.

The IRS has a list of approved shipping services that qualify as valid shipping services to be used for timely filed petitions, etc.

Many of the Federal express products such as Priority Overnight, Standard Overnight, FedEx 2nd Day are listed as approved, however, the 3rd day option is not listed.

Therefore, the taxpayer by trying to perhaps save $5 on shipping costs had their whole Tax Court appeal denied and I am not sure how much was involved, but it does not pay to overlook the fine print on IRS and Tax Court appeals.

Paul Neiffer, CPA