One thing that surprised us a little bit last year when preparing our farmers’ tax returns was new questions that the IRS was asking regarding Form 1099s on all tax returns.  These two questions were asked on Form 1065, 1120, 1120S and schedule C and F.  The two questions asked on the forms were:

• “Did you make any payments in 2011 that would require you to file Form(s) 1099?
• “If “Yes”, did you or will you fill all required Form(s) 1099?

Form 1099s are required for almost all payments for services to non-incorporated entities that you incur during the year if the payments total $600 or more.  Also, if you are making machine hire or contract hire payments, these form 1099s are especially important since major penalties may be incurred if these forms are not filed properly.

Other payments that require Form 1099s are also subject to penalties and these penalties seem to increase every few years and can add up to a major non-deductible reduction to your cash balance.

In some cases, you may be notified by the IRS that you will be required to perform backup withholding on certain payments to your vendor.  Ignoring or performing this task incorrectly can also subject you to additional penalties.

The filing season for these forms is coming up soon (given to vendor by January 31 and normally filed with IRS by February 28) so now is the time to make sure your accounting system is ready for these requirements.

 Paul Neiffer, CPA

We had a reader ask the following question:

“179 depreciation is scheduled for $25,000 in 2013 do you think this will be changed? If not how would it work on a pivot worth $71,000. ? $25,000 first year and remainder $46m over 6 years ?”

I am sure that the major equipment manufacturers such as Deere, Case IH are actively asking this same question.  These manufacturers (and farmers) have enjoyed the benefits of 100%/50% bonus depreciation and Section 179 of up to $500,000.  This year, bonus depreciation is 50% and Section 179 is limited to $139,000.

As the reader says, next year Section 179 drops all the way back to $25,000 and there is no bonus depreciation.  For the answer to his calculation question, he would take Section 179 of $25,000 leaving $46,000 to be depreciated over seven years as follows:

1. Year 1 – 9.38%
2. Year 2 – 19.13%
3. Year 3 – 15.03%
4. Year 4-7 12.25% each year
5. Year 8 6.13%

These percentages may change a little bit if the mid-quarter convention applies.

Therefore, his total depreciation deduction for 2013 would be $25,000 plus $4,315 for a total of $29,315.

As to his question on whether this will be changed, we may know this by the end of the year or we may not.  With the major push for revenue raisers, it may be tough to get much of an increase, however, when they score this over a ten year budget window, the net effect on the budget is fairly minor due to deduction simply being a timing of the deduction, not an extra deduction.

If Section 179 and bonus depreciation remains as is, the  effect on farmers and farm equipment manufacturers will most likely be dramatic since many farmers will now have a year of little depreciation (all soaked up with bonus and Section 179) and buying equipment at year-end may yield a very minor depreciation deduction.  This may result in their equipment loan payments coming out of cash flow with no or little tax deduction.  This can be the worst case scenario.

We shall keep you posted.

Paul Neiffer, CPA

I head out for the second annual Executive Women in Agriculture conference sponsored by Top Producer magazine.  I spoke at the conference last year and women tend to ask more and many times better questions than men.  I look forward to speaking at this year’s event and I already have spoken to some of the women that will be there.  I think there were about 150 women at last year’s event and many more are expected this year.

If you are attending, please come up and say hi.

Paul Neiffer, CPA

Most farmers know the benefits of the Section 179 deduction.  The deduction has been as high as $500,000, is $139,000 for 2012 and is scheduled to drop back to $25,000 in 2013.

What many farmers do not know about is the ability to go back and amend their tax return to change their Section 179 deduction.  The reasons for doing this are many:

• The farmer may be selling a piece of equipment this year that they took Section 179 on which creates a fully taxable sale.  They can go back and amend the return to take no Section 179 on this equipment and substitute another piece that will not be sold.
• The farmer may have a Section 179 carryover that becomes too large on the current year tax return or future return.  In some cases, the farmer will loss part or all of this deduction entirely unless they amend prior year’s returns to reduce the Section 179 deduction amount.  This can happen when the farmer has multiple investments in other partnerships and S corporations and the flow-through from those entities may be more than desired in conjunction with their current Schedule F Section 179 deduction.
• They may want to increase or decrease the deduction in prior years.
• They may find that other items of income or deduction were missed on the original return and changing the Section 179 deduction amount will keep their tax liability the same (if desired).

Under current law, this amendment is only available for assets placed in service before January 1, 2013.  For 2013, once you make the Section 179 election it is irrevocable (unless Congress extends the law).  You generally have three years from the due date of your return to make the amended election.

If rates dramatically increase next year, it may be wise to amend your Section 179 deduction for prior years to bring some of that deduction forward into 2013 and beyond.  Check it out with your tax advisor.

Paul Neiffer, CPA

The IRS announced last week (IR-2012-95) a  penny per mile increase in the standard mileage rate for business and medical or moving purposes.

For business purposes, the rate increases from 55.5 cents per mile to 56.5 cents per mile (don’t ask me why they do not round it to the nearest penny).

For medical or moving purposes, the rate increases from 23 cents per mile to 24 cents per mile.

The charitable rate remains at 14 cents per mile.

The business rate is based on an annual study of the fixed and variable costs of operating an automobile.  Taxpayers have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates ( I would guess that most farmers use this method rather than the standard mileage rate).

 Paul Neiffer, CPA

I am traveling tomorrow from Ames, Iowa to home (Yakima, Washington).  I most likely will not get home until about 10 pm (assuming no delays in flights and my drive home).  Some of my fondest childhood memories were of Thanksgiving.  My mother was the oldest of 12 children (cheap farm labor) and for several years we had Thanksgiving at my grandparents’s house.  During a couple of these dinners, we had at least 30 relatives there and it was always fun to see how much we could get by with since all of the parents were visiting and not totally paying attention to us.

I hope that our readers have been able to create these childhood memories for their children and grandchildren and we wish you a very Happy Thanksgiving!

Paul Neiffer

The Employee FICA tax rate for 2011 and 2012 had been cut from the normal 6.2% to 4.2%.  This provision was set to expire at the end of this year and then revert back to the normal rate beginning January 1, 2013.

Allowing this cut to expire in 2013 seemed like a reasonable position several months ago, however, the tepid economy has Congress discussing extending the cut or coming up with an alternative.

This cut costs about $115 billion in revenue each year to the government, however, if it is not extended, it drains this amount out of worker’s pockets and some economists predict that this will reduce economic growth by about .6% next year.

House Republican leaders are opposed to extending the cut and coming up with an effective alternative such as a credit has not shown any progress.  A credit sounds good in theory, however, it prevents giving a immediate shot to the consumer since they would have to wait to file their tax return to receive the credit.

Others want to use this cut as a bridge to income tax reform, however, in my experience Congress does not build very good bridges, whether for tax reform or roads.

Paul Neiffer, CPA

We tend to talk more about the tax costs of Obama Care and forget about some of the tax savings that are available.  One of those savings is for employers that cover part or all of their health insurance premium costs. 

This credit is allowed in full assuming less than 11 employees and average wages of $25,000.  It is fully phased out if you employ more than 25 employees or the average wage is greater than $50,000.  A 35% credit is available during years 2010-13.  For 2014-15, the credit can be up to 50%.

Many employers have not taken advantage of this credit since there is some paperwork involved.  However, if you pay a substantial amount of your employee’s health insurance premiums and you meet both two tests, it is worth the paperwork.  However, if your average wage exceeds about $45,000, it may not be worth all of the paperwork involved.

 Paul Neiffer, CPA

Due to the summer drought spurring much higher feed costs, farm lending activity at commercial banks recorded their fastest pace in five years.  According to the Federal Reserve of Kansas City in their National Trends in Farm Lending October, 2012 report, demand for short-term operating loans increased as input costs soared and herd liquidation boosted loans for feeder cattle.

Bankers continue to report increases in land values, but the pace of gains has slowed from the previous quarter.  Competition among agricultural lenders remained heated and banks have plenty of liquidity.  Average return on assets for banks rose to a four year high.

The volume of short-term loans jumped 36% from this quarter compared to last year which is a new survey high.  Due to high prices in the crop sector, loans for machinery remain above year-ago levels.

Feeder cattle loans exceeded 2011 levels by about 60 percent, more than offsetting a drop in other types of livestock loans.

Non-real estate loan volumes at small banks rose by about 10 percent while larger banks saw a 4% drop.

Ag banks saw a return on assets of about .6% which compares very favorably to the .4% for non-ag banks.

Farm land prices continue to increase as summarized in this chart.

Steven Miller, Acting Commissioner of the IRS wrote a letter dated November 13, 2012 to select members of Congress informing them on the possible delays in processing 2012 income tax returns if the AMT patch is not enacted.

Under current law, it is estimated that 28 million additional taxpayers will pay some Alternative Minimum Tax (AMT) for 2012 tax returns unless the AMT patch is enacted.  If the patch is passed, then only about 5 million taxpayers would be subject to the tax.

Mr. Miller explained that the IRS is ASSUMING that Congress will pass the AMT extender bill before December 31, 2012 and if so, they will be able to process returns with minimal delay.  However, if Congress does not pass an extender bill or waits until sometime in 2013 to pass it, he indicates that the IRS may not be able to process any returns affecting up to 60 million taxpayers including most farmers until late March, 2013.

The extension of the AMT patch is fairly easy to program into the system since it involves changing a few numbers.  If the extender is not passed, then the IRS has to completely rewrite their code to handle the new ordering rule of many tax credits for AMT purposes and this is what would take the extra time.

As we have indicated in many other posts, you may want to consider making a required estimated tax payment on January 15, 2013 and then file your return by April 15.  This could save you much time and aggravation, especially in 2013.

We will keep you posted.

Paul Neiffer, CPA