Today was the first day of the Top Producer Conference.  The first session was very interesting.  Dr. Tom Deans, author of Every Family’s Business gave a talk on how many farmers really should be looking at “selling” the farm instead of “gifting” the farm.

Too many times, the gift of the farm ends up creating inter-family squabbles, while a sale, either to family or outside parties can greatly reduce this risk.  Definitely food for thought.

I then headed over the Chicago Board of Trade to meet up with Thomas Grasifi of Indiana Grain Company.  He took me down the floor and it became very apparent that trading has changed dramatically.  The pits where futures are traded were just about empty.  We spent some time at the corn options pit which was very interesting.

We then came back down for the close of the meats at about 1 pm and for about 2 minutes you could hear the roar from the pit action and then it was basically done for the day.

At 1:15, the Fed had their announcement and you had action in gold, financials and the equity indexes till the close.

Almost all of the futures trading is now electronic and it may not take much longer for more of the options, etc. to be done this way.

Paul Neiffer, CPA

Even though the IRS granted relief for farmers to file their tax return by April 15 of this year, there is a “gotcha” in the details.

If you file your return on or before March 1, 2013, you must also payyour tax on or before March 1.  If you file on March 1 and then pay your tax on April 15, you most likely will be subject to the penalty.

Therefore, to file and pay your tax without the penalty, make sure to file between March 2 and April 15, 2013.  Otherwise, you may owe a penalty you were not counting on.

Paul Neiffer CPA

Yesterday I attended the Tomorrow Top Producer conference in Chicago.  The main Top Producer gets started today and runs through Friday.

Some of the observations from yesterday are:

• Younger producers are very worried about the availability of land to farm.  With cash rents rapidly increasing and land prices exploding, they worry about their ability to acquire the landed needed to economically run their farm.
• The last presentation at the conference may of helped address this problem.  A group of farmers in Northeastern Iowa have banded together to farm.  There are both older and younger farmers in the group and by combining all of the equipment resources into one pool and allocating costs based on the acres farmed, younger farmers can get the benefit of new updated equipment without the capital outlay.  They simply pay the per acre price for the land they farm.
• Brent Gloy from Purdue discussed whether farmland prices are in a bubble right now.  His conclusion is that they are, but who knows when it will POP.

I will post tonight on the activities at the first day of the Top Producer Conference.

Paul Neiffer CPA

We had a reader send in the following question:

“Do long term capital gains count in determining AMT? And thus potentially increasing 15(20) percent effective rate?”

We wrote a post a couple of weeks ago about there being ten different long-term capital gains tax rates beginning in 2013.  Well, we can probably at least two or three more for the effect of Alternative Minimum Tax (AMT) on our effective rate calculations.

The good news is that AMT taxes long-term capital gains and qualified dividends at the same rate for federal income tax purposes.  The bad news is if your income is at a certain level, each additional dollar of capital gains phases out 25% of your allowed AMT exemption.  Without getting too technical, this means that for 2013, if your AMT income is between roughly $75,000 to over $300,000 depending on your filing status, this may apply to you.

For example, assume a married couple is in the range where the phase-out applies and their adjusted gross income on the tax return is $250,000, with $10,000 of capital gains.  Since they are below the net investment income tax (NIIT) threshold, their capital gains tax rate is 15%.  However, this extra income caused $2,500 of their AMT exemption to phase out and the net effect on this is either $650 or $700 (depending on their AMT rate).  This makes their effective capital gains tax rate either 21.5% or 22%. 

Now if we bump their income over the NIIT threshold, this increases their net capital gains tax rate by another 3.8% pushing it up to 25.3% or 25.8%. 

Now on top of it, if we have the 3% of itemized deductions apply to their AMT situation (sometimes it won’t), then the final maximum rate could be almost 1% higher.

As you can see, depending on their overall AMT situation, their net capital gains tax rate could be as low as 15% or as high as almost 27%.  Since the AMT exemption is usually fully phased out when the maximum 20% capital gains tax rate kicks in, we won’t quite get over 30% due to AMT.

Since it looks like we can have three additional capital gains tax rates due to AMT, I think we are not at an official bakers dozen (and it is really more than that based on your number of personal exemptions claimed on the return).

Any time a farmer loans money to a corporation that they own (or vice versus), the income tax laws require these loans to bear interest.  If the loans do not bear interest, then the law requires the farmer to calculate an “imputed” interest amount based upon the applicable federal rates published by the IRS each month.  Lately, these rates have been very low (less than 1%).

In the past if the farmer loaned money to an S corporation and did not charge interest, the imputed interest rules normally did not affect the bottom line tax.  The amount of interest income the farmer would report would be offset by the same interest deduction reported on the S corporation.  However, if the S corporation had loaned money to the shareholder, it would change the bottom line tax since the interest “paid” by the farmer would usually be non-deductible.

With the imposition of the 3.8% net investment income tax (NIIT) for this year, this is no longer true for higher income farmers.

If your adjusted gross income (AGI) is $250,000 or less ($200,000 for singles) this tax does not apply.  However, if your AGI is over these levels, then the imputed interest will create an additional 3.8% tax on part or all of this income even though your AGI does not change.

Let’s take a look at some examples on how this works.

Suppose, we have a farm couple with exactly $250,000 of AGI.  In this case, their income tax is $52,213.  They owe no NIIT since their AGI is exactly $250,000 (remember NIIT is computed on the LESSOR of net investment income or AGI minus $250,000). 

Now let’s impute $10,000 of interest income on loans they made to their S corporation.  In this case, they have net investment income of $10,000 subject to the 3.8% tax, but their AGI is still $250,000.  It went up by $10,000 of imputed interest income reported on their Schedule B, but the S corporation income went down by the same $10,000, therefore, they do not owe the extra $380 of NIIT since their AGI still is not over $250,000.

Now let’s assume this is a regular C corporation.  In this case, the farm couple would owe the $380 of NIIT since their AGI went up by $10,000 and the offsetting deduction is reported on their corporation, not their personal return.

Let’s assume their AGI was $255,000 with no investment income.  With the imputed interest of $10,000, they now have investment income of $10,000, but since their AGI is still $255,000, their NIIT is only $5,000 time 3.8% or $190.

Let’s assume their AGI was $260,000 with no investment income.  In this case, the $10,000 imputed interest will be subject to the full 3.8% NIIT since the difference in AGI and net investment income is exactly $10,000.

The rule of thumb is if your AGI is less than $250,000 before imputing interest, then imputing interest will not create the NIIT (assuming a loan to an S corporation).  If the amount of AGI over the $250,000 is less than the imputed interest, then only this amount is subject to the tax and if this amount is greater than imputed interest, then all of the imputed interest will be subject to NIIT.

This is just another added layer of complexity that many farmers will face this year.  Since these applicable federal rates are extremely low right now, it makes sense to “lock” in these low rates so minimize the imposition of this new tax.  Talk to your tax advisor now.

Paul Neiffer, CPA

Every five years the Department of Agriculture sends out a very detailed census form for farmers to prepare and send back.  We have already discussed this form with several farmers and as usual it can be very hard to follow the paper form.  We have found preparing the form online can save some time and frustration.

This is primarily due to the computer automatically taking you to the next part of form based on how you fill out each answer.  This is not true in all cases, but based on our feedback, the online version seems to create less frustration.

This census does provide valuable information to the Department of Agriculture, and thus, should not be ignored.

Paul Neiffer, CPA

Every once in a while we read an article on either how progressive or non-progressive our tax system is in the US.  We ran across this article while browsing the Internet and the first thing that struck me is how the word progressive is denoted in these articles as being equal to percentage.

In the article, the author strives to indicate that the richest 1% barely pays more tax than those in the lower income brackets since their overall percentage of income paid to taxes is not much more than lower income earners.  They state that even though the federal income tax structure is progressive, all of the other taxes such as  payroll taxes, excise, sales, property and other taxes are clearly regressive (in their opinion).

For example, the article states that the lowest 20% of taxpayers pay on average about 19% to taxes.  The highest 1% only pay about 29% and the overall average is about 28%.

What the article fails to point out is the amount of overall taxes paid by each bracket.  For example, the lowest 20% bracket pays about $2,262 of total taxes, while the upper 1% pays almost $400,000 or about 200 times higher than the lower 20%.  The average for the “bottom 99%” is about $16,000 which again is about 25 times lower than the 1%.

As with most of these articles, it is very easy to take a statistic and slant it one way or another using percentage in one case and actual dollars in another.  The point is to understand both sides of the spectrum so you can make a more informed decision.

Paul Neiffer, CPA

The Kansas City Federal Reserve Bank just released their third quarter Agricultural Credit Conditions report.  The report indicated that the drought caused lower farm income for the quarter which caused farmers to increase their farm operating loans.  Capital spending plummeted in the quarter.  This could have been caused by the drought or perhaps the lower Section 179 limits and 50% bonus depreciation may have already reduced farmers appetite for more equipment.

The sharpest income declines emerged in cattle feedlot and hog operations.  With the drought, feed prices appreciated over the previous year and quarter and summer pasture dried up.  The bankers also reported that corn and soybean income fell below last years levels, however, wheat farm income was actually higher than last year.  The drought came too late to affect wheat production.

Bankers expressed concerns about the drought effect extending into 2013.  The spike in feed costs has already resulted in some herd liquidations.  The reported closing of a Cargill beef plant in Texas last week is probably primarily caused by these conditions also.

Bankers reported the steepest quarterly increase in farm loans since the first quarter of 2010.  This was offset with the lowest demand for equipment financing since the same early 2010 period.

Even with the drought, farmland prices continue to rise.  The district saw a 24% overall rise in non-irrigated farmland with Nebraska leading at 30% with Kansas and Missouri right behind at 22-23%, respectively.  About three-quarters of the bankers thought that farmland values would stabilize for 2013.

Paul Neiffer, CPA

The IRS announced today in Issue Number IR-2013-7 today that due to the extended processing time for many tax forms including form 4562 (Depreciation), that the deadline for any farmer and fisherman has been extended April 15, 2013 from March 1, 2013.

To take advantage of the extended due date, the farmer will file out form 2210-F (which they normally already due when filing on March 1) and check the waiver box and attach it to the tax return.  Nothing else will be required.

It would have been nice to make this announcement before the farmer estimated tax payment was due three days ago, but it is better to make the announcement now than to wait until near the March 1 deadline.

Much kudos to the National Farm Bureau for all of their support and Senator Grassley writing his letter.  Without their help, this most likely would have taken longer.

Paul Neiffer

We just read an article in the Xconomy website on a drastic retroactive law change specific to the state of California that will possibly impact many taxpayers.  Federal law has a rule under Section 1202 that allows you to deduct a certain percentage of your gain from investing in Qualified Small Businesses (QSB).  We won’t go into all of the details, but in general, this deduction is 50% (in some years 100%).  The state of California decided many years ago to enact a law essentially similar to the federal law.

In the article the author explained how the state lost a Court case that challenged part of the law requiring QSB’s to maintain a certain amount of the business in California.  The Courts finally ruled that this part of the law was unconstitutional.  When parts of income tax law are rule unconstitutional, etc. the state or federal government normally changes the laws to make it correct.

HOWEVER, the Franchise Tax Board in FTB Notice 2012-03 decided not to correct the issue, but rather, retroactively demand payment for any income tax refunds granted since January 1, 2008.  This means that if someone deducted $1,000,000 of gain on their 2008 tax return and saved about $45,000 in tax, they will be required to pay this back to the state.

Here is their very convoluted reasoning for disallowing the deduction:

Federal income tax law provides for the exclusion or deferral of gain from the sale or exchange of qualified small business stock (QSBS). Beginning in 1993, California adopted its own standalone QSBS provisions dealing with exclusions, which generally mirrored existing federal law. However, California law required that at least 80 percent of the company’s payroll at the time the stock was purchased must be within California and 80 percent of assets and payroll must be within California during the taxpayer’s holding period for the stock in order to qualify for a QSBS gain exclusion or deferral. In 1998, California adopted its own standalone QSBS provision dealing with deferrals.

The provisions in California law regarding the 80 percent asset and payroll requirements were found to be unconstitutional in August 2012 by the California Court of Appeal in Cutler v. Franchise Tax Board (FTB). The court’s decision made California’s entire QSBS statute invalid and unenforceable. As a result, all QSBS gain exclusions and deferrals previously allowed under California law became invalid. It is important to note that the court’s decision in Cutler did not change the federal treatment of QSBS.

Because QSBS gain exclusions and deferrals are no longer valid for California purposes, taxpayers who previously took advantage of California’s preferential treatment of QSBS in years still open for assessment under the four-year statute of limitations (generally 2008 and later) must now recompute their taxable income for each affected year without excluding or deferring gains from the disposition of QSBS. For 2007 (and prior) tax years still open under the statute of limitations, a QSBS gain exclusion or deferral will be allowed if the taxpayer meets all other requirements under California law, i.e., those other than the 80 percent asset and payroll requirements (See FTB Notice 2012-03).

This is probably one of the most egregious retroactive tax increases that we have seen in a long time.  None of the taxpayers did anything wrong, rather the State decided they would lose too much money and simply took away the benefit granted to taxpayers over a 4 year period.

We think as states need more and more revenue, you may see more cases like this (especially in California).

Paul Neiffer, CPA