The IRS announced today that most if not all of the forms waiting to be released should be final and ready for processing by Monday.  Some software providers may be ready a few hours earlier, but we are guessing that all should be ready on Monday.

If you file on or after Monday, you are not required to pay your tax until April 15.  However, in the past, some of our clients have gotten notices indicating tax amount due before the April 15 deadline when filing too early before actual payment.  If you plan is to pay around April 15, we would suggest waiting to file your return until later in March.

On another note, I attended the first day of the Commodity Classic in Orlando today and visited with several clients, friends and others.  This is a great show to meet other farmers and if you have never attended, I would highly recommend it.

The final crop insurance numbers for corn and soybeans were determined with today’s trading.  The price is $5.65 for corn and $12.87 for beans.  The corn price is a few pennies lower than last year and the bean price is about 30 cents higher.  This may provide a tiny bit of incentive to switch to beans, but based on what we are hearing talking to farmers, input providers and others, we do not see too much of a change.  Close to 100 million corn acres but probably 2-3 million short (but we know this can change with weather, etc.).

Paul Neiffer, CPA

We received this question from one of our readers yesterday:

“With my husband passing away in October 2012, I have sold the cattle & much of the farm equipment. Now wondering how all will fall out as relates to depreciation. Obviously, the sale price was less than when purchased new. Ex: Used 90 Dump Truck on IRS depreciation @ $7,000 in 2004; had to sell for $1,000 for salvage/parts as repair costs exceeded any greater sales value.”

We get questions like this fairly often.  When a person passes away, any assets owned by them will get stepped up to fair market value as of the date of death (or stepped down if the asset is worth less than its adjusted tax basis).  If the asset is owned jointly with their spouse, then in most cases, the half owned by the person passing away will get the step up and the other half will continue to be depreciated by the surviving spouse.

Now for those couples living in a community property state, there is an interesting twist in that both halves get a step-up in basis.  Thus, for taxpayers in those states, they get the double benefit of all assets owned by the community (the deceased spouse and the surviving spouse) getting to adjust their cost basis to fair market value. 

For those assets stepped-up in basis you will begin to depreciate them using the class lives called for by the tax rules (sorry, no bonus depreciation or Section 179).

The nice thing about these rules is that you do not have to go back and try to find our what they originally paid for an asset (if not on the depreciation schedule).  The only documentation required is how you arrived at the fair market value of the asset.

In the example of our reader, even though they paid $7,000 for the Dump Truck and most likely fully depreciated it, they would most likely use $1,000 as their FMV value.  If this is not a community property state, then $500 would be their cost basis since the surviving spouse had fully written down her cost to zero.  In a community property state the basis would be a $1,000 and no gain or loss would be recognized.

Remember that this step-up applies to harvested grain that has not been sold.  If you have sold the grain on a deferred payment contract and have not received the cash yet, this does not get a step-up since it is considered “income”  and income items do not get a step up.

Paul Neiffer, CPA

We got this question from a reader today:

“Can  the amount I contribute to my solo 401k as deferred compensation be used as wages when figuring the domestic production activities deduction? I have no other wages.”

Several years ago Congress placed into law a Domestic Production Activities Deduction (DPAD) that was primarily in response to the World Trade Organization disallowing some of our other tax incentives.  As a result, farmers are entitled to deduct approximately 9% of their net farm income as long as they meet certain other rules.  One of the rules limits the deduction to 50% of W2 wages. 

If the farmer is sole proprietor and has no employees, then the only DPAD deduction available is if they have a flow-through DPAD deduction from a cooperative. 

In the case of our reader, since he has no employees wages and the solo 401k is not considered wages, then no DPAD deduction is available.

This is a case where it may make sense to pay your spouse a wage to take advantage of the DPAD deduction and in many cases it will allow you to deduct more 401k expense.  The offset is that payroll taxes will be owed on the wages to your spouse and that cost may outweigh the deduction benefit.

Paul Neiffer, CPA

Although we posted on this subject already, we have received multiple questions from readers and other CPAs regarding filing after March 1.  As of the time of this post, there are most likely at least two major forms that the IRS has not yet released that will directly affect most if not all of our farmers. 

First, is form 8582 which reconciles your passive income and loss calculations assuming you may have some activities that are passive. 

Secondly, Form 8903 which is used to calculate your Domestic Production Activities Deduction (DPAD) has not been released.  Every active farmer will qualify to calculate this deduction (you may not end up with a deduction, but should calculate to verify).  Also, if the farmer is a member of a cooperative that distributes a DPAD deduction to the farmer, you will need to fill out this form to claim the deduction.

Therefore, since there are only about 5 days left before the March 1 deadline and these two forms are not yet formally available, there should be no concern with filing after the March 1 normal filing deadline to take advantage of paying the tax on April 15.  The IRS recognizes that substantial delays have been caused by Congress and the President delaying the new law as long as they did. 

The only time to file by March 1, 2013 is if you have a desire to pay your income tax early.  Otherwise, if you would rather wait until April 15 to pay your tax without a penalty, wait until after March 1 to file your tax return.

Paul Neiffer, CPA

For farmers who raise certain crops with a longer pre-productive life (over two years) such as apples, oranges, and other similar plants, one of the tax rules under Section 263A require all of the costs associated with planting and growing this crop until it reaches economic production to be capitalized and then depreciated over ten years.  The IRS has a list of  these plants which they periodically update.

The IRS just released Revenue Notice 2013-18 removing blackberries, raspberries and papayas from these rules.  This means cash basis farmers will now be able to deduct normal growing costs associated with these plants from the time of planting forward.  Hard asset costs such as irrigation systems, wells, etc. will still be capitalized and depreciated over their normal life.

Revenue Procedure 2013-20 provides guidance on the timing and procedures to follow in making this change.  This should be welcome news for those farmers since accounting and accumulating these costs can provide heartburn to farmers and their accountants.

Paul Neiffer, CPA

The Kansas City Federal Reserve issued their latest Agricultural Credit Conditions report for the 4th quarter of 2012.  Due to the widespread drought in their area, irrigated cropland values saw a 13 percent jump in the 4th quarter alone and up 30% for the year.  Cash rental rates for irrigated cropland also surged more than 20% from the prior year.

Although fourth-quarter incomes were better than expected, but there is concern about the drought affecting certain areas in the months ahead.  Capital spending rebounded in the 4th quarter although loan demand remained low.

More non-farmers appear to be buying farmland for recreation and residential development than the prior year, although levels are still much lower than previous years, primarily due to farmers snapping up most of the available land.

Crop land surged by more than 25% compared to the previous year in Kansas and Nebraska with Missouri not too far behind.

Paul Neiffer, CPA

With farmland prices at or near an all-time high, many farmers are considering selling their farmland and rolling over the gain into other real estate on a tax-deferred basis using a Section 1031 tax-deferred exchange.  Under these rules, the farmer has 45 days from the date of closing (not when you sign the offer) to identify the real estate they wish to buy (usually up to three can be identified without any issue) and then another 135 days or 180 days total to finally close on this replacement property.

The farmer must reinvest the net selling price of the property sold in the purchase of the new property.  For example, if land is sold for $1.5 million with $100,000 of selling costs and $400,000 of debt paid off, the farmer must reinvest $1.4 million and at least $1 million of cash.  They can pay more than that in cash, but the minimum is the $1 million.

If the farmer meets these rules, they automatically assume there will be no tax due, however, certain things can spring a nasty surprise at tax time.

First, the sale of farmland may also involve the sale of personal property such as wells, fences, grain bins, etc. that are subject to Section 1245 recapture.  Farm land can normally be reinvested into any other real estate, however, personal property has greater restrictions on what qualifies.  If the farmer sold their $1.5 of farmland, but $300,000 of this was personal property that was not acquired for the same kind, then the farmer will have $300,000 of ordinary income that could easily cost $100,000 without having any cash to pay for it.

Second, if the owner of the property lives in a state separate from their land holdings, the whole gain may be subject to state income taxes.  Many states require any replacement property to be reinvested in the state of sale.  If not, the state will assess tax when the reinvestment property occurs out of state.  For example, assume a Missouri resident owns the $1.5 million farm in Oregon and rolls over the farm land into an apartment building in Missouri.  Assuming a $1 million gain, this whole amount will be subject to Oregon tax of about $100,000, again with no cash to pay for it.

Third, many taxpayers assume that these day requirements automatically roll over to the next business day which is not correct for Section 1031 purposes.  You must count the actual days and if the 45 day or 180 day date falls on a Saturday, Sunday or Holiday, you must make sure to perform the required task BEFORE that date.

This can be a very complicated transaction and it is very important to review this with a tax advisor that understands these rules.

Paul Neiffer, CPA

A common question that arises in our meetings with clients is about making sure that the farm remains in the family for multiple generations.  One option for accomplishing this is the use of a Dynasty Trust.  Many states such as South Dakota, Delaware and Alaska allow for trusts that are either perpetual or last for 100′s of years.  This allows the farm family to place land into the trust and make sure that the farmland will remain in the family for multiple generations.  However, there are several questions that you must answer before doing this:

• Is this what all of the family wants to happen?  Has this been discussed with all of the next generation?  Even though the assets may be placed into a trust, if communication has not occurred, “fights” about this may occur.
• Is the property large enough to support the dynasty trust structure?  The passing of 500 acres to the next generation in a dynasty trust may make sense, however, once it passes onto the next generation or the one after that and there are suddenly 45 beneficiaries of the trust; the use of a trust may not make sense from an administration standpoint.  The fees to properly allocate income and prepare the tax return may exceed the income generated by the trust.
• How much control from the “grave” are you trying to achieve.  My friend told me the only way to take his fortune to the grave with him was to write a check that could not be cashed.  Is your desire to control this from the grave or do what is best for the next generation(s).  Sometimes this is the same answer, but many times it is not.
• Is it better to transfer assets now than to wait for the estate?  In many cases, a transfer during life make more sense than waiting for a step-up in basis.  If the land will remain in the family for multiple generations, there will be no sale anyway.  By gifting now, you may be able to escape estate taxes later.  The dynasty trust can be used during your lifetime.

These are some of the important questions that must be answered.  There are most likely many others that apply to your situation.  Now is the time to get help from your advisor on how best to accomplish this.

Paul Neiffer, CPA

Four Senators (two Democrats and two Republicans) this week introduced a bill “The Farm Program Integrity Act of 2013″ to place a cap on farm payments that an individual farmer can receive and try to close “certain perceived” loopholes in the farm payment program.  This bill closely follows language that was included in the original 2012 Senate farm bill proposal.

The bill would establish a per farm cap of $50,000 on all commodity program benefits plus $75,000 on any loan deficiency payments and marketing loan gains.  This would result in an overall $125,000 per farm cap which is doubled for a husband and wife.  The $50,000 cap would apply to any new farm programs that are developed as part of the final 2013 farm bill (assuming one gets done).

The bill tries to close the perceived loophole that currently allows “non-farmers” to qualify for federal farm payments.  This provision will prevent non-farmers from being able to use the management “loophole” that is in the current law.  The bill would clearly define the scope of people who qualify as actively engaged in farming by only providing management for the farming operation.  However, like most law, it is our opinion that “clearly define the scope” will not be quite as black and white as the Senators would like.

Both the National Farmers Union and the National Sustainable Agriculture Coalition support the bill.

On another related note, as part of the Sequester talks, there is a chance that 2013 Ag payments may be reduced.  The discussion right now is an 8% haircut, but we know anything is possible in this process.

We will keep you posted.

Paul Neiffer, CPA

We came across this blog from the Internet and it is a great reminder for all of us that will be getting charity donation acknowledgements between now and when we file your tax return.  In order to claim a charity donation, you must get a written acknowledgement from the charity and retain in your files before you file your tax return.

It is important for this acknowledgement to have the “magic blurb” as follows:

No goods or services were provided in exchange for your donation (or similar wording). 

Without this statement, the IRS, if they audit your return, are allowed to completely deny your charitable donation even if you have a cancelled check and the letter from the charity.  There have been several court cases where the IRS has won and disallowed the donation simply due to the omission of this statement from the charity.

If you get one of these letters this year without this wording, please call the charity and have them reissue it in the proper form and let them know that they need to update their system accordingly.  This simple mistake can be very costly.

Paul Neiffer, CPA