After the House passed their Farm Bill today, it appears that their version on the Senate version are not too far apart.  The key points for both are:

• An elimination of all direct farm payments
• A reduction in CRP acreage to either 24 or 25 million acres
• Consolidation of many farm programs
• A Price Support program that guarantees a farmer a minimum price for their crop, or
• A Revenue Program that a farmer can elect (they have to elect one or the other).

The Price Support program is either based on a price set by Congress (the House version) or based on the average Olympic average of the prior 5 years of prices (the Senate version).  If a farmer elects the Price program, they cannot participate in the Revenue program and vice versus.

A couple of key differences is a payment limitation in the Senate of $50,000 per person for the Senate and $125,000 for the House.

The Senate also eliminates these payments if your adjusted gross income is over $750,000 while the house boosts this to $950,000.  This will most likely make the accounting simpler than it is now since you will most likely only need to look at the bottom line income shown on the bottom of your Form 1040 page 1.

We would guess that a final farm bill will be ready for a vote in the  next week or so, but with Memorial Day only a week from Monday, who knows long Congress will take off for that Holiday.

We will keep you informed.

Paul Neiffer, CPA

I was doing a google search on the House Farm Bill today and the 10th item that showed up in my search was this article.  With a title of “House Ready to Make Draconian Cuts to Food Stamps in House Bill” I was interested in what these “draconian” cuts were.  As you read the article, you will note that the author point out that the House Farm Bill is proposing cutting “Food Stamps” by about $2.5 billion per year or $25 billion over the 10 years.  This compares to the Senate Bill which calls for lower cuts of about $4.1 billion in total over 10 years.

On the face of it, $2.5 billion might be a lot of money, however, the total “Food Stamp” portion of the Farm Bill is close to $60 billion per year.  The proposed $2.5 billion cut equates to a 4% reduction.  I would normally not consider that to be “Draconian”.  The House is most likely battling this issue as I write this post and it will be interesting to see what final number they pass onto the floor for a vote.

It also appears that the Dairy margin management program is still part of the Bill, but this may get eliminated or changed in the committee between the House and Senate.  We will keep you posted on any material changes in both versions.  So far, the Senate Bill appears to mostly follow the bill passed last summer.

Paul Neiffer, CPA

The University of Illinois puts out a great daily email called the “Farm Doc Daily”.  In today’s email, they summarized the debt to asset ratio from 2005 through 2011.  The lower this ratio goes, the better.  Their database showed that the average farmer in Illinois for 2005 had total assets per acre of $1,267 and related debt of $365.  This resulted in a debt to asset ratio of 29%.  For 2011, the total assets had increased to $2,385 while related debt increased but by a lower % to $500.  This resulted in the debt to asset ratio declining from 29% to 21% in 2011.

Farmers have done a great job over the last few years in keeping this ratio low, however, you can note that total debt has increased from $365 to $500 per acre.  I wondered how this ratio would change if we assumed that the three major asset categories used (crop and feed inventories, machinery and farm land) would each decrease by 10% or 20%.  A 10% reduction would lower total assets from $2,385 to about $2,150 and would increase the ratio from 21% to 23%.  A drop of 20% would put total assets at about $1,900 resulting in a ratio of 26%.

As you can see, even if all asset values decrease by 20%, farmers are still better off (using this ratio) than they would have been in 2005.  To get to the same 2005 29% ratio would require an almost 28% drop in asset values.

Keep up the good work.

Paul Neiffer, CPA

Creighton University produces a monthly index called the Rural Mainsteet Index (RMI) indicating the overall economy for several rural states in the Midwest and Mountain states.  The May Index was recently released and I thought this month I would recap the index for each of the states covered.

Any value greater than 50 indicates economic growth.  The Index values by state are as follows:

• Colorado – 73.1 down from a strong 75.2 in the previous month
• Illinois – 56.7 down slightly from 56.9
• Iowa – 62.3 an almost 3 point dip from 65.2
• Kansas – 61.8 a full 9 points higher than an almost neutral 52.8 reading
• Minnesota – 66.7 almost no change from 66.8
• Missouri – 71.7 a substantial increase from 56.3
• Nebraska – 57.3 up from 54.9.  In January the index was actually under 50
• North Dakota – 78.8, as would be expected this state has the highest index reading (shale oil and low unemployment will do that)
• South Dakota – 57.2 a small decrease from 58.8
• Wyoming – 55.1 a good increase from 52.8

Many of the states farmland indexes appear to be having more swings both up and down versus a more sustained increase in several previous months.  Are we seeing a crest in land prices (leading to a dip) or is this just the start of the next wave.  We shall see.

Paul Neiffer, CPA

WARNING – THIS IS MY LONGEST POST EVER

The House Ways and Means Committee just issued a proposal to “simplify” the treatment of small business (including most of our farmers).   I will attempt to summarize it:

Core Changes:

• Permanently expanding Section 179 from the current $25,000 level (for 2014) to $250,000 with a phase-out starting at $800,000,
• Allowing all taxpayers to use the cash method of accounting if their annual sales are less than $10 million (most farmers can use this already),
• Somehow they believe making partnership tax returns have a due date of March 15, S corporations have a due date of March 31 and C corporations have a due date of April 15 will help tax compliance (this assumes a calendar year-end and individuals remain at April 15)

There are two options regarding S corporations and partnerships:

Option #1 offers changes as follows:

For S Corporations:

• Reduce to five years the built-in period (GOOD),
• Increase to 60% the portion of an S corporation’s earnings that may be passive without triggering an entity-level tax and eliminate the rule that terminates an S corporation if it has excess passive income for three consecutive years (GOOD),
• Simplify the procedure and extend the time for making an S corporation election, permitting it to make the election on its first tax return (GOOD).

For Partnerships:

• Repeal the rules relating to guaranteed payments to partners, replacing with treating payments as either payments in their capacity as partners or as non-partners (MAYBE GOOD),
• Require mandatory adjustment of partnership’s basis in partnership property when a partner distributes property or transfers his interest (Normally anytime the word mandatory is in the law, it is BAD),
• Clarify that all distributions of inventory are treated as a sale between the partnership and partner (most likely BAD),

Option # 2 – New Simple, Unified Pass-through Rules

This option would repeal current Subchapter K (partnership rules ) and Subchapter S and replace it with one uniform set of rules.

• It would encourge the formation of new businesses by allowing contributions of property and money on a tax-free basis (GOOD),
• Maintain the current relationship that the character of the income and loss pass through to the owners (NO CHANGE),
• Reduce the use of complex structures to engage in tax avoidance by permitting only net ordinary income or loss, net capital gain or loss and tax credits to be specifically allocated (THIS IS WHEN YOU HAVE TO WATCH OUT),
• Close the tax gap while also “simplifying” owner’s current quarterly estimated tax responsibility by requiring entity-level withholding on the pass-through income (THIS MEANS THEY WANT THEIR MONEY SOONER AND YOU HAVE TO WAIT TO GET YOUR MONEY BACK IF DO NOT OWE ANY TAXES),
• Prevent owners from gaming the system by using losses to reduce tax liability by limiting deductions for losses to an owner’s basis in the pass-through interest, but allowing excess losses to be carried forward indefinitely (WHEN THEY USING THE WORD GAMING “WATCH OUT”),
• Ensure that taxes are paid on real, economic gains (but not on returns of capital) by limiting tax-free distributions to the owner’s basis in the business (MOST OF THIS IS IN EFFECT NOW),
• Prevent the use of pass-through entities to shift gains and losses by requiring pass-through entities to recognize gain on all distributions of appreciated property (OUCH FOR PARTNERSHIPS),
• Conform to the basis rules that currently apply to partnerships by allowing owner’s basis in their ownership interests for entity-level debt (both recourse and non-recourse) (THIS IS GOOD)
• Provide certainly with respect to owners who actively participate in the business by allowing them to be treated as employees (COULD BE GOOD).

As you can see, I probably just set my new record for longest post ever, but in my opinion these rules are the first step in Congress taking away the flexibility that farmers have enjoyed for the last several decades on the proper use of partnerships, corporations and limited liability companies.

The proposal does not address the employment and self-employment taxes of partners and shareholders and with this year’s implementation of the 3.8% Medicare/net investment income tax on all income except pass-through income from material S corporations, it would not surprise me that all business income will become subject to this tax very soon.

It seems like every time Congress uses the term “Simple” it simply means an easier way for them to get more money from farmers.  We shall see.

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

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

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