Just some short clips of wheat harvest near Dixie, Washington (about 12 miles east of Walla Walla, Washington) on Saturday, August 11, 2012.

• Short clip of harvesting wheat
• Short clip of grain cart coming up the hill with Dixie/Walla Walla in the background
• Longer clip of dumping wheat in the grain cart

All of these videos were taken by my wife (in her flip flops, she did not know I was going to have her do this, she thought she was just picking me up to go home, but I got her to ride the combine for a couple of hours).

I spent Friday afternoon and all day Saturday cutting wheat for my cousins down in Walla Walla.  I started out on Friday driving their older Case IH 2388 and then they kindly allowed me to drive a new Case IH 8230 with about 100 hours on it that they were renting.  This is a nice machine to cut wheat with. 

On the  2388, the top speed in 100+ bushel wheat was about 2.5 miles per hour with a 30′ header.  With the new machine, you could get close to 4 miles an hour with a 40′ Draper header.  The biggest issue with the header was its weight.  It created a delay in dropping and lowering the header that was much more noticeable than the 2388.

I am attaching a few photos from the two days and I think I probably harvested about 100-120 acres in total.  It is very hard with photos to let you know who steep this ground is to harvest.  Each of these combines are equipped with Hillco side hill levels to keep the cutting platform level on up to 25 degree slopes.  The photo at the bottom was probably close to a 20 degree slope and the one on the right was slightly less than that.  If you look at the header you can see that it is sloped downhill from the combine platform.  The auger is out ready to dump into the grain cart.

On my second days I was cutting a sidehill several times where the Hillco was unable to keep the platform totally level, but with the four large front tires and rear wheel assist, you are always feel fairly safe.

Remember, for this farm boy, cutting wheat for a day or two is the ultimate vacation.

The IRS announced this week the new standard mileage rates for 2012.  Most of the rates remained the same as the last six months of 2011.  For regular business use, the rate is still 55.5 cents per mile (don’t ask me where they came up with the half cent).  For charitable purposes, the rate is 14 cents and for moving and medical expenses, it is 23 cents per mile.

You can use these rates to reimburse your employees for their business miles and or deduct businessuse of your personal vehicles on the farm.

Here is the announcement.

We had a reader ask the following question:

“If I purchase and take delivery of a tractor in December 2011 but do not want any of the depreciation until 2012 can I still get the section 179 and bonus depreciation in 2012?”

In order to depreciate equipment such as this tractor in 2011, the farmer must both purchase the tractor (either for cash or financing it) and place the tractor in service.  Generally at year-end, the tractor needs to be delivered to the farm and available for use on the farm.  The farmer does not have to actually use the tractor in the field before year-end, but it must be available for that use.

If the farmer meets both of these tests, then the tractor is depreciated in 2011 either using bonus depreciation, if new, or using Section 179 and regular depreciation on the remainder, if used.

Now, if this farmer does not want to depreciate it in 2011, then he can purchase the tractor, but not place it in service.  He may simply have the tractor delivered to the farm after year-end and this would make it eligible for bonus depreciation and Section 179 in 2012.

However, the farmer needs to understand that bonus depreciation in 2012 is only 50% not 100%, and Section 179 is only available on $139,000 of assets, not the $500,000 available in 2012.  Now, these numbers may change and go back to the 2011 amounts, but this is not law yet.

With the increased Section 179 deduction available in 2011 of $500,000 farmers need to be very careful if they have ownership in multiple partnerships and S corporations that will be purchasing large amounts of used equipment and deducting it under Section 179.  The partnership and S corporation have an overall $500,000 Section 179 limitation on deducting at their entity level and when this amount flows through to the farmer, there is another $500,000 limitation level on his tax return. 

If more than $500,000 of Section 179 expense flows through to the farmer, then this excess amount is permanently lost as a deduction.  In this case, the farmer should have one or more of the entities look at amending their tax return to take a lower amount of Section 179 or if it new equipment, the 100% bonus depreciation rules would apply and it would result in the same deduction to the entity.

Another trap to watch out for is if the farmer has multiple C corporations that he controls, the Section 179 rules require the $500,000 limitation to be allocated among all of the C corporations that he controls.  This will result in only $500,000 being able to be deducted among all the C corporations.

If you think these limitations may apply to you, make sure to review it with your tax advisor.  The worst thing that can happen from a tax standpoint is to permanently lose a tax deduction that can be prevented.

We had a reader in Washington state suggest that we try to explain how steep some of these hills are that we harvest in this area.  Unless you have been on a combine harvesting a steep hill, it is hard to explain just how steep these hills are.

I know that as a child with my two siblings, we decided to go sledding down our “steep hill” by our house.  It took us about 15 minutes to walk up to the top of the hill.  We then put the sled down and all three of us got on it and away we went.  It only took about 100 feet for all three of us to get knock off the sled since it was so steep, we could not control it.

Another steep hill we had, the combine would start up the sidehill to get to the top.  At the bottom, we were cutting a full swath and by the time we got halfway up the hill, the combine had slid half way down the swath area and by the time we got to the top of the hill, we were lucky to be cutting a 5 foot section.

We had Caterpillar crawler tractors then and I remember riding with my dad around 10 years old and we would be coming up this same hill pulling the plow and as we got toward the top all you saw was blue sky and just as you crested the hill, the crawler tractor would continue to climb up into the air and then gravity would take over and the front end of the crawler would plunge back to earth.  Now, that was what I called a great amusement ride.

On a slightly more tragic note, we had purchased a brand new International 453 combine.  This was my second year of driving the combine during harvest and normally I would have been operating it this day, but had spent the night a friend’s house and my dad said he would drive it that morning.  We were cutting a field with moderately steep hills, but not too bad.  My father was going up hill when the transmission gears blew up and back then you spent most of the time standing up while driving.   Once the gears went, the combine immediately started to go backwards down the hill.  This caused my dad to grab the steering wheel and turn the combine into the hill which caused it to tip over pinning my father inside of the cab.

He was pinned inside the cab for over three hours while the emergency people worked on getting him out.  The gruesome part was that the combine’s throttle lever went through his leg pinning him inside of the cab.  He had use a hacksaw to cut himself out of the cab.

But being the tough German he was, he was back helping me combine the next summer.

There are many YouTube videos out there of combining on steep hills, but they do not really show you how steep these hills are.

Here is a sample of one of them.

We got the following question from one of our readers:

“When does depreciation recapture on equipment kick in? For example a 20 year old tractor fully depreciated sells for $30,000 cash. It cost $50,000 new. Is any of the $30,000 considered a capital gain?”

This is a fairly common transaction for many farmers during their farm career.  Let’s take the example that was part of the question and break it down.

When, the tractor is purchased for $50,000, this is the basis that is used for depreciation purposes.  In this case, the tractor was fully depreciated and sold for $30,000.  Depreciation is recaptured up to the amount of “total depreciation taken”.  So, in this case, all of the gain is depreciation recapture since the sales price of $30,000 is less than the total depreciation of $50,000.  Another way to look at it is if the the sales price is less than original cost, then all of the gain will always be depreciation recapture.

If the tractor had sold for $70,000, then there would have been depreciation recapture of $50,000 and Section 1231 gain of $20,000.  This gain is usually taxed as long-term capital gains, however, if during the last five years, you had accumulated Section 1231 losses, then part of this gain would be taxed as ordinary income.

In the example, the farmer sold the tractor for cash.  Let’s assume the farmer sold the tractor to a neighbor for $5,000 down and the remainder on a five year note.  Since all of the gain is depreciation recapture, the full gain on $30,000 is reported in the year of sale, even though the farmer only got $5,000 of cash.

In a post a couple of days ago, I indicated that a new Ag building placed in service after September 8, 2010 but where the construction started before that date would not qualify for 100% bonus depreciation, but would qualify for 50% bonus depreciation.

There is one exception to this rule that may help farmers some.  Any unique component that can be separately determined to have commenced construction after September 8, 2010 and placed in service before the end of this year may qualify for the 100% bonus depreciation.  A unique component is any material part of the construction that can be identifiable by both the start of construction and its costs.

For example, if a farmer constructs a machine shed that starts before September 9, 2010, this building can only be depreciated using 50% bonus depreciation.  However, if the machine shop has an unique door system that is started after September 8, 2010, then this door can be deprecated using 100% bonus depreciation.  Another example of a component that may qualify is a feed handling system or watering system installed in a hog barn.

The farmer must elect on the tax return to use this method of depreciation on these components, so it is very important to review this with your tax advisor during construction and when preparing your tax return.

The tax law passes late last year had a very favorable tax treatment for the construction of new farm buildings.  In that law for any new farm buildings placed in service after September 8, 2010 and before January 1, 2012, a farmer would be able to write off 100% of this new construction cost in the year placed in service.

For example, if a farmer started to build a new machine shop in late 2010 and placed it in service in May, 2011, they could deduct 100% of this cost on the 2011 tax return.  Most tax advisors were under the assumption that this 100% bonus depreciation would apply on any new building placed in service between these dates.

However, the IRS has thrown us a curve ball in that their intrepatation is that both the contruction must commence and be placed in service during these time periods.  Therefore, if in the above case, the farmer started the construction before September 9, 2010, then they can only deduct 50% of the new building as bonus depreciation.  The beginning of construction is defined “as when physical work of a significant nature begins”.

If this applies to your operation and you deducted 100% of the new building on your 2010 tax return, you will need to review with your tax advisor to see if an amended tax return is required.

Several of the farm equipment manufacturers that are publicly traded have recently posted their third quarter earnings.  In most cases, these earnings were down from last year’s third quarter and in some cases, the amount was down substantially.

Agco’s net income was down about 90 percent.  The company blamed their earnings short fall on two main items:

1.  Lower commodity prices, and

2. Tight credit

The company indicated softening demand in North America and Europe, weakness in Russia and Eastern Europe and stabilizing demand in South America.  Agco makes equipment under the Massey Ferguson, Challenger, Fendt and Vaitra brand names.  Sales were down almost 33 percent, therefore a reduction in net income of about 90% was actually better than most analysts expected.

More numbers are available here.

Lindsay, the maker of irrigation systems indicated that their profit for the quarter dropped 81 percent on a 50 percent drop in sales.  Both earnings and sales were substantially less than what the analysts expected.  Rick Parod, the company’s CEO said farmers continued to remain cautious about making investments in capital goods.

Further information can be found here.

I will try to update more of these publicly traded companies each quarter as their earnings comes out.  You can obtain good trend information from reading their quarterly reports or analysis.