We had a reader ask the following question:

“You previously wrote about electing out of deferred farm sales where the farmer could elect to include the income for a March delivery contract into the previous year to increase his taxable income in the previous year. I deferred my payment on my 2011 grain until 1/3/12. Can I elect to show part of this income on my 2011 taxes. ”

When a farmer sells their grain on a deferred sales contract into the next year, they can elect out of the installment method on the grain that is covered by that particular sales contract.  The key point is that they have to elect out of all of the grain covered by the contract or none of it.

In the question, the bushels of grain covered by the contract for delivery on January 3, 2012, all of that grain would have to be reported as income in 2011 if he elects out of reporting it in 2012.  He cannot elect to report part in 2011 and part in 2012.

That is why we suggest having multiple smaller deferred sales contracts so you can pick the best one to defer if you need to.

For example, let’s assume the farmer above had sold 25,000 bushels of corn for $150,000 delivered on January 3, 2012.  He can elect to report all of this income in either 2011 or 2012, but it has to be all in one year or the other.  Now, let’s assume he entered into 5 separate 5,000 contracts at $30,000 apiece.  Under this example, he can elect out of 1, 2, 3, 4, or 5 of these contracts to bring in $30, 60, 90, 120 or $150,000 of income into 2011 if he so elects.  By spreading the contracts this way, he has five times the flexibility than having one contract.

For those farmers who have corporations for their farm operations, there are several changes to the form 1120 for this year.  These changes are as follows:

• Merchant card and third-party payments.  For the 2011 tax year, the IRS has deferred the requirement to separately report on the corporation’s tax return the amount of merchant card and third-party payments from form 1099-K.  These were going to be required to be reported on line 1a of the return.  The instructions now indicate these should be lumped in with all gross sales on line 1b.
• New form 1125-A, Cost of Goods Sold.  For tax years beginning in 2011, filers of form 1120, 1120-C, 1120-F, 1120-S, 1065, or 1065-B are required to use new form 1125-A to report any cost of goods sold.  For most farm operations, this would not be applicable if you report your farm income and expenses on Schedule F, but it may apply to you.
• New Form 1125-E, Compensation of Officers.  If you farm corporation has gross receipts greater than $500,000 and you pay officer compensation, then you are now required to fill out new form 1125-E.
• Change of Address.  Form 8822-B, Change of Address – Business, has been created by the IRS specifically for business use.  In the past, changing the address on form 1120 normally was sufficient, however, now the IRS wants this form filled out for a business change of address.

Although these changes are specifically associated with form 1120, most of the same changes apply to form 1065 for partnerships.  The only one that would not apply is form 1125-E, Compensation of Officers.

I think the Kansas City Federal Reserve is one of my favorite sites to get good farm information.  In a recent issue of the Main Street Economist Agricultural and Rural Analysis, they had an article entitled “Is This Farm Boom Different?”  The article recapped the two primary farm booms of the 20th century.

In the 1910s, World War I ushered in the first farm boom.  In the second half of that decade, U.S. farm exports rose dramatically to meet war-time demand for food and most agricultural prices doubled.  Simultaneously, very low real interest rates allowed farmers to invest rapidly into capital improvements.  Between 1900 and 1919, farm real estate prices rose more than 70%.

The century’s second boom occured in the 1970s when farmland prices soared again.  With President Nixon’s trips to Russia and China, world demand for our farm products increased dramatically.  Even the recession in mid-decade only slowed the rapid rise in farm prices.

The end of both booms were due to two primary factors:

1. A rapid drop in world demand, and
2. An increase in interest rates

Today’s boom is very similar.  World demand for our farm goods has increased dramatically, especially from China.  Interest rates are the lowest they have been since at least the 1960s.  Real US farm income has increased dramatically with 2011 being the first year that farm net income was in excess of $100 billion.

Despite these two similarities, farm capital investment presents a striking difference from the last two booms.  In those booms, farmers took aggressive advantage of low interest rates and expanded their farm operations rapidly with more debt.  In contrast to these past farm booms, non-real-estate investments in agriculture have not soared to the highs of previous farm booms.  In addition, farmers have not used much debt to fuel their capital improvements.

During the 1970s, annual farm capital expenditures surged 71%, as farmers tripled their capital spending on tractors, farm buildings and land improvements.  Even in 1919, farmers more than tripled their spending on tractors and farm buildings as compared to the pre-WWI high.

This debt accumulation in both decades was a critical factor in the bust that happened in the succeeding decade.

As long as farmers continue to avoid the use of massive debt to fund their capital investment, this boom may continue and although we know their will be a correction, it may end up not being a bust.  We shall see.

Every five years the USDA performs an agricultural census of the farms in the US.  The last census was performed in 2007 with this year being the next census.  We have already seen some of the census forms received by our farm clients.

We were curious how many counties in the US had more than $1 billion in farm sales in 2007.  We accumulated the list as follows:

 As you see, California was the most dominant state with twelve counties exceeding $1 billion in farm sales.  California also had a couple of other counties that were very close to the billion dollar level.

Only two other states had at least two counties (1) North Carolina and (2) Washington. 

Our guess is that this list will easily double in the next census to come out later this year.  Several states had at least two to four counties there were in excess of $750 million of farm sales and with the current high prices,we would guess this will push those counties over the $1 billion mark.

We will keep you posted on how the next census numbers end up.

Following up on my post from yesterday, here are some more interesting farm export facts.

Total 2011 agricultural exports are expected to $137 billion.  This is an all time high with 2008 in second place at $115 billion.  An interesting note is that farm imports were $93 billion which is primarily comprised of fruits, vegetables and coffee.

Of total exports, less than 40% of this is bulk products such as corn, wheat and beans.  Back in the 1970s and 1980s more than 60% were bulk grains.

Our top 5 exporting countries are China #1, Canada #2, Mexico #3, Japan #4, and the EU #5.  Canada had been number 1 for several years until China took over in 2011.

China imports almost 60% of the total world trade in soybeans and almost 40% of cotton.

The IRS just issued Revenue Ruling 2012-2 which lists the Applicable Federal Rates for January, 2012.  These are the minimum interest rates that you must charge on related party loans such as a loan from a parent to a child or a shareholder to their corporation.

For short-term loans, this interest rate is only .19%.  For mid-term loans it is only 1.17% and for long-term loans, it is about 2.60%.  These rates are at an all time low and if you are thinking about making some inter-family loans, this is a great time to make the loan.

It allows you to transfer the use of income producing property from you to your child and they are only required to pay you interest are these very low rates.

Also, if you have loans from your corporation or vice versus, this is a great time to lock in these low rates.

One last thing, due to Emancipation Day, the due date for your tax return this year is April 17, 2012.

One of the hardest things to keep track of as a CPA who prepares income taxes is “What is the due date of your tax return, income tax estimates and other due date?”.  Normally these due dates fall on the 15th of a month.  However, if the 15th is a Saturday, Sunday or federal holiday, the due day rolls over to the next business day. 

This can sometimes be confusing as to what the actual due date is by looking at a calendar.  For example, in my post yesterday, I referred to the farmer’s tax estimate being due on January 16 this year since January 15 falls on a Sunday.  I had looked at my calendar and noted those dates, however, my calendar did not tell me that Martin Luther King’s federal holiday was on January 16.  Therefore, the actual due date is Tuesday January 17, 2012, not Monday January 16, 2012.

Just remember, that if a tax filing due date is on a weekend day or federal holiday, it automatically rolls over to the next business day.

An alert reader let me know that one of my points on how to defer your crop insurance proceeds was not written as well as it could have been. 

In my original post, I had indicated that each crop is a “separate” business unit, then each crop is looked at separately.  This separate business unit definition is really based upon how the farmer accounts for his grain operations.  Almost all farmers account for their grain operation under one business unit which includes the production of corn, soybeans, wheat, cattle, etc.  Under these conditions, the farmer if they elect to do so, is required to defer all crop insurance proceeds for those crops that qualify for the deferral.  

Therefore, if the farmer has one business unit and crop insurance proceeds are received on both corn and beans, the eligibility test for deferring crop insurance proceeds is based on the aggregate. If together more than 50% of the crop sales are normally reported in the year after harvest, then the farmer can elect to defer all of the insurance proceeds to the following year.   

If the farmer, however, has more than one business unit with multiple crops, then each business unit can review its situation and decide if it wants to defer the crop insurance proceeds.  For example, a farmer may run his farm as a sole proprietor and have another farm operation with a brother in a partnership.  Both his crops and the partnership crops are damaged by hail and receive crop insurance proceeds.  The farmer can elect to defer his crop insurance proceeds, while the partnership can elect to not defer or vice versus.As you can see, crop insurance deferral rules can get a little bit complicated and each situation can be a little bit different.  Always review this with your tax advisor and thanks to the alert reader for requesting clarification.

We had a reader ask the following question:

“I was flooded on one farm & hailed on another so received multi-peril income this year. How much of our MPCI can be deferred?”

Without knowing all the facts here, we can give general advice on how much crop insurance proceeds can be deferred from one year to the next.  There are several rules that must be followed:

• The crop insurance must be for damage to the crop, not reimbursing you for a reduction in crop prices. 
• The general rule is that more than 50% of your crop sales normally occur in the following year.  For example, if you harvest corn in October, normally sell 35% at harvest and the remainder in the following year, you can defer your crop insurance proceeds.  However, if normally sell more than 50% of your crop at harvest or in the current crop year, you cannot defer the proceeds.
• First, the crop insurance proceeds must be received in the year of the actual crop damage.  If the crop was damaged in 2011 and the crop insurance proceeds were received in 2011, then you may defer the income to 2012 as long as you meet the other rules.  If the proceeds are received in 2012, you have already deferred the receipt by one year and thus it is taxable in 2012 and cannot be deferred to 2013.
• Each crop is a separate “business” unit, so each crop must be reviewed to see if the crop insurance deferral rules apply.  You may have one that qualifies and one that does not.  Therefore, if one crop (perhaps corn is sold more than 50% in the next year) and one crop (soybeans is sold more than 50% in the current year), then corn would qualify to be deferred and beans would not.
• You cannot pick and choose the amount that you can defer.  If you elect to defer the crop insurance proceeds, you must defer all proceeds received during the year for that particular crop.

These are the general rules and will cover almost all situations, however, there are usually some anomalies out there and you always need to review this with your income tax advisor.

President Obama signed late yesterday a new law extending the payroll tax cut for the first two months of 2012.  This means for January and February 2012, the employee’s portion of the FICA tax will be 4.2% instead of the normal 6.2%.  For self-employed farmers, for net SE farm income up to $18,350 shall be at the reduced rate (this is reduced by any other wages earned during the period).  If the payroll tax cut is not extended for the rest of the year, I am assuming the W-2 would have to be revised to reflect any wages earned between January 1, 2012 and February 29, 2012 (what a mess that would be).

However, the new law has a recapture provision for any wages earned during the first two months in excess of $18,350.  This recapture provision provides for a tax of 2% on all wages in excess of this amount earned during the first two months.  The $18,350 is one-sixth of the FICA wage base of $110,100 for 2012.

The IRS will interpret this new section including how this tax would be paid.  We will keep you posted.