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.

Most farmers are on a calendar year basis for reporting their income taxes and one of the items that came about back in early 2010 is not available until they file their income tax returns for 2011.  This credit is called the “HIRE” credit and is available to any taxpayer who meets the following requirements:

• Hired a new employee after February 3, 2010 and before January 1, 2011,
• The employee was employed for at least 52 consecutive weeks,
• The employee’s wages in the last half of that period was at least 80% of the wages in the first half,
• The employee certified on form W-11 or an equivalent that they were not employed for more than 40 hours in the 60 days before being hired,
• The employee hired was not a replacement of another employee unless they voluntarily left, and
• The employee is not related to you.

If you meet all of these requirements, then you qualify for an additional $1,000 income tax credit that may offset your income tax on a dollar for dollar basis. 

Now is a good time to review your employee’s records to see if you qualify for this credit.

The Federal Reserve Bank of Kansas City puts on an Ag Symposium each year.   It was held July 19-20, 2011 in Kansas City and here are some interesting farm export facts that I gleaned out of reading their information which is available online.

The share of the US crops that is exported each year is as follows:

• Wheat – 46%
• Corn – 15%
• Rice – 53%
• Soybeans – 47%
• Cotton – 81%

The US share of total world crop exports are as follows:

• Wheat – 18%
• Corn – 53%
• Rice – 11%
• Soybeans – 39%
• Cotton – 35%

The share of livestock that is exported is as follows:

• Beef 10%
• Pork 22%
• Poultry 17%

These percentages are based upon their estimates for 2011-2020.

There is more information that I will share over the next few weeks, but I thought this was informative.  For example, only 15% of our corn crop is exported, however, this makes up about 53% of all corn exports through-out the world.  Also, almost 40% of the soybeans exports come from the US, with most of the remainder coming from South America.

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.

With January 16, 2012 being less than two weeks away, I thought I would update our farmers on their estimated tax requirement and give some examples.   As we have previously posted, most farmers work very hard to get their income taxes filed by March 1 of each year since as long as they file their return and pay any tax owed by that date, there is no penalty for not paying estimated taxes.

However, in many cases, I think it would be much better to pay in their required tax estimate on January 15 (this year January 16) and then pay the remaining amount owed on April 15.

The amount owed on January 16, 2012 is the lessor of (1) the 2010 total tax liability less any withholding already paid in for 2011, or (2) the 2011 estimated tax liability, net of any withholding, times 66.667%.

As an example, assume a farmer’s tax for 2010 was $10,000.  He had a very good year in 2011 and knows that his tax will be at least $100,000.  He can either pay this tax on March 1, 2012 or he can pay $10,000 on January 16 and pay the remaining amount on April 16, 2012 (the 15th is on a Sunday this year).  Let’s assume that he can borrow at 4%.

The interest cost on the $10,000 from January 16 to April 16 is about $100.  The interest cost on $100,000 paid on March 1 until April 16 is about $500.  Under this example, the farmer would be better off by about $400 by just making an estimated tax payment on January 16 and waiting till April 16 to pay the balance.  Also, he has an extra 45 days to prepare his tax return and make sure all of his form 1099s, etc. are correct.

Let’s take one more example of possibly the worst case.  Assume a farmer has to pay $100,000 of tax this year and his last year’s tax was well over that amount.  In this case, he needs to pay in $66,667 on January 16 and $33,333 on April 16 or pay $100,000 on March 1.  In this case, his interest cost on the $66,667 is $667 versus the $500 cost for paying the $100,000 on March 1.  He is out of pocket about $167, but he still got the extra 45 days to prepare the return.  Whoever prepares the books and the tax return would probably like to have the extra 45 days if the cost is only $167.

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.

We had a reader ask the following question:

“I put a deposit on a building in Nov 2011 thinking that it would completed and paid for by 12/31/11. The builder has not started the building yet and says it will most likely be completed mid January. What can i do to get the 100% cost deduction for 2012? Could I just pay for it now, or does it have to be 100% complete by 12/31/11?”

In order for a farmer to construct a new farm building in 2011 and be able to take 100% bonus depreciation on the building, it must be completed by December 31, 2011.  Usually having the occupancy permit that shows the completion date on or before that date will be sufficient, but in several states, the local county does not issue occupancy permits on many farm buildings.

In these cases, I would try to take photos of the property and get them date stamped and put in some type of file showing that the building was completed.  To prove the date, etc., you may want to hold up a copy of the local newspaper showing the date so that there is no question on what date the photo was actually taken.

In this case, since the construction will not be finished by year-end, then 50% bonus depreciation will apply in 2012, not 100% bonus depreciation in 2011.  There might be a chance that the construction is of two separate buildings.  For example, a machine shop may be one building and a shop located next to the machine shop may be a separate building.  If one is done in 2011, it would qualify for 100% bonus depreciation, but this does not appear to apply here.

Merry Christmas to all of our readers and we wish everyone a Happy New Year!