Wow, what an action packed day.  First, breakfast was at 6 am to get the day started.  At 7 am, we had the taping of the show for the US Farm Report to air this weekend.

At 8:15, my breakout sessions started.  Each one last 55 minutes and were back-to-back-to-back.   I thought the last session would be the smallest, but it actually turned out to be the largest and each session had many good questions (and I think I gave good answers).

Ann Duignan of JP Morgan gave a presentation on how the global economy is affecting the farm machinery business and then its affects on our farmers.  The presentation was very informative.

Last night we had the Top Producer of the Year award dinner.  There were three finalists and based on the video presentation for all three, I could not tell who was going to win.  Each farmer has been very successful and will continue that success.  The one thing that was brought out to me by all three was each of their passion for the employees that work for them.  They are part of their family and it showed.

I think this is the first time that I have ever seen a farmer use a pink flamingo as part of their branding process.

I won’t tell you the winner here since it will be posted on the Top Producer section of www.agweb.com.

The Top Producer Seminar started out today with a bang.  Peter Zeihan with Stratfor Group gave an interesting presentation on the economic outlook in general and for ag.  It was very interesting to see a map with an outline of the world’s river systems and how that has affected the world’s economy over the last couple hundred years or so.

America, with the Mississippi River system and inter-coastal waterway has by far the best series of cheap river and water systems in the world.  That is why it is cheaper for an American farmer to ship his corn from Minnesota all the way to New Orleans than for a Brazilian farmer to ship his corn by truck for a hundred miles.

The only other water system that comes close to our is Argentina with three rivers that flow eventually down to Buenos Aries.  Because of this waterway system, Argentina’s standard of living in 1900 was about 90% of ours. 

There was a group panel on where the new farm bill was headed.  Consensus was a bill in 2013, but may still get one this year.  Direct payments will no longer be there and some expanded form of crop insurance is most likely to happen.

The value of peer groups was discussed in the afternoon and I believe that these have great potential value to all farmers.  It is always good to get another opinion that you value and it is much easier to held accountable by a peer.

All in all, the first day of Top Producer was very productive and I had several readers of the blog come up and say hi.  I hope to see more tomorrow and with three back-to-back presentations, I know I will be more tired tomorrow.

Today was the Tomorrow’s Top Producer at the Chicago Hilton.  Several speakers gave great presentations on various subjects.  Chris Barron of Carson and Barron Farms, Inc. gave a very interesting hour and half seminar on creating effective collaborations of multiple generations of farmers and farms.  This collaboration does not utililize a formal partnership for the operation, but rather gets like minded farmers together that will take advantage of cost savings and efficiencies, while still maintaining what is the most important such as family, friends and relationships.

Most of the partnerships that developed in the 1970s and 1980s to take advantage of cost savings failed since the most important object for them was purely financial.  For Chris and his “partners”, the other non-financial considerations are more important.  That is why I think we will see more and more of these type arrangements, especially with new combines in excess of $350,000, etc.

There were several break-out sessions and I attended one on the quest for 300 bushel yields.  There are 7 key components that get you to this number and some are more important than others.  Since in our area, irrigated corn is consistently in the high 275-300 bushel range, these numbers are very realistic.

I did one break-out session today and I look forward to Thursday when I do three of them.

I will keep you posted.

On Monday, my wife and I will be traveling to Chicago for the Top Producer seminars that begin on Tuesday.  Tuesday is set aside for the Tomorrow’s Top Producer and I will be speaking at a breakout session dealing with what is the right entity selection for a beginning Top Producer.

The main Top Producer conference begins on Wednesday and goes through Friday morning.  I have three breakout sessions on Thursday morning from 8:15 to noon dealing with tax savings tips, etc.  At the end of the third one, I will be worn out from talking.

I look forward to the conference and please feel free to stop me at any point during the conference to discuss farm accounting, taxes and who will win the Super Bowl.

On another note, we had some technical difficulties with our site yesterday.   The company that hosts the site had an issue with their internal database for our site and many others.  I would like to say it was very nice to be able to actually call and talk to someone in technical support without being on hold for an hour and they got the issue resolved fairly timely, but we were down for most of yesterday, but everything seems to be working just fine now.  Many of these so called hi-tech sites (including Google and others like it) seem to feel that customer support does not involve telephone numbers or talking to a human being over the phone.  It is very refreshing when one does allow this.

The Self-Employment (SE) tax rules for 2011 tax returns are different than the rules for 2010 tax returns, which were different than the rules for 2009 tax returns.

The Job Creation Act of 2010 reduced the Social Security tax component of the SE tax from 12.4% to 10.4%, for 2011 only.  Therefore, the SE tax rate on the first $106,800 of 2011 net SE income is “only” 13.3% (10.4% for FICA and 2.9% for Medicare) versus the normal 15.3%.  Since the temporary SE tax reduction only affects the first $106,800 of 2011 net SE income, the maximum amount that a farmer can save is $2,136 ($106,800 times 2%).

What you may not know is that the 2011 above-the-line federal income tax deduction (most states allow the deduction also) remains unchanged.  Before 2011, the deduction was a straightforward 50% of the SE tax bill.  For 2011, the deduction equals 57.51% of the SE tax amount, as long as the amount does not exceed $14,204 (the SE tax on $106,800 of net SE income).  If the SE tax exceeds this amount, you multiply it by 50% and add $1,067.

The effect is to allow a SE tax deduction equal to 50% of what the SE tax bill would have been if the Social Security tax component was the normal 12.4% (instead of the temporary 10.4%).

There has been an extension of this until February 29, 2012 and it may get extended, but we are dealing with Congress on this subject and who knows what will happen.

Also, one additional comment is that the self-employed health insurance premiums allowed as a deduction against SE income for 2010 in arriving at net SE tax owed has been eliminated for 2011.  This means that your SE tax bill will be higher this year than 2010 assuming the same amount of health insurance premiums.

Many of our clients operate their farm operation as either an S or C corporation and in many cases the only employee of the corporation is the farmer and perhaps their spouse and children.  Many of these farmers do not report any wages to them until the fourth quarter of the year.  In these cases, the wages reported in this quarter can easily exceed $20,000.

What many farmers do not realize is if the wages reported for any quarter exceed $20,000, the corporation is now subject to paying Federal Unemployment taxes (FUTA) and in most cases state Unemployment taxes (SUTA).  Although FUTA can be fairly minor (perhaps $42 per person), it can increase to around $400 per person if SUTA is no handled or paid correctly.

In many states, once you are subject to SUTA it can take a minimum of two years to get out of paying it since it requires you to be under the $20,000 quarterly threshold for the current year and the previous year.  Also, these states usually require you to be in the highest rated pool and your tax rate can exceed 3.5% and you would owe SUTA on up to $35,000 in wages or more.

Let’s look at an example, assume the farmer pays himself $50,000 per year in wages all in the fourth quarter.  Let’s assume his SUTA rate is 3.5% on the first $35,000 of wages.  His SUTA liability would be $1,225.  His normal FUTA liability would be 6% of $7,000 or $420, however, since he paid into the State, he is allowed a credit to reduce this liability down to $42 (some states do not get the maximum credit.  We recapped that in a post about two weeks ago).  Therefore, his total SUTA and FUTA liability for 2012 is $1,267.

Now, if the farmer has spread out his wages evenly over the four quarters, he would not owe any FUTA or SUTA.  Also, the payment of commodity wages is exempt from FUTA and SUTA (although you need to check your state rules).

Every state seems to have different rules on the application of SUTA to shareholders of a corporation, but at a minimum if you keep your total wages under $20,000 per quarter, you can save some payroll taxes.

Creighton University produces a Rural Main Street Index based upon a survey of rural bankers in six states, Colorado, Iowa, Minnesota, Nebraska, South Dakota and Wyoming.  The index ranges from 0 to 100.  Anything over 50 is considered in an expansion mode. 

For January, the index rose to 59.8 from 59.7 in December which is the highest it has been since June 2007.

Here are some other trends from the survey:

• Bankers expect average farm input costs to rise by 7.2% in 2012
• 9 of 10 bankers do not expect the end of the blender’s tax credit to have a significant negative impact
• More than one in four bankers indicated that a decline in agriculture commodity prices is the biggest economic challenge in 2012
• Almost as many indicated a shortage of jobs and workers was the main economic challenge

After rising to a record level of 84.1 in December, the farmland price index fell almost 12% to 74.3 in January, 2012.  A recap by state is as follows:

• Colorado – Dropped from 88.5 to 78.9
• Iowa – Dropped from 77.1 to 68.2
• Minnesota – Dropped from 76.2 to 57.8
• Nebraska – Dropped from 84.6 to 73.5
• South Dakota – Dropped from 69.4 to 60.1
• Wyoming – Dropped from 84.3 to 73.9

These are healthy drops in the index, however, this drop is based on only one month of data and December can very very skewed with certain sales happening for tax purposes.  It will be interesting to see what the index numbers for February are.

It is now apparent when I wrote my post last week on electing out of deferred sales contracts, that my terminology was not the best.  Sometimes when writing these posts, I know what I mean but when transmitting the brain waves to the keyboard, it does not always get put down correctly.

The correction on the post is that a deferred sales contract calls for the delivery and sale of the grain in 2011, however, the payment of the grains sales delivered in 2011 will be deferred til 2012.  If your grain sales contract meets this criteria, then you would normally report the grain sales in 2012 since that is when you collected the funds (assuming a cash basis farmer).

However, you may elect out of this installment sale on a contract by contract basis and report the income in 2011 if you so choose.

I am sorry for the confusion.

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.