We just finished a three part series on the top estate planning mistakes farmers make and we had some readers ask which one was most important? This is strictly my opinion, but I think the first one listed “procrastination” is the worst mistake farmers and probably all business owners make. Many farmers will never have to deal with corporations, partnerships, limited liability companies, etc. but all farmers will have to deal with both succession planning and their estate.

The sooner they take direct action, the more likely they will accomplish their goals, not what the government wants for their estate. Just simply taking advantage of the annual gift exclusion available over the last 20 years would allow farm families to give away $2-5 million in today’s dollar value without much work or effort.

Even if your plan is not perfect, it is much easier to correct things alongbthe way than to attempt to fix it at your death. It is up to you, but our advice is “Get Started Now”.

I got into Nashville late Thursday night/early Friday morning.  Friday morning I headed over to the Gaylord Opryland complex.  Wow, what a facility.  There was probably five acres or more of glass roofing and it felt like a 10 minute walk from my car to the convention center.

I was able to attend the last part of the speech by Secretary of Agriculture Tom Vilsack.  There appeared to be at least 3,000 people in attendance and I think I heard that over 5,000 were signed up for the Classic. 

The Trade Show had more than 100 booths and I was able to walk around most of it on Friday and early Saturday, but I must admit that I did not get to every booth.  It was nice to see several farmers that I had met over the last couple of years and get caught up with what was going on with their farm operation.

Friday afternoon I attended the learning sessions and midway through the third session, I had noticed some noise on top of the ceiling and about 2 minutes later, a guy walked in and told us there was a tornado warning and we needed to evacuate to the basement.  We headed down to the basement and there probably were about 1,000 people in the basement area where I was.  I had downloaded an app to my IPhone and was able to watch the cell pass over our location and get real time weather updates.

After about an hour, the warning was over and we were able to go back to normal, however, by that time, the day was over.

On Saturday, my partner Nick Houle gave a two hour seminar on the Top 10 (there were 11 though) mistakes that farmer’s make in estate planning.  Nick and I had met up the night before and we discussed that attendance might be on the low side since this was the last seminar of the event and many people had already left.  We were wrong.  The attendance ended up being almost SRO (standing room only) and many great questions were asked and I think Nick and I answered them all.

All in all, the Commodity Classic is a great event for any farmer to attend and I look forward to going next year.

Being a farm boy from Washington state, we never had tornados and although the warning was interesting and nobody got hurt in our area, I would be happy never to be part of another one.

We got the following question from one of our readers:

“ I made profits on commodity trades in 2011. The amount was $20,000. The 1099 from MF Global shows $20,000. However, I have received only $14,000 and probably will not get the entire $20,000. How much do I have to pay tax on?; the $14,000 that I received in 2011 or the 1099 showing that I made the entire $20,000?”

This situation is really two separate tax issues.  The first issue is the reporting of the gain on the 2011 commodity trades.  This $20,000 will be reported in 2011 just like any other year.  The taxpayer had gains of $20,000 in the account and they are taxable as realized (we are assuming these are speculative trades; if a hedge, the amounts may be different).

The second issue is whether there is a “theft” loss due to MF Global’s actions.  If it is finally determined that there is a loss and it is considered theft, then it should be fully deductible in 2012, not 2011.  The tax laws indicate that if the amount of the theft loss is not known by the end of the tax year, the loss is not deductible until the amount is known.  In the MF Global case, that will be 2012 at the earliest and could be 2013.

This is a very complex case, but the bottom line is the loss is not deductible in 2011.

With the March 1 farm tax return deadline rapidly approaching, I want to remind our farmers to make sure they actively review their tax return to see if farm income averaging will save them money this year.   Farm income averaging allows you to smooth out your income tax liability for the current year if this year’s income spikes from the previous three years.  Without farm income averaging, a farmer may end up paying tax in a much higher tax bracket than they need to.

For example, let’s assume a farmer had exactly zero taxable income for 2008, 2009,  and 2010.  In 2011, the farmer has taxable income of $270,000.  At this level of taxable income, his income tax for the year would be approximately $66,500 and he would be in the 33% tax bracket.  With farm income averaging, we could assign between $65,100 and $68,000 of income to 2008, 2009 and 2010.  This would soak up the 15% and 10% tax brackets for those years.  We then pretend the farmer paid the respective tax for each year and add those taxes to  the remaining amount taxed in the current year.  This results in  all of the taxable income being taxed at either 15% or10% for a total tax of about $37,200.  By making this election in 2011, the farmer permanently saves over $28,000 of income tax for the year.

This is a great provisions for farmers, but you must review the return to make sure you or your tax advisor took advantage of it.  If you don’t; it can cost you a lot of money.  The rules can be complicated so you need to review it with your tax advisor.

When we see in the headlines that farms in Iowa and other parts of the corn belt are going for $10,000, $15,000 and perhaps $20,000 an acre, I think we automatically assume that all farmland values across the US are increasing.

However, in reviewing the Federal Reserve Bank of Richmond, VA agricultural survey for the third quarter of 2011, it indicated that farmland values for their region (Maryland, Virginia, North and South Carolina and most of West Virginia) had actually declined in value.  The decline from the second quarter of 2011 was 1.5% and 4.5% from the same quarter in 2010.

The survey presented a chart of farmland values from 2002 until 2011 and most farmland values in this region peaked in early 2007 and have not recovered to that value since.  The average price of farmland during the third quarter was $3,263. 

In the fourth quarter survey done by the Dallas Federal Reserve, this region actually had an increase in irrigated land values and dry-land and ranch values held fairly steady.  Even with the drought conditions in the area, most of the bankers are expecting prices to rise over the next three months.

As the saying goes in real estate, “It is Location, Location, and Location”; it is certainly true about farmland prices.  The increase in price depends on where it is located.

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.