In reviewing several of the farmer tax returns that I have been working on lately; I have noticed that most of them are running out of any depreciation except for what they get from placing equipment in service in the current year.  Therefore, if Congress suddenly stops bonus depreciation in 2013, many farmers will be in the situation of having little or no depreciation deductions, large equipment loan payments and much higher income taxes.  This is what I would call a triple whammy.

I think if they do eliminate bonus depreciation it will be over a couple of years to give the farmer enough time to plan accordingly or there will be an adjustment to Section 179 deduction back to the $500,000 range.  However, we are dealing with Congress and the President, so any prediction is not worth much at this point in time.

If you have never been to a Top Producer Conference, you should go.  It is both informative and entertaining and is well worth attending.

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.

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.

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.

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.

“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.

• 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.

IRS Headliner Volume 317 has the details on the states and the amount of reduction in the credit.  The painful part is that you also will have to fill out Schedule A as part of the return instead of taking the simple 5.4% credit on the front page of form 940.

• 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.

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.