Part of the ongoing Alternative Minimum Tax (AMT) mess over the last several years involved the allowance of certain nonrefundable individual tax credits such as the adoption credit, the child and dependent care credit, the lifetime learning credit and other similar credits to be allowed to reduce AMT.  In some years it was allowed whereas in other years it was not allowed or was only allowed on a retroactive basis.

In some years if a taxpayer had regular tax before these credits of $10,000 and AMT of $7,000, they could offset $10,000 of tax and potentially have zero tax liability.  In other years, they could only offset $3,000 of regular tax and still be subject to the AMT of $7,000.

The new tax law passed at the beginning of the year now makes the more beneficial treatment permanent (at least as permanent as Congress will allow).  This rules has been made effective as of January 1, 2012.

Therefore, along with the increase in the AMT exemption to reflect inflation, taxpayers can now offset AMT with nonrefundable personal credits that might not have been allowed under the old law.

On another subject that appears to be raising its head is that possible limitation of 2013 direct payments.  Although Congress passed a one-year extension of the 2008 farm bill; with the upcoming fight over the debt ceiling and sequester issues, there is a distinct possibility that these direct payments will be reduced or eliminated.  The possible savings in the current and future years may be too tempting for Congress to pass up.  We will keep you posted.

Paul Neiffer, CPA

The Employee FICA tax rate for 2011 and 2012 had been cut from the normal 6.2% to 4.2%.  This provision was set to expire at the end of this year and then revert back to the normal rate beginning January 1, 2013.

Allowing this cut to expire in 2013 seemed like a reasonable position several months ago, however, the tepid economy has Congress discussing extending the cut or coming up with an alternative.

This cut costs about $115 billion in revenue each year to the government, however, if it is not extended, it drains this amount out of worker’s pockets and some economists predict that this will reduce economic growth by about .6% next year.

House Republican leaders are opposed to extending the cut and coming up with an effective alternative such as a credit has not shown any progress.  A credit sounds good in theory, however, it prevents giving a immediate shot to the consumer since they would have to wait to file their tax return to receive the credit.

Others want to use this cut as a bridge to income tax reform, however, in my experience Congress does not build very good bridges, whether for tax reform or roads.

Paul Neiffer, CPA

We tend to talk more about the tax costs of Obama Care and forget about some of the tax savings that are available.  One of those savings is for employers that cover part or all of their health insurance premium costs. 

This credit is allowed in full assuming less than 11 employees and average wages of $25,000.  It is fully phased out if you employ more than 25 employees or the average wage is greater than $50,000.  A 35% credit is available during years 2010-13.  For 2014-15, the credit can be up to 50%.

Many employers have not taken advantage of this credit since there is some paperwork involved.  However, if you pay a substantial amount of your employee’s health insurance premiums and you meet both two tests, it is worth the paperwork.  However, if your average wage exceeds about $45,000, it may not be worth all of the paperwork involved.

 Paul Neiffer, CPA

Based on this year’s drought, we know that this will most likely be the largest amount of crop insurance claims ever processed.  With proper planning, you may be able to structure when to report these crop insurance proceeds to achieve the best tax advantage for this year.

Crop insurance proceeds due to crop damage (not price drops) are taxable in the year of receipt.  However, the tax laws do allow a farmer to make a deferral until the next year assuming that the farmer meets the following:

• The crop insurance proceeds are for the current year crop, i.e. crop insurance proceeds for 2012 crop damage received in 2012 can be deferred to 2013.  If the proceeds are received in 2013, then no deferral is available, AND
• The farmer normally has a history of reporting more than 50% of their crop sales in the subsequent year.  For example, if the farmer harvests 50,000 bushels in 2010 and sells all 50,000 by the end of the 2010, then he cannot defer his crop insurance.  If, however, he normally would sell 25,001 or more bushels in 2011, then he can defer his crop insurance proceeds.

The election to defer is made on the tax return.

If you are a farmer that normally sells all of his crop in the year of harvest, you still may be able to “defer” by working with your crop insurance agent and company to not make the claim until late in the year and receive your check after year-end, otherwise you will need to report in 2012.

We have worked up a Crop Insurance Matrix that can step you through the process.

 Paul Neiffer, CPA

On Monday, I spent most of my day in St. Joseph, Missouri and near White Cloud Kansas.  I visited our St. Joseph office in the morning and I had a great time meeting the staff and partners at a new office to me.  However, this visit really made me feel old since as I looked around the room of about 30 people in the morning meeting, it looked like half of them were my oldest son’s age.

I had a meeting with a farmer client up near White Cloud, Kansas at noon and I planned on eating lunch before I got to the meeting.  Little did I know there are no restaurants between St. Joseph and White Cloud other than a buffet at the Indian Casino (which I quickly gulped down).

Most of the corn in this area is already planted and coming out of the ground and my client is waiting for the weather to warm up a little bit more before planting beans.

Later that day, I had a meeting with a couple of people at the American Angus Association whose headquarters are in St. Joseph.  When I was growing up on the farm, we had about 40-50 head of Angus cattle until I was about 9.  I really enjoyed helping my dad feed and take care of the animals.  I remember there was one mama cow that really did not like me and any time I went out in the pasture, she would try to chase me off the field.  I am sure that I never did anything to her, but according to my wife, she feels I probably did something I should not have done (since I seem to do this frequently as a husband).

Another memory is of my dad helping to deliver a calf and after the calf was safely born, the mama cow got up took one look at my dad and decided that my dad did not belong in the pen with her and her calf.  My dad figured this out quickly and was headed for the fence to climb over, but did not quite make it when mama cow caught his rear end and flipped him over the fence.  Everybody in the situation was fine, but it does make a great memory.

The American Angus Association registers about 300,000 head of Angus cattle each year.  The other breeds of cattle register something less than 75 thousand head a year.  Back in the 1960s and 70s, the Hereford breed registered about 55% of the cattle and Angus was closer to 45%.  It has now completely changed to Angus being the dominant registered breed.

On Tuesday, I am in Des Moines and Cedar Rapids and will give you an update later today or early tomorrow.  The weather has been great and I enjoy seeing the Midwest scenery.

I am sure that all of our farm readers realized that a log of all of their cell phone usage up to December 31, 2009.  This log was required to deduct the cost of the cell phone service and any personal use would either not be deductible or would have been included as part of compensation to the employee.

However, the Small Business Jobs Act of 2010 removed cell phones from the definition of listed property (listed property items require a log of use, etc.).  This new law is effective January 1, 2010 and the IRS just issued Notice 2011-72 clarifying how these changes apply to taxpayers.  In brief, as long as the cell phone is necessary for the employee to perform their work for the employer, then the cell phone cost is deductible by the employer and is non-taxable to the employee.  This applies whether the employer pays for the cell phone service directly or reimburses the employee.

I would hazard a guess that almost no farmers or other users of cell phones ever performed the logging of cell phone use in any substantial manner, so this new rule is very welcome.

If you want to get even more detail on this matter, here is a memo that the IRS has issued that provides guidance to their agents in reviewing cash allowances and reimbursements for work-related use of personally-owned cell phones.

We had a reader ask the following question:

“Does Iowa have a reduced capital gains tax rate on sale of farm land held for 15 years?”

If certain qualifications are met such as holding the farmland or assets for at least 10 years and material participation in the farm (can not cash rent the land), Iowa does have an exclusion of 100% of the capital when selling your farmland or other farm assets.  This also applies to other business related assets, not just farmland.

I also know that Oregon had a capital gains exclusion for the sale of farmland, although that may no longer be there.

The key when analyzing your total capital gains tax is to review your state requirements to determine if there is a qualified deduction for the sale of farm assets.  Many states have these exclusions, but there are almost always different rules for each state.

As most everybody knows, I spent most of last week on the Midwest Crop Tour.  The weather this year was much better than last year when we got rained on for one full day of the tour.  I do not remember even getting one sprinkle this year.  My thoughts are as follows:

• Last year, I remember having multiple stops where the corn yield was over 200 bushels.  Also, I remember that at least 70% or more of the corn yields were 170 or higher.  This year, each day, we would only have one or two fields over 200 and perhaps 3 other fields in the 170 range.  All of the other fields were less than 150 each day.  However, last year, our lowest yields were substantially lower than this year.  We never had a yield under 100 bushels this year and last year, I remember having several under 100, primarily in South Dakota and North Central Nebraska.  This year, we did not cover any of that area.
• The soybeans on average looked very good this year, however, the heat and lack of rain may be getting to them.  If the beans get a couple of inches of rain in the next couple of weeks, they should yield fairly well.
• At all four of the evening stops, the farmers in attendance were not a bullish about their yields as last year.  At the same time last year, all of the crops looked very good, however, the finish to the crop was poor.  This year, most farmers expect a poor finish, but hope for better.
• There were more people on this year’s tour and more of them were not farmers.  It appears that the tour is one of the best guides for industry groups such as traders, hedge funds, farm media groups, etc. to get a good handle on where the crop is headed.
• Pro Farmer does an excellent job of putting on the tour.  From Chip and Brian leading each leg to the other staff involved in making each day and night run smoothly, I just want to reinforce how good of a job they do.

All in all, this year’s Midwest crop tour shows a lower crop than last year or the three year trend and I look forward to next year to see how it turns out.

In a recent Florida Federal District Court Case, the IRS was granted the right to summon the accounting software file of a small business.  This case did not involve a farm, however, the IRS has gotten very aggressive in demanding the actual accounting software file, especially Quickbooks and other common software accounting programs.  Before the advent of these software programs, providing a print out of the actual accounting data was usually sufficient for the IRS during an exam.

Now, with most agents being able to utilize these accounting software packages on their computers, they are demanding a backup of the whole accounting software, even if there are years in the accounting software that are not under exam.  Also, any comments in the comments, memo or notes section of your software would be available for review by the IRS.

This case decision is limited to this small district court jurisdiction, but you can be sure that the IRS will be very aggressive in taking this to the next level.

Just be careful what you write in your accounting software comments section.  Remember, an IRS agent may be reading it in the future.

Historically, wheat prices have generally been higher than corn prices and sometimes the difference can be major.  In many years, wheat could be $1 or $2 higher than corn.  This is due to two main reasons:

• Corn was primarily used for feed
• Wheat was more heavily used for bread and other products directly consumed as food
• A bushel of wheat also provides slightly greater feed value than a bushel of corn

However, during many days in 2011, corn has now overtaken wheat in price.  This has been caused by these major factors:

• The Ethanol mandate requires almost 5 billion bushels of corn to be used
• China has rapidly increased their imports of corn
• Wheat is in plentiful supply and corn may have its lowest carryover in many years

In a recent Wall Street Journal article, it mentioned that due to this flip-flop in prices, many consumers of corn for feed such as poultry and hog producers are now blending in more wheat into their feed rations.  Also, wheat can be used to make Ethanol and some Ethanol producers are now blending about 5% wheat into their mix. 

As long as wheat remains cheaper than corn, this trend may continue.