Agribusiness Blog http://blogs.claconnect.com/agribusiness Farm CPA Today Thu, 17 Aug 2017 15:13:13 +0000 en-US hourly 1 https://wordpress.org/?v=4.8.1 53853350 http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Man-Harvesting-Grapes.jpg Watch Out For State Estate Taxes http://blogs.claconnect.com/agribusiness/watch-out-for-state-estate-taxes/ http://blogs.claconnect.com/agribusiness/watch-out-for-state-estate-taxes/#respond Thu, 17 Aug 2017 15:13:13 +0000 http://blogs.claconnect.com/agribusiness/?p=5958 Most farm families will not end up owing federal estate tax (with proper planning and structure, it would typically take a combined gross estate of more than $20 million to be subject to federal estate tax).  However, if you happen to live in a state with an estate tax, the issue may be more pressing.

Many states such as Oregon have an estate tax that kicks in at the $1 million level.  This $1 million level is based on your overall estate values not just assets located in Oregon.  Therefore, even if you have property in Oregon that is worth less than $1 million, you are still subject to an Oregon estate tax.  Let’s look at an example:

Mary Farmer passes away in 2017.  She is a Iowa resident, however, she inherited farmland in Oregon that is now worth $750,000.  Her total estate is $3 million.  Her heirs will not owe any federal estate tax, but they will need to file an Oregon estate tax return.  This calculation will be based on Oregon tax owed on $3 million times 25% ($750,000 divided by $3 million).  If the Oregon estate tax rate is 10%, then the total Oregon tax owed is about $75,000.

State estate taxes are a major revenue source for certain states.  Using 2015 data, there are four states that collected more than $250 million of estate taxes.  New York at $1.1 billion, New Jersey at $793 million and Illinois and Massachusetts at slightly more than $300 million.

Certain states also have an inheritance tax owed by the heirs not the estate.  Iowa and Nebraska are the corn belt states with this tax.  Pennsylvania raised slightly over $1 billion from this tax in 2015 and New Jersey also collects this tax in addition to their estate tax (revenue raised is included in above number).  Iowa collected $87 million and Nebraska collected $67 million from this tax.

You are only subject to this tax if you are either a resident of this state or have real property situated in this state.  One option available for some states is to convert your real property into personal property by placing it into an LLC, LLP or some other type of entity.  This works for certain states, but not others; so you would need to consult with a planner for that particular state.

Another option is that most states do not have a gift tax.  Therefore, if you give away property during life, you may be able to get around owing the state estate tax.

The final option is to move out of that state into a state with no estate tax.  Even California does not have an estate tax, but I would not advise moving to California to avoid estate tax.  They have other more pressing income tax issues than that.

If your estate is under the $5.49 million federal exemption amount, but you live in a state with an estate or inheritance tax, make sure to discuss this with your estate tax advisor.  If not, your heirs could end up owing tax that they did not need to pay.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Man-Driving-Tractor-in-Field.jpg How Fast Can We Write Off Assets Under Tax Reform http://blogs.claconnect.com/agribusiness/how-fast-can-we-write-off-assets-under-tax-reform/ http://blogs.claconnect.com/agribusiness/how-fast-can-we-write-off-assets-under-tax-reform/#respond Wed, 16 Aug 2017 21:07:38 +0000 http://blogs.claconnect.com/agribusiness/?p=5956 The house had originally proposed allowing farmers and other businesses to write-off all assets in the year of purchase other than land.  However, since the border adjustment provision has now been eliminated as an option, it is likely that farmers will not be able to write-off assets 100% in the year of purchase.  Here is what is being discussed right now:

  • Some type of enhanced Section 179 provision. Under current law, Section 179 is at $500,000 indexed to inflation ($510,000 for 2017).  Sen. John Thune of South Dakota had proposed bumping this amount to $2 million and making bonus depreciation permanent at the 50% level (scheduled to disappear in 2020).  Since past-president Obama had proposed bumping Section 179 to a million, this should have a good chance of happening.
  • Farm machinery is now depreciated over 7 years.  There is some discussion to accelerate this to a 5 year write-off.

Since Section 179 is not an extra deduction but rather an acceleration of depreciation that would normally be allowed over 7 years for most assets, this changes would help small businesses including farmers and not increase the budget deficit by much over the 10 year scoring time period.

We will keep you posted.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/08/Filan-9230.jpg For Our Flatlanders http://blogs.claconnect.com/agribusiness/for-our-flatlanders/ http://blogs.claconnect.com/agribusiness/for-our-flatlanders/#comments Wed, 09 Aug 2017 02:42:30 +0000 http://blogs.claconnect.com/agribusiness/?p=5948 My friends Chris and Alissa Barron visited Patty and I over the weekend and we were able to get them ride on my cousin’s Case IH 9230 (and Chris was OK with riding red instead of green).  The field they were on overlooked the Mill Creek valley east of Walla Walla, Washington and the yields were about average for this field (likely around 80-90).  Most of the other good wheat in this area yielded about 135-150, but this field does not get much sun and the soil is not the best.  I would guess the slopes on this field ranged from about 20-35 percent.

After riding combines there, we explored Walla Walla and then stopped by client’s field about two miles north of Waitsburg up Whoomenup Hollow (yes that is the name) later on to watch a Case IH 8230.  We did not ride on this one, but the video below shows the slope (likely about 35 percent).  You will notice that the combine threshing platform is not “level” with the hillside.  The Hillside kits only level to about 30 percent and once you exceed that slope, your combine starts to lean with the hill.

The second video shows dumping wheat on the go on the hillside.

This post has nothing on tax, but we need to let our flatlanders know that you can grow good wheat on steep hills.

Hillside Video

Dump on the Go

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Two-Men-Talking-in-Apple-Orchard.jpg Does Your Successor Really Want to Succeed You? http://blogs.claconnect.com/agribusiness/does-your-successor-really-want-to-succeed-you/ http://blogs.claconnect.com/agribusiness/does-your-successor-really-want-to-succeed-you/#respond Mon, 07 Aug 2017 18:03:34 +0000 http://blogs.claconnect.com/agribusiness/?p=5942 Many farm families are working on transitioning the farm operation to the next generation and the biggest assumption made in these transition plans is that the next generation really wants to come in and take over the farm operation.  But what happens if they really don’t want to do that.  It can become a disaster for both the current generation and the new generation.

Iowa State University has a Beginning Farmer Center and there are six very important questions that should be asked to determine if the transition will be a success:

  • Is the owner generation ready for a successor? – Many farmers say they want to transition, but really, they would rather continue being the farmer until they “die in the tractor seat”.  In this case, it may make more sense for the current generation to help the younger generation start their own farm.  There can be various income tax and FSA planning opportunities associated with doing this.  Plus, it will not frustrate either generation (as much!).
  • Is the successor really committed to farming?  All too often, the current generation assumes the next generation wants to farm and really, the next generation is only farming because they think mom and dad want them to.  If you do a transition where the next generation is not committed, it may be better to find someone else who has a passion for farming and help the next generation find what they really want to do.
  • Is the business profitable enough?  The worst thing you a farm family can do is to turn a profitable one-family operation into a two-family unprofitable operation.  Before making the transition, come up with a plan to get it to profitability.
  • Is there a common vision of the future?  Without a common vision, it is likely there will be much more stress on the farm and family.  Make sure both parties are “rowing the boat” the same way before doing a transition.
  • Can you live and work together?  In many cases, father and son (or daughter) see each other in a farm operation more than they see their spouse.  If you can’t get along, your farm will suffer and then your family life (or perhaps in reverse order).
  • Are the nonfarming heirs supportive?  Have you communicated to the non farm heirs what is happening with the transition.  If so, are they supportive?  If not, make sure to work that out before you make the transition.

These are very important questions to ask and the Beginning Farmer Center has a lot more material on how to make this work.  I would suggest checking it out.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Cows-In-Field.jpg IRS Informs North Dakota of Extended Period for Livestock Rollover http://blogs.claconnect.com/agribusiness/irs-informs-north-dakota-of-extended-period-for-livestock-rollover/ http://blogs.claconnect.com/agribusiness/irs-informs-north-dakota-of-extended-period-for-livestock-rollover/#respond Fri, 04 Aug 2017 13:24:53 +0000 http://blogs.claconnect.com/agribusiness/?p=5940 IRS Commissioner John Koskinen wrote a letter to Senator Heidi Heithamp of North Dakota on July 26, 2017.  He indicated that due to the drought, cattle ranchers affected by the drought and required to sell excess cattle had an extra two years to purchase additional cattle to defer the gain.

Under Section 1033, ranchers are allowed to defer the gain from selling excess cattle due to drought.  Taxpayers normally have two years to purchase cattle to defer the gain.  However, if the area is designated as eligible for federal government assistance because of the drought, the deferral period is extended to four years.

This deferral only applies to “extra” livestock that are sold.  For example, if your average sales over the last three years is 125 head and you sell 175 head due to drought, you are allowed to defer the gain on 50 head.

If the area continues to be designated as being in drought (the IRS issues a notice each September indicating those counties), then you can continue to defer your gain.  However, if you do not purchase the required cattle during this deferral period, you are required to go back to the original year, pay the tax plus interest.

There are many cases where it would not make sense to defer the gain.  In many cases, the sale of this cattle would be at capital gains rates which are lower than regular rates and any investment in breeding stock or farm equipment would allow you to deduct it at ordinary income rates.  Let’s look at an example:

Rancher James is required to sell an extra 100 head for $150,000 due to drought.  All of this cattle was raised breeding stock.  He generates $350,000 of net farm income during the year before the purchase of $150,000 of breeding stock before year-end.  If he elects to rollover the proceeds into his new breeding stock, the basis in the new herd is zero and he will pay tax on $350,000 of net farm income.  However, if he reports the gain on the herd and pays tax at 15% ($22,500 of tax) and elects to take Section 179 on the breeding herd, this will reduce his tax by $49,500 ($150,000 times 33%).  Overall, his tax bill goes down by $27,000 by not making the election to defer the excess sales under Section 1033.

There is also an election under Section 451 to simply defer reporting the gain for one year.  Each situation is different.  Perhaps the farmer has a loss for the year and would like to carry the loss back five years to pick up tax paid then.  In that case, making the election may be prudent.

If you are in this situation, it would be good to meet with your tax advisor now to determine the best strategy.

 

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Pig-Farm.jpg Farm Loan Rates Continue to Be Favorable http://blogs.claconnect.com/agribusiness/farm-loan-rates-continue-to-be-favorable/ http://blogs.claconnect.com/agribusiness/farm-loan-rates-continue-to-be-favorable/#respond Thu, 03 Aug 2017 14:27:53 +0000 http://blogs.claconnect.com/agribusiness/?p=5938 The Chicago Federal Reserve publishes a quarterly Ag Letter.  The 2017 first quarter letter showed a chart summarizing the interest rates charged by banks in their system over the previous five quarters.

Interest rates on Operating Loans have ranged from a low of 4.87% in the third quarter of 2016 to a current high of 5.13%.  Although this is up, it is only by about 27 basis points, which is probably a result of the Federal Reserve hike in December, 2016.

Feeder Cattle loans have ranged from a low of 4.95% (again in the third quarter) to the current high of 5.27%.

Real estate loan rates ranged from 4.57% in the second and third quarter of last year to the current 4.8% rate.

Although all of these rates are higher than a year ago, the net change is still fairly minor.  As the Federal Reserve continues to raise rates, it will be interesting to see how these rates will continue to change.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Man-with-Tablet-in-Front-of-Grain-Elevators.jpg Be Very Careful What We Wish For http://blogs.claconnect.com/agribusiness/be-very-careful-what-we-wish-for/ http://blogs.claconnect.com/agribusiness/be-very-careful-what-we-wish-for/#respond Wed, 02 Aug 2017 14:18:08 +0000 http://blogs.claconnect.com/agribusiness/?p=5936 It appears that Congress and the Trump Administration want to repeal the estate tax (at least for 10 years).  This is welcome news to farmers, however, the chatter that we are hearing may make it worse than the current law.

Under current law, when a person passes away, their heirs get a step-up in basis on most inherited assets.  There are certain assets such as IRAs and pension plans, deferred payment contracts that do not get a step-up, but almost all other assets do (sometimes assets get stepped down too).

Let’s look at an example:

Henry and Martha Farmer own a farm operation.  Farmland is worth $10 million with a cost basis of $1 million, plus they own farm equipment worth $2 million and have crop on hand worth another $2 million.  Let’s assume that Henry and Martha pass away in 2018.  Their combined estate of $14 is greater than the $11 million lifetime exemption amount (rounded), so the heirs will owe about $1.2 million of estate tax.  However, they will inherit a new cost basis in the land of $10 million, the equipment of $2 million (depreciated over 7 years) and $2 million of grain which they can sell for $2 million and owe no taxes.

The rules on step-up basis have been around for several decades.  Congress had tried to repeal these rules about 40 years ago, but it ended up being very messy to determine cost basis for assets inherited so the rules were repealed.

Now, let’s move forward to possible tax reform.  Congress would like to eliminate the estate tax, but they are also discussing either eliminating step-up in basis or having a capital gains tax at death (similar to the Canadian tax system).  There may be some level of assets not subject to the tax or allowance for step-up, but let’s see how this might affect our example:

The heirs of Frank and Martha will not owe any estate tax, therefore saving $1.2 million of estate tax.   However, they no longer get a step-up in basis and let’s assume they decide to  liquidate all the assets in 2018.  They will owe capital gains tax on the land at a rate of about 30% (combined federal and state rates) and will owe about 45% on the sale of the equipment and inventory.  Total income tax will be about $4.5 million ($9 million times 30% plus $4 million times 45%).  They saved $1.2 million of estate tax but had to pay $4.5 million of income tax for a net cost of $3.3 million.

As you can see, eliminating estate tax can cost many farm families a lot of money if they eliminate step-up in basis or have a capital gains tax at death.  Most farmers under current laws will never owe any estate tax, but almost all farm heirs benefit from the step-up in basis.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Man-in-Sugar-Factory.jpg IRS Warns More Info May Be Needed to E-File Business Returns http://blogs.claconnect.com/agribusiness/irs-warns-more-info-may-be-needed-to-e-file-business-returns/ http://blogs.claconnect.com/agribusiness/irs-warns-more-info-may-be-needed-to-e-file-business-returns/#comments Fri, 28 Jul 2017 12:23:15 +0000 http://blogs.claconnect.com/agribusiness/?p=5933 The IRS just issued IR 2017-123 that warns tax preparers that their tax providers may require additional information to e-file their business tax returns.  Due to phishing and other tax identity issues, the IRS continues to see more tax returns that are “fictitious”.

Therefore, to combat this, the IRS is asking tax software providers to require additional information to allow e-filing of business returns.  Some of the information that may be required include the following:

  • The name and Social Security number of the company individual authorized to sign the business return. Is the person signing the return authorized to do so?
  • Payment history – Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
  • Parent company information – Is there a parent company? If yes who?
  • Additional information based on deductions claimed.
  • Filing history – Has the business filed Form(s) 940, 941 or other business related tax forms?

As you can see, if you are a preparer of business income tax returns, you may have to get quite a bit of additional tax information from your clients that you normally would not obtain.  It is likely that each software provider will come up with their own procedures.

We had posted on this earlier this year and got quite a bit of feedback from our readers asking about this.  This ended up being something that our tax software provider had thought was required on 2016 tax returns, but it was not.  As you can see, it will now be required on 2017 tax returns.  It may be a good idea to inform your clients that additional information may be required to file their tax return.  The issue is that you may not know what is required until you actually try to e-file the return.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Restaurant-Worker-Placing-Menu-Outside.jpg Farm Financial Standards Council Meeting http://blogs.claconnect.com/agribusiness/farm-financial-standards-council-meeting/ http://blogs.claconnect.com/agribusiness/farm-financial-standards-council-meeting/#respond Thu, 27 Jul 2017 13:41:09 +0000 http://blogs.claconnect.com/agribusiness/?p=5929 Today is the annual Farm Financial Standards Council meeting.

Our first session was on the dairy industry in New York State.  Here are some statistics:

  • New York ranks 3rd in milk production in the US behind California and Wisconsin (just barely ahead of Idaho)
  • It makes up about 45% of total farm sales in the state
  • Total estimated economic impact is about $38 billion
  • About 4,650 dairies with about 620,000 head
  • Average milk per cow has increased from 18,879 in 2006 to 23,815 lbs in 2016
  • Average herd size is now 133

Cornell University provides a diary database system.  It has been around since 1955 and has been web based since 2003.  The system provides a great set of data to allow benchmarking for the diary industry not just in New York.  One report on large dairies was produced in 2014 that you can access here.

Although dairy returns have been very variable, the average long-term rate of return on assets has held steady at about 6%.  The last couple of years have been slightly negative, however, 2014 was probably the best year in the last 20 or more years.  The industry has not dropped back to the 2009 levels which were record low with low milk prices and record high feed costs.

The range of debt per cows range from $248 to $7,643.  In most cases it appears the most profitable farms actually have some debt since farms with no debt pressure may be less likely to maximize all costs savings, etc.

Net farm income per cow increases as production increases.  At production levels of less than 15,000 pounds, the net income per cow is less than zero, whereas, production over 25,000 pounds range from $1,000 to $3,000 depending on milk pricing.

The smallest farms actually have the lowest operating costs, however, when you include family living costs, they now have the highest overall cost structure.

Feed costs as a percent of milk sales has slowly decreased over the years.  The long-term trend is down and is slightly less than 35% of sales.  However, in many cases spending more on better feed increases the bottom line return.

There is a direct correlation between net farm income and average sales per worker.  They look at six year trends since this usually includes a good three year period along with a bad three year period (this seems to be the long-term trend in dairy cycles).

They have fostered numerous peer groups that include benchmarking both against the group and then by name and operation (you will not find two farms from the same area).  If the group is going to talk about a topic, then data must be processed for the meeting.

Benchmark data includes:

  • Annual financial performance
  • Monthly key production and financial parameters
  • Activity analysis projects
    • Increase understanding of cost and performance across different areas of business
    • Encourage adoption of managerial accounting procedures

This was a recap of the first session.  I will post others as needed during the rest of the conference.

 

 

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Men-Pointing-at-Field.jpg Farm Financial Standards Week http://blogs.claconnect.com/agribusiness/farm-financial-standards-week/ http://blogs.claconnect.com/agribusiness/farm-financial-standards-week/#comments Mon, 24 Jul 2017 11:09:06 +0000 http://blogs.claconnect.com/agribusiness/?p=5927 The annual Farm Financial Standards Council meeting is in Syracuse, New York later this week.  I always enjoy attending this event since almost all of people attending are actively involved in helping farmers understand their finances.  When times are good, many farmers tend to “ignore” financial reporting, but as times get a little tougher, farmers understand more readily that a firm grasp on their financial information can be a competitive advantage.

Today I am meeting with a farm client in Indiana who has a good grasp on their finances and this allows me to help be a better advisor.  Many times, I give advice based on “bad” financial information from the farmer.  This then leads to “bad” results.

This afternoon I go over to South Bend, Indiana to get some AgDay taping in and then head over to Syracuse tomorrow for the conference.  On Saturday and Sunday I visit a dairy farmer in New York state and then drive back into Northwest Indiana for a meeting on Monday and fly home that night.  A fair amount of travel, but I really enjoy visiting with farmers around the country and I learn something new every time.

I know that there is a drought in the Dakotas, but in this part of the US, they had the opposite problem “too much rain”.  Out in the Pacific Northwest, wheat harvest is well underway and it appears that record yields may be coming.  I rode on a combine on Saturday and it is always nice to see a yield monitor hit 180 bushels per acre in wheat (it won’t end up there, but the lowest yield shown was 130).  This is also on ground with slopes exceeding 40%.  The Hillco Hillside kits only self-level to 27% and these slopes are well in excess of that.  It is always fun to dump on the go when the auger as about 25 feet in the air.

I will keep you posted on the conference this week.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Group-Collaboration-Meeting.jpg “Some Assembly Required” http://blogs.claconnect.com/agribusiness/some-assembly-required/ Sat, 22 Jul 2017 18:09:45 +0000 http://blogs.claconnect.com/agribusiness/?p=5925 For most males, the three most dreaded words in the English language is “some assembly required”.  I would estimate over half of the arguments I have had with my wife in 35 years of marriage involved “some assembly required”.  As usual, I would start on putting something together without reading the instructions and then start muttering to myself when it was not going well.  At that point, my wife would interject some words of wisdom (at least to her they were) and off to the races we would go.

Now, you may be asking how does this affect farmers and tax planning.  Well, I view tax planning as involving “some assembly required”.  For example, tax planning usually evolves as follows:

  • Financial records are updated and gathered together (the more accurate the better).
  • This provides the base numbers for the tax plan.
  • We then project income and cash expenses for the remainder of the year.
  • We add all of those items together to come up with our new base income for the year.
  • We then subject depreciation that will be deducted on prior year assets.
  • This is now our final base income and then we start our “what ifs” regarding Section 179, bonus depreciation, deferred payment contracts, prepaid farm expenses, pension plan contributions, etc. to arrive at our final taxable income estimate.

This is the process of normal tax planning and as you can see it involves “some assembly required”.  Therefore, if you skimp on any of the steps, the final result can end up looking like some of the furniture I have tried to assemble over the years (not a pretty sight).  You should make sure to follow all of the steps to arrive at the best tax plan you can.  If you skip any, the final result at tax time may not be want you want.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Group-Children-in-Corn-Field.jpg Farmland Values Are Mixed http://blogs.claconnect.com/agribusiness/farmland-values-are-mixed/ Wed, 19 Jul 2017 04:18:05 +0000 http://blogs.claconnect.com/agribusiness/?p=5922 The Federal Reserve Bank of Kansas City just released their latest Ag Finance Databook and it appears that certain parts of the Midwest have seen some price increases such as Iowa (up 2%) and Southern Wisconsin (up 5%).  However, other parts of the region have seen some steep losses.

The Mountain states are down about 17% and South Dakota is down about 10% from last year.  This is probably due to the large concentration of cattle ranches and wheat farms in these states.

Although the farm sector has been stressed, the rate of return for rural farm banks is slightly higher than the five-year average of 1.1% at about 1.2%.  Also, farm loans are out performing other loans at smaller banks by about 20 basis points.

Maturities of farm debt (non real estate) has increased from an average maturity of 23 months to about 35 months since 2015.  This is a fairly easy way for farmers to inject working capital into their farm operation.

Interest rates exceeding 6% on non-real estate loans has almost doubled to about 15% since 2015.

All-in-all, stress is still apparent, however, the trend appears to be flattening out and we may see a turn around if we get some improvement in prices.  We will keep you posted.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Sunset-On-Wooden-Path-Daybreak.jpg Sheridan, Wyoming http://blogs.claconnect.com/agribusiness/sheridan-wyoming/ Thu, 13 Jul 2017 13:33:20 +0000 http://blogs.claconnect.com/agribusiness/?p=5918 I am in Sheridan, Wyoming today and tomorrow doing a two day farm tax seminar in conjunction with Washburn University.  Many of you may remember that I was in the Sheridan area last year for the annual Farm Financial Standards Council annual meeting.  The Sheridan Rodeo is in town both last year and this.

If you have never been in Sheridan, I would strongly suggest you need to make a visit.  The area is surrounded by the Bighorn Mountains and I think this is one of the most scenic parts of the country that you can live in (although a bit remote).  We are teaching at the Sheridan College which is mostly funded by a grant from Edward Whitney who settled in the area just after Sheridan was founded.  He was a banker who invested in numerous ranches in the area and left his legacy for education in Wyoming.

We have about 50 in attendance today with another 40 or so attending via the web (that is becoming more common all the time).

This post has nothing to do with income taxes, but it is good to learn about other things once in a while (even for us tax geeks).

 

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Rodeo-Cowboy-Silhouette.jpg Should You Consider a Cash Balance Plan http://blogs.claconnect.com/agribusiness/should-you-consider-a-cash-balance-plan/ Wed, 12 Jul 2017 15:25:20 +0000 http://blogs.claconnect.com/agribusiness/?p=5916 A looming large income tax liability faces many farmers as they near retirement.  They have done a good job of kicking the tax can down the road, but now it may be time to pay the piper (sorry for all of the clichés).  There are several tax tools that we can use to reduce this burden and one of them is to use a cash balance pension plan.

There are two general types of pension plans.  A defined contribution plan simply contributes money each year based on a percentage of a person’s compensation.  A typical defined contribution plan includes a profit sharing or 401k plan.

A defined balance plan contributes money based upon the age and earnings history of the employee.  This plan is more complicated than a defined contribution plan.

A cash balance plan is a hybrid of each of these plans and is less complicated than a defined benefit plan.  As a farmer nears retirement age, the cash balance plan allows the farmer to contribute about 100% of their net earnings into the plan.  If they pair it with a 401k plan, they may be able to deduct more than their earnings.  This could easily allow a farmer over a five year period to soak up over a $1 million of deferred grain inventory that they are worried about having to pay 40% or more in income taxes on.

As example, assume a farmer expects to have about $1.25 million of grain in his last year of farming and wants to clear that up over a five year period.  By reporting $250,000 of net farm income each year for five years, he can then deduct about $1.25 million placed into his cash balance plan.  He then will start to take this money out of the plan beginning at age 70 when his tax rate should be much lower.

We recommend that you maintain this plan for at last five years.  You are required to cover full-time employees, but their contribution is usually much lower.  The fees to set up a plan is usually $2,500 to $5,000 depending on complexity and the annual administration fee is likely around $2,500 or lower.

If you are at least five years away from retirement and want to reduce your tax burden, a cash balance plan may make a lot of sense.

 

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Farmer-in-the-Wheat-Field.jpg Farmer Equals Step-Up – Share-Crop No Step-Up http://blogs.claconnect.com/agribusiness/farmer-equals-step-up-share-crop-no-step-up/ Thu, 06 Jul 2017 14:23:10 +0000 http://blogs.claconnect.com/agribusiness/?p=5912 Back in December 2016 we had previously posted on the Backemeyer Tax Court Case regarding a farmer who passed away after prepaying farm inputs.  He was able to deduct those costs on this tax return. When his spouse inherited those assets, she was able to deduct the costs again on her Schedule F, due to the step-up in basis at his death. Essentially, the farm couple ended up with a “Double Deduction”.

If Mr. Backemeyer had been a share-crop landlord at the time of his death, the answer gets trickier.  If he had purchased crop inputs and not applied them to the land, then these inputs would get a step-up in basis which his heirs could then deduct (again).  However, if the inputs had been applied to the crop, they are then converted into a “rental asset” which does not get a step-up in basis.  Also, if the landlord had received grain at harvest and then passed away before selling the grain, this does not get a step-up.  This asset is considered to be a “receivable” that has not been converted to cash and under the tax rules, there is no step-up.

CliftonLarsonAllen has a service called Farm Tax Network that covers these tax subjects such as this case in more technical detail.  If you are interested in subscribing to this service, please send an email to Cathy Olson at cathy.olson@claconnect.com.

 

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Lightbulb-String-Outdoors-at-Night.jpg Will You Be Able To Deduct Business Interest Under Tax Reform? http://blogs.claconnect.com/agribusiness/will-you-be-able-to-deduct-business-interest-under-tax-reform/ Wed, 05 Jul 2017 17:46:23 +0000 http://blogs.claconnect.com/agribusiness/?p=5909 One of the controversial proposals by the House Republicans regarding tax reform is to limit business interest deductions.  Here is what we think we know on this subject (but as with all tax reform, the final result may be materially different):

  • Since the house proposal is allowing farmers to deduct all business investments other than land, the offset is that business interest expense will only be allowed as a deduction against business interest income (for most farmers this is zero).  Any unused interest expense is allowed to be carried forward.
  • The interest paid on loans to purchase land should be allowed as a deduction since land cannot be deducted when purchased.
  • It is likely that all current loans in place would be grandfathered (this may be another reason to lock in long-term low interest rates).  Any refinancing of loans or renewals of lines of credit would likely have interest deductions limits at that time.
  • There may be certain elections that farmers could make.  One election may allow you to depreciate business investments instead of full deduction.  Under this election, you could then deduct the interest on that purchase.  We are not sure if this would be an asset-by-asset election or an all-or-non election.
  • Certain small business taxpayers (such as most farmers) may be allowed to deduct business interest and fully deduct business investments.

As you can see, there is not much clarity on this year.  President Trump does not seem to support the elimination of business interest deductions, but the final proof will be in the pudding (so-to-speak).

We will keep you posted.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2016/08/Tractor-Planting-Corn.jpg Right to Repair Movement http://blogs.claconnect.com/agribusiness/right-to-repair-movement/ http://blogs.claconnect.com/agribusiness/right-to-repair-movement/#comments Fri, 30 Jun 2017 14:30:19 +0000 http://blogs.claconnect.com/agribusiness/?p=5906 As a farmer, you wear many hats.  On this blog, we often discuss wearing the tax and administrative hats of your farm, however, a recent article from Time (click here) discusses the repairman or mechanic role many farmers take on as well. 

As the article discusses, equipment manufacturers are producing ever increasing high-tech  tractors or other heavy machinery that often runs on copyright-protected software.  Instead of being able to diagnose problems themselves, then, farmers are forced to work with company-approved technicians that are often much more expensive.  Because of this, some farmers have come together in support of a so-called Right to Repair legislation that has been proposed in at least 12 states and would require equipment manufacturers to offer the diagnostic tools, manuals and other supplies that farmers need to fix their own machines. 

Farm equipment manufacturers have their own arguments against this, however, the interesting piece with this is an unexpected opponent to this movement:  Apple. Apple argues the proposals could result in subpar repair work or make consumers vulnerable to hackers. 

Maybe even more interesting with this is that the issue is cutting across party lines, with support from Republicans in agriculture-heavy states like Nebraska and pro-consumer Democrats in states like New Jersey. Given the large size of some of the companies against this movement, as the article points out, I am not sure we should expect any big changes anytime soon.  But, if the movement at least gets the conversation started and the ball rolling, it could force some companies to open up a little bit.  With many farms struggling with cash flow due to high input costs and low crop prices, any little bit of savings can help.

Special thanks to David Enquist for this post.

 

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Walking-Through-Wheat-Field.jpg Ranking States By ARC/PLC Payments http://blogs.claconnect.com/agribusiness/ranking-states-by-arcplc-payments/ Mon, 26 Jun 2017 17:54:55 +0000 http://blogs.claconnect.com/agribusiness/?p=5902 Brent Gloy and David Widmar write a blog called Agricultural Economic Insights and they recently did a post on “How Has your State Fared Under the 2014 Farm Bill?”.  In the post, they provide data on a state-by-state basis showing the average amount of payments each state has received for ARC/PLC during 2015/16 (2014 and 2015 crop year) versus the average direct payment paid during 2010-2013.

“Fixed direct payments were by far the largest portion of farm program payments under the 2008 farm bill.  These payments were made on a fixed price and yield for most commodities.  For example, corn producers received $.28 per bushel on the farm’s direct payment yield on 83 to 85% of base acres.  The direct payments were reduced by 20% for farms that chose to participate in the ACRE program.”

We know that a substantial majority of corn and soybean farmers elected ARC-CO under the 2014 farm bill.  Wheat growers were about 58% ARC and 42% PLC.  The original CBO estimates for the repeal of Direct, Counter Cyclical, and ACRE payments called for about $6 billion in program savings.  In its place, the CBO expected an average of about $3.5 billion of ARC/PLC payments.

We know for the 2014 crop (paid in 2015) and 2015 crop (paid in 2016) that total ARC/PLC payments were about $5.2 and $7.8 billion respectively.  The Economic Research Service (ERS) estimates 2016 crop payments this year may exceed $8.5 billion.  This cumulative amount will exceed the CBO estimates by about $10 billion and be about $3.5 billion higher than the 2008 farm program payments.

The large increase in 2017 payments (2016 crop year) primarily relate to wheat PLC payments.  Most wheat growers that elected PLC will likely only need about 2,000 acres to hit the maximum $125,000 payment limit.

The blog post has a nice US map showing how these average 2014 Farm Bill payments compare to 2008 Farm Bill Direct Payments.  The corn belt appears to have fared fairly well under the new Farm Bill with Nebraska and Wisconsin each showing over 200% of 2008 payments.  However, most of the mountain and southern states appear slightly worse.   But these are the states most likely to get a large wheat PLC payment for this year.

Once the 2017 payments are factored in, it is likely that almost all states will be better off under the 2014 Farm Bill than the 2008 Farm Bill.  Notice that we say states and not counties.  There are many states that show large increases, however, several counties in those states received little or no ARC payments while their neighboring counties may have received payments each year in excess of $70 per acre.  The new Farm Bill will should address those issues.

It appears that 2014 Farm Bill has been better than 2008, however, remember we still have two years to go and it is likely that ARC payments will be substantially reduced for both 2017 and 2018 and wheat PLC is likely much lower this year.  If that holds true, the final numbers for 2014-2018 may not be much different from the old Farm Bill.  We shall see.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Man-in-Sugar-Factory.jpg Single Member LLC Update http://blogs.claconnect.com/agribusiness/single-member-llc-update/ http://blogs.claconnect.com/agribusiness/single-member-llc-update/#comments Tue, 20 Jun 2017 15:49:14 +0000 http://blogs.claconnect.com/agribusiness/?p=5900 In our previous post, we indicated that the IRS had recently released a ruling indicating that a single member LLC is not an individual for purposes of getting out of the late filing penalty for small partnerships.  Our language could have been a little better.  The ruling is actually from 2004 (Revenue Ruling 2004-88) and the Ninth Circuit of the Court of Appeals in the Seaview Trading, LLC case just affirmed the IRS ruling.

Therefore, if you have any partnership with fewer than 10 partners in a partnership and if any of the partners are a single member LLC or revocable living trust, the partnership does not qualify for the small partnership exception.  This means that if the partnership is late in filing its tax returns, it will owe the penalty for being late (or the partners can be hit with tax adjustments after their individual statute of limitations expires).

Although the tax rules indicate that single member LLCs and revocable living trusts are disregarded entities, they are still considered “flow-through” entities for purposes of Revenue Ruling 2004-88.  Just something to watch out for.

A more detailed discussion on this matter can be found here.

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http://blogs.claconnect.com/agribusiness/wp-content/uploads/2017/06/Farmers-Looking-at-Laptop-Grain-Elevators-in-Background.jpg Single Member LLC is not an Individual http://blogs.claconnect.com/agribusiness/single-member-llc-is-not-an-individual/ http://blogs.claconnect.com/agribusiness/single-member-llc-is-not-an-individual/#comments Tue, 13 Jun 2017 14:17:49 +0000 http://blogs.claconnect.com/agribusiness/?p=5816 I probably get at least two or three small partnerships each year that file their tax returns late due to various reasons.  The penalty for filing a partnership tax return late can get very steep very fast.  It is about $200 per month per partner that the return is late up to a maximum of 12 months.

For example, assume you have a partnership with 5 partners and they are five months late in filing the return.  The penalty in this case is almost $5,000.

A way to abate the penalty is to be a qualified small partnership.  This involves having 10 or fewer individual partners who all timely report the partnership income on their tax return.  A recent ruling from the IRS indicated that a single member LLC is not an “individual”.  Normally, a single member LLC is ignored for income tax purposes and you would assume since it is ignored, that the “individual” would count in this case.  However, the IRS ruled otherwise.

Therefore, if you own a partnership interest via a single-member LLC make sure to file the tax return timely.  Otherwise, it can cost you and your partners some money.

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