Chapter 12 is a special type of bankruptcy for farmers.  It allows them to reorganize their assets and liabilities and in most cases allows the farmer to continue farming.  Sometimes, however, the farmer will need to sell part of the farmland to payoff the debt.  If the farmer had incurred income taxes before the bankruptcy, in many cases, this debt for taxes is forgiven as part of the bankruptcy process.

In the current case, the farmer argued that the capital gains tax arising from the sale of farmland should also be forgiven.  The IRS disagreed and the case went all the way to the Supreme Court.  The 5-4 decision was very close, but the final ruling is that this debt is owed by the farmer since the bankrupt estate cannot owe tax.

If you are in a situation like this, it is wise to discuss it with your attorney and tax advisor since it may make more sense to trigger the capital gains tax before you file Chapter 12.

Paul Neiffer, CPA

• The amount of cash donated (if any),
• A description of any property other than cash that was donated (an estimate of the value of said noncash property is not required),
• Whether the charity provided any goods or services in exchange for the donation (other than intangible religious benefits), and
• A description and good-faith estimate of the value of any goods and services provided by the charity in exchange for the donation.

Also, the taxpayer needs to receive this before filing their return.

The most often error that we see is the second item.  Many times, the taxpayer will get a listing from the church of all of their donations, but this statement is not included.  If this tax return was audited, the taxpayer would stand a good chance of losing the deduction.

A recent Tax Court case underlines how much this can cost the taxpayer.  In Marshall Cohan case (TC Memo 2012-8), the taxpayer transferred a first right of refusal on valuable property on Martha’s Vineyard in exchange for cash and other assets that were value at less than fair market value.  This difference was valued at $2 million by the taxpayer and charity.  The charity provided a written acknowledgement to the taxpayer of what was transferred to the taxpayer, but for some reason did not completely list the assets that the taxpayer transferred to the charity.

The Tax Court agreed with the IRS that the whole $2 million deduction was disallowed and in addition agreed that the taxable gain should have been $15 million instead of the $9 reported.  Bad!

It also appeared that the taxpayer and the charity were playing audit lottery on purposely not reporting all of the items, so the Court agreed that the 20% negligence penalty also applied.  Double Bad!!

Something as little as not completely listing property transferred on a charity transfer can cost taxpayers a large amount of money.

 Paul Neiffer, CPA

Social security benefits are based upon the top 35 years of earnings during your career (as indexed for inflation).  Therefore, if you started work at age 22 and had good earnings from that age until age 57 or so, you have put in your good 35 years.  If you want to work part-time from age 60-65 to build up your earnings base for social security, it really will not help you any since those earnings will be less than your 35 good years.

You will end up paying social security taxes into the system that will gain you no benefit.

It always wise to review your social security statement at least once a year to make sure they have posted the correct earnings to your account.  I have seen several times where they picked up the wrong self-employment earnings for our clients.

The IRS has now announced that it is in the process of revising all of its correspondence to include a plain language explanation of the nature of each notice and will state the actual action that the taxpayer must take in addressing the correspondence.  Many of these letters or notices can be handled without having to call, write or visit an IRS office.

A listing of these redesigned notices and letters, including the number and description are located on the IRS website here.

I am not why it has taken so long to finally do this on the part of the IRS (probably something to do with their antiquated computer system), but it is long overdue and I look forward to see if it really is in “English”.

 Paul Neiffer, CPA

I am retiring from farming and I have equipment valued at 500,000 ,all of which is fully depreciated. I would like to give this equipment to a charitable trust to get 50,000 over the next 9 years (I think they keep 10%) . Do I give title to the equipment to the trust or sell the equipment in my name and give the trust the money? Or do I need to have the buyer make the check out to the trust to avoid the income tax? Also if I want to give the trust 10,000 bushels of soybeans ($150,000) and have the trust give it back to me over 9 years, do I sell the soybeans in the trust name or my name and give them the cash?

We have had some discussions on charitable remainder trusts (CRT) previously, but a brief recap is in order.  A retiring farmer can transfer fully depreciated equipment or unsold crop with no tax basis to a CRT.  The CRT can sell the assets, pay no tax, invest the proceeds and then provide an annual annuity to the farmer as outlined in this question.  The farmer will pay tax on the income as it is received and it is not subject to self-employment taxes.

To answer the farmer’s questions, he must transfer the equipment and the crop to the trust and then have the trust sell the assets.  If he sells for cash, he will recognize all of the gain on the sale and then get a small charitable dedution on the transfer to the trust.  This defeats the purpose of using a CRT.

To make the transfer, he should create a bill of sale showing the transfer from him to the trust.  If the grain is stored at an elevator or coop, he needs to make sure that the business creates a new account for the trust and then transfer the grain to the trust account before selling.

Also, make sure to NOT have a pre-arranged sale of the assets already  in writing before the transfer.  If this happens, technically the farmer is required to report the income in most cases.

Paul Neiffer, CPA

For bonus depreciation of new equipment, if the asset is placed in service between January 1, 2012 and December 31, 2012, then 50% bonus depreciation is available.

Section 179 rule are a little different since these provisions are based upon when your fiscal year begins.  Many farmers have a C corporation and if that fiscal year begins in 2011, then they can take a Section 179 deduction of up to $500,000.  For fiscal years beginning in 2012 (including the normal calendar year), a farmer can take Section 179 of up to $139,000 and the phase-out of this deduction begins at $560,000.

Let’s show an example:

Farmer Smith has a C corporation with a year beginning September 1, 2011 and ending August 31, 2012.  The corporation purchases a new tractor for $300,000 on November 1, 2011, a new combine for $350,000 on March 1, 2012, and two used tractors for $375,000 on June 1, 2012.

The corporation will be able to fully deduct the new tractor bought in November, and then has to make a choice on the new combine bought in March for $350,000.  If it does not take Section 179, the 50% bonus depreciation creates a $175,000 deduction plus normal depreciation of $18,750 or $193,750 total.  If it takes the full Section 179 on the tractors of $375,000, this leaves $125,000 to apply against the combine leaving $225,000 available for bonus depreciation, resulting in $112,500 plus depreciation of $12,053 or total Section 179 and depreciation taken of $249,554.  In this case, taking the Section 179 of $125,000 results in a larger total deduction by about $56,000.

If this farmer was a calendar year taxpayer, they would not be able to take any Section 179 on the 2012 purchases, since the total cost or $725,000 exceeds the Section 179 phase-out amount of $699,000 ($560,000 plus $139,000).

Remember, you have to take Section 179 first, then apply bonus depreciation on new assets and depreciate any remaining amount using normal tax depreciation methods.

Social Security is form of a pension plan and it has three major components that make up the fund.  Two are positive and one is negative.  The positive items are contributions (i.e. FICA taxes) and earnings.  The negative is benefits paid out.  Right now, the social security fund has about $2.7 trillion in its fund.

The trustees project that more revenue will come into the fund (taxes and earnings) than is being paid out through the year 2021 or so.   This will result in the fund increasing to almost $3.1 trillion.  Beginning in 2022, the benefits being paid out will start to exceed the amount of income coming in and this deficit will increase each year.  The trustees are projecting that the surplus of $3.1 trillion will be completely gone by 2033.

It is at this point where the fund is “exhausted”.  After that year, the money coming in will not be enough to cover the money going out and the fund will run at a deficit which will be covered in some way.  Either directly by additional taxes being paid by the employers, employees or the taxpayers or a cut in benefits or some combination of both.

The trustees would like to see this happen now and not in 2033 when it is too late.

Paul Neiffer, CPA

As part of the latest report, the trustees project that the fund will be exhausted in 2033 (three years sooner than earlier projections).  The report also includes the following recommendations for keeping the Social Security program solvent:

• Increasing the combined employer and employee contribution from the current 12.4% (10.4% in 2011 and 2012) to 15.01%, which is a 21% increase,
• Reduce scheduled increases in benefits in a manner equivalent to a reduction in benefits of 16.2%,
• Draw on alternative sources of revenues (i.e. other types of taxes),
• Or a combination of the three.

Click here to read a copy of the report.  It is only 252 pages long.

These changes are very politically tough to do and it will be interesting to see what happens and when.

If you are a resident of the state of Wisconsin and receive a form W-2G from gambling winnings, you are taxable on these winnings when you file your return.  Now, if you gambled in Iowa and received form W-2G (assuming it was a large enough amount), you must file a return in Iowa, report those gambling winnings and then claim an offset on your Wisconsin tax return for any tax paid to Iowa.  In most cases, you will not pay extra tax, but you will be required to file an extra return.

The unique part about taxation of gambling winnings is that you can only offset gambling losses against gambling winnings based upon the net winnings from a “gambling session”.  Each gambling session is treated as a separate taxable event and if you have a net loss in one session, you cannot offset any of that net loss against your net winnings.

For example, let’s assume you go to a Wisconsin casino in the morning and sit down at the slot machine, take one spin of the wheel and hit the big jackpot for $10,000.   You decide to cash in the jackpot and take your children golfing for the rest of the day.  That evening, you go back to the casino, take your $10,000 and start to play the slots.  You have a bad night of it and end up losing the full $10,000 plus another $5,000.

In the eyes of the State of Wisconsin (and most likely other states), you are taxable on the $10,000 won in the morning and cannot deduct any of the net loss of $5,000 in the night session.  So you are out of pocket $5,000 plus Wisconsin taxes on the $10,000 winnings which could easily be $1,000.

This can add up to a lot of extra state taxes at the end of the year, even if you lost money gambling during the year.

The key thing from this notice and others like it is if you gamble on a very infrequent basis, you probably do not need to worry about it too much.  However, if you gamble on a regular basis, the IRS and each state you gamble in will want their “fair share” and maintaining adequate records of your gambling sessions is very important.

Paul Neiffer, CPA

In Northwestern Missouri and Northeastern Kansas, most of the corn appeared to be planted or fairly close to being done.  Some farmers were going to wait a few days before planting beans since they were still early compared to other years.

Heading into Iowa, the planting progress appeared to be much slower.  In my travels around the Waterloo area for two days; I saw very few planters in the field and rain was expected by that weekend.  With the newer larger planters, farmers can plant many more acres than in years past, but mother nature still needs to cooperate.

In Northern Illinois, most of the corn planting appeared to be almost done and the farmers that I met with had just finished planting the night before I arrived.

With 2011 being a record year for farm income, you should be looking at your farm budget for this year to see if you can lock in prices that approach last year and at least cover your input costs.  If the US really ends up planting 96 million plus acres of corn and harvests 160+ bushel crop, prices will most likely go down and this can materially effect your bottom line.

Also, if you are late getting in your corn, with bean prices near $15, you may want to consider switching to beans and locking in these good prices now.