As part of the Affordable Health Care Act (ObamaCare), there is now a new excise tax effective as of 2012.  It is based upon the number of participants enrolled or covered by the plan and the tax is $1 a person if your plan year ends between October 1, 2012 and September 30, 2013 and rises 100% to a $2 per person tax for plan years ending by September 30, 2014 with an undetermined per person fee thereafter.

If a farmer has one of these plans that covers him, his spouse and four children, then the fee is $6, however, there are two methods of how to calculate the numbers covered and you may end up with a slightly different number under each method.  The filing deadline for this tax is July 31 and is based upon your year-end ending in the previous calendar year.  For example, a plan that had a calendar year-end for 2012 is required to file by July 31, 2013.

There is no de minimis exception to this filing and a penalty may apply for not making the required filing.

CliftonLarsonAllen LLP has provided additional information regarding this filing and you may access that information here.

Also, here is a link to the federal form 720 needed for filing.

Paul Neiffer, CPA

Yesterday was an update on farm income tax planning and whenever I give a presentation like this I always worry about running out of things to say.  As usual, the opposite happened and we could not get through all of the material.

Michigan is three hours ahead of my time zone and I had my computer still set to my time zone.  Roger had me get up and talk about common reporting issues and about five minutes into it, he interrupted me and said we had two minutes to go.  I was an hour off on my time, but I must admit I was not unhappy about not having to talk for another hour.

There is a lot of discussion on how the 3.8% net investment income tax is going to apply to our farmers for this year.  For many farmers, they will still be able to keep their income under the threshold level, however, for those over the income levels, many will be hit with the tax that are not expecting it. 

If this tax might apply to you, now is the time to talk to your tax advisor.

Paul Neiffer, CPA

Under the new Farm Bill proposals, the farmer can elect either a revenue option (Senate ARC or House RLC) or a price option (House PLC) that will kick in if prices get low enough.  Gary ran some numbers for an Illinois sample farmer with an average yield of 182 bushels per acre.  Gary assumed a long-term trend price of $4.50, $4.00 and $3.50 for each year from 2013 to 2016 and then crunched the numbers to determine respective payment amounts.

At the $4.50 level, the only program that made any payments was ACRE.  Over the 4 year period, $117 of total per acre payments would be collected by the farmer over the four years.  None of the other programs made any payments.

At the $4.00 level, ACRE would pay out $289, ARC $110, RLC $50 and PLC zero.

At the $3.50 level, ACRE would pay out $498, ARC $291, RLC $248 and PLC $100.

As you can see for corn farmers, the old ACRE program is much better than any of the new programs offered.  For other farmers, such as peanut and rice farmers, the difference may be much smaller or even tilt toward the new programs, but for corn, bean and wheat farmers, it appears the new programs will pay-out much lower than the old ACRE program and in many cases, there will be no pay-out, even with lower prices.

Paul Neiffer, CPA

“Are payments for prevented planting deferrable into the following year for income tax?”

Most farmers are aware that crop insurance proceeds can be defer to the following year if you meet the following basic qualifications:

• You use the cash method of accounting;
• You receive proceeds for damage to crops in the current year (if you receive the proceeds in the year following the crop damage, you cannot defer it); and
• You business practice is to normally sell more than 50% of your crop in the following year.

You need to meet all three of these requirements with certain nuances related to the last one.  Additionly, the crop insurance proceeds needs to be for damage related to some type of weather event (drought, flood, hail, etc.).  “Prevent Plant” insurance on the face of it might not meet this requirement since in order to have a crop, you must plant it.  However, there is a provision in the Code that indicates proceeds related to prevented plantings qualifies as crop insurance for purposes of the deferral.

Therefore, as long as you meet the normal crop insurance requirements you can defer “Prevent Plant” proceeds.

Paul Neiffer, CPA

“In your example of Eric gifting to his grandson, does the grandson have to report this gift as income in either case (gifting in the current crop year or the following year)?”

In general, the receipt of the gift by the child or grandchild is not reported as income until they sell the grain.  The child will receive a basis of zero (assuming a gift of a prior year crop) or a basis equal to the amount of cost allocated to the grain gifted.  In our Eric example, he allocated $4,000 of cost to the 1,000 bushels of corn, so his grandson would have this as his cost basis.

If his grandson holds the grain for at least a year from the time of harvest, this will qualify for long-term capital gains treatment, otherwise, it is short-term.  In most cases, the “Kiddie” tax will apply and the (grand)child will have to use the tax bracket of their parents.  This almost always applies for kids that are in college or younger and being supported by their parents.

Also, if the fair market value of the grain gifted is greater than $14,000, you will be required to file a gift tax return.  You will not owe any gift tax, but a return is required (unless you have gifted more than $5.25 million during your lifetime, then gift tax will be owed).

Example #1 – Eric’s grandson is gifted 1,000 bushels of corn (from the previous year).  The value at the time of the gift is $7,000 and the his cost basis is zero (since this is the previous year’s crop).  The grandchild sells it a month later for $8,000 and will report a short-term capital gain of $8,000.  His tax rate will most likely be based on his parent’s marginal tax bracket.  If the grandson had held the crop until at least a year had passed from the time of harvest, it would be taxed as long-term capital gains.

Example # 2 – Same facts as number 1, except this is a gift of the current crop.  In this case, $4,000 of basis is allocated and the grandson will have a short-term capital gain of $4,000 instead of $8,000.

Paul Neiffer, CPA

The projected wage base for 2014 is expected to rise about 1.6% to $115,500.  Based on their assumptions, the wage base will start to increase at a more dramatic rate starting in 2015 and by 2022, the wage base will be $165,600.  That is almost a 50% increase from the current 2013 amount.

Also, as Congress debates changes to Social Security, it would not surprise us that the Wage Base may be expanded even more to shore it up.

We will keep you posted.

Paul Neiffer, CPA

First,

“For a cash basis farm taxpayer, I was under the impression that care must be taken to assure that crop is gifted after the year in which the crop was grown.  Otherwise, costs to create the crop need to be backed out of farm expenses and treated as basis for the contribution.  I could be wrong on that point so could you address that issue?”

The reader’s question and comment is correct for the gifts of commodities to non-charities.  In that case, a farmer wants to make sure that they are gifting prior year crops instead of current year crops.

Example

Eric gives 1,000 bushels of corn to his grandson worth $7,000.  The gift is made right after harvest and is of the current year crop.  When he prepares his tax return for the current year, he will be required to reduce his expenses by the percentage based upon the number of bushels gifted divided by total bushels grown.  For example, if his total costs were $400,000 and he harvested 100,000 bushels of corn, he would need to back out $4,000 ($400,000 times 1% (1,000 / 100,000)) of expenses when filing his return since this was the “cost” of the bushels donated to his grandson.  However, if he elected to wait until after year-end to make his gift, then he would not be required to back out any of the expenses. 

Charitable gifts of commodities do not have this rule.  You are allowed to fully deduct your expenses on schedule F, etc.  A simple way of looking at it is that if you were required to reduce your expenses on Schedule F, you would then be allowed to deduct the costs of the commodity as a donation on your schedule A.  The  IRS has been beat up a lot lately, but this is a favoable decision by that IRS  since the other way can be a pain to calculate and you would then lose the benefit of a reduction in self-employment income, etc.

Therefore, when making commodity gifts to non-charities, make sure to gift the commodity after the year it is harvested.  This can be tougher with the contribution of livestock.

Another reader asks if the gifts of commodities to charities works for partnerships and corporations.  The quick answer is yes.   Since there is no deduction involved, the amount given will not show up on schedule K-1 as a charity donation, however, the primary benefit is the reduction in income subject to self-employment tax for partnerships and the possible reduction in AGI for higher income farmers that might be subject to the 3.8% net investment income tax.

A nice feature of these types of gifts for C corporations is that you no longer have to worry about the 10% of gross income limitations.  If you make a cash contribution in a C corporation, the deduction for the current year is limited to 10% of your overall net income before the gift.  However, you can have an unlimited commodity gift since there is technically no deduction to be limited.  Also, if the corporation owner does not itemize their deductions, this is way of getting that deduction to flow through the corporation since the amount of grain donated will reduce the taxable income of the corporation.

 If you have a choice between a commodity gift or cash gift to a charity, do the commodity gift every time.  It will save you taxes.

Paul Neiffer, CPA

“Please comment on the tax ramifications of gifting farm commodities to a charitable foundation.”

Many farmers have charitable intent, but in many cases their standard deduction ends up greater than their itemized deductions including their charitable donations.  In these situations, the farmer can get an extra advantage by contributing grain or other farm commodities directly to the charity.  With this direct gift, the farmer does not report any of the grain given as income and this eliminates self-employment tax on the amount of the gift and may reduce the income tax.

Example

Farmer Bean normally write a check to his church each year for $10,000.  He has no other itemized deductions and gets no federal tax benefit from the donation.  For this year, he elects to give the church 1,500 bushels of corn.  This reduces his farm income by $10,000 (reducing his income and self-employment tax) and is still entitled to deduct his standard deduction.  Assuming he is in a 15% tax bracket, the gift of grain saves him about $3,000 in tax versus making a cash gift.

For farmers in higher tax brackets, an additional benefit of making commodity charity gifts is that it reduces the amount of adjusted gross income that may be subject to the new 3.8% net investment income tax or phase-out of itemized deductions and personal exemptions.

Care must be taken to make sure the gift is properly documented.  There must be a physical transfer of the commodity to the charity and they must be in control of the disposition of the commodity including any fees and expenses.

Paul Neiffer, CPA

Although last year was a very large loss to the program, insurance is not based on what happens in one year, but rather, what happens over several years.  The article does a good job of explaining this, but in summary, what I noticed is that the gain from the crop insurance program for 2009 ($3.5 billion) and 2010 ($3.1 billion) was about $6.6 billion in total.  This amount would be in excess of the loss realized for 2012 and over the last five years, the total net gain to the program is about $2.1 billion.  Since 1995, the crop insurance program shows a net loss ratio of about 93%, therefore, it appears that the program is accomplishing what it is intended to do and I would suggest that Congress really does not need to tweak the subsidies involved since this may end up with unintended consequences. 

For example, if the subsidy is reduced for higher income farmers, we could see many of these farmers electing to self-insure and the reduction of those premium payments may result in greater overall losses to the program.

All in all, the crop insurance program appears to be one of the more successful government/private programs and lets try not to mess it up too much.

Paul Neiffer, CPA

Starting at about age 15 I became a full-time operator of the combine and although my parents “paid” me by putting me through college, buying a car, etc., they failed to do it properly for tax purposes.  Instead of issuing a W2 to my brother and I for the work we performed, they simply paid for certain items and never ran it through the farm.

The correct way to do this is to issue a W2 to your children based upon an appropriate wage for the services they perform.  These wages, although reported on form 943 and a  W2, are not subject to any payroll taxes (assuming you are sole proprietor farmer) as long as the child is under age 18.  The wages are also fully deductible by the farmer against their farm income and does reduce self-employment tax.

The child can earn about $6,000 and not have to file a federal return or pay tax (in some states, they may owe some state income tax).  Another nice feature is that these wages qualify for contributions to a ROTH IRA and if they invest those funds until retirement it can grow to quite a nice nest egg.  For example, assume the child earns $20,000 from age 15 to right before age 18.  The farmer would save about $8,000 in income and self-employment taxes and the child would owe no income tax and if invested in a ROTH at 6% until age 68, this $20,000 would grow to about $320,000 of after-tax wealth.  Not too bad of a return.

Remember, if you have kids under age 18 that help you on the farm, pay them. 

Paul Neiffer, CPA