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May 2010 Archive for The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

IRS Is Getting Ready for Billions of Form 1099s

May 27, 2010

Scott Heintzelman of The Exuberant Accountant has a very good post on the new rules coming for 1099 reporting for all businesses starting in 2012. In one of my previous posts, I indicated that these rules were coming, but Scott does a very good job of highlighting the changes.

One thing that needs to be stressed that most of us probably have ignored is that if we do not comply properly with these rules, two bad things can happen.

First, if you do not report the transaction to the IRS, they can assess a penalty of $50 per form 1099 not reported up to a current maximum of $100,000. Under the current rules, if you missed one or two 1099s that should have been reported, the total penalty might be less than $500. Under the new rules, if you are required to issue form 1099 to all businesses that you purchase goods and services from, the penalty could add up very fast. For example, if you deal with 100 vendors that you paid more than $600 to during 2012 and do not report any of these transactions on form 1099, your potential penalty is at least $10,000.

Second and perhaps more important is that if you do not provide your federal identification number to your customers, they may be required to perform backup withholding on payments to be transmitted to you. This backup withholding is usually 20% of the total sale. Therefore, if you sold grain for $250,000 to your local elevator and backup withholding applies, the elevator would only give you a check for $200,000 and send $50,000 to the IRS. You would be able to get the $50,000 back when you file your return, but that means you have to wait until the following year to get your money.

Under current rules, backup withholding does not apply to  the sale of farm products, but it is my opinion that with the new rules, backup withholding will probably apply on the sale of any product including farm products. Therefore, it will be very important to provide your EIN to any customer you sell products to.

I would strongly suggest that you review your current accounting system and procedures to make sure that you are ready for 2012.  As the scientist Carl Sagan would say, the IRS is about to get "billions and billions" of form 1099s starting in 2012.

Russia May Surpass US in Wheat Exports

May 25, 2010

It is projected by 2019 that Russia may become the world's largest wheat exporter and Russian, Ukranian and Kazakhstan (RUK) wheat exports collectively may double the United States wheat exports according to the June 2010 issue of Amber Waves.  This growth in wheat exports may help mitigate global food security concerns and help offset the the shift in US acreage to corn, soybeans and other more profitable crops.

USDA is projecting that wheat exports by there three counties could increase by about 50 percent to over 50 million metric tons by 2019 or about 1.9 billion bushels.  The region may account for over half of the increase in wheat exports and could supplant the US as the "wheat breadbasket of the world".

The US has been in second place since World War II but could easily slip to second place especially if the trend to more corn and bean acres at the expense of wheat production continues.

The US share of wheat exports may drop from the current 24 percent range for 2001-09 to an estimated 16 percent by 2019.  The European Union, Canada and Argentina will also lose market share while Australia is expected to remain flat.  The three former Soviet Union counties should see their market share go less than 20 percent to over 33 percent by 2019.

There are two main reasons why RUK have become larger wheat exporters.

  1. The region's transition from planned to market-orientated economies that began with collapse of the former USSR in the early 1990s.  During the late Soviet period of 1987-91, the USSR imported 35 mmt of grain, while in 2009, the former USSR nations exported nearly 55 mmt.  This is a turnaround of over 90 mmt or about 3 billion bushels of grain.  Also, the large contraction in the livestock sectors led to market driven importation of meat and exports of grain.
  2. The region's yield has risen steadily during the 2000s.  During the 1990s, wheat yields actually decreased primarily due to bad weather and a lack of inputs, especially fertilizer.  However, during the 2000s, wheat yields have risen about 32 percent in Russia and about 25 percent in Kazakhstan.  A lot of this increase is due to the large vertically integrated enterprises that are in charge of the crop from the very beginning to the final wheat sale.

If the world market for grain was expected to remain steady, this increase in Soviet production could lead to much lower prices, however, the world will add another 750,000 or so people over the next 10 years and they will eat a lot of wheat so wheat prices may actually rise over this period.

Some S Corporation Dividends May Become Subject to Self Employment Taxes

May 24, 2010
The American Jobs and Closing Tax Loopholes Act of 2010 is expected to be passed in the next week or so.  In this tax act, there is a provision that states all ordinary income earned by S corporation from professional services (such as accounting, consulting, medical and other related professions) will be subject to self-employment taxes.  Currently, an S corporation is required to pay appropriate salaries to owners that are active in the business, but any income earned above the salary is not subject to any self-employment tax.

Now, for those businesses that are affected, all ordinary income will either be subject to self employment tax or normal payroll taxes on salaries paid.  It may now make sense not to pay any salaries for these owners since the income would not be subject to any state or federal unemployment or worker's compensation taxes.  This provision is effective for years beginning after 2010.

This provision will not apply to most farmers, however, in many situations, a farmer will set up a corporation that they will list as being in the consulting business.  You need to make sure to list the corporation as a farmer and therefore, the current tax situation on these earnings still should be in effect.

Also, this is probably the first step to making all ordinary income from S corporations subject to self employment taxes sometime in the future when Congress needs to raise more revenue.

Please note this Tax Act has not yet passed, however, it is expected to become law by the end of May.

Farmland Values Rise in First Quarter

May 17, 2010

The Federal Reserve Bank of Kansas City issued their quarterly report on agricultural credit conditions for the first quarter of 2010.  They indicated farmland values rose due to strong demand and the rebound in livestock prices.  Both farmer and non-farm demand appears to be very good.  Looking ahead, they expect farmland values to hold steady.

However, most district bankers reported that farm income fell slightly in the first quarter, however, they expect higher levels in the second quarter with the year being steady.

Farmland values for the quarter rose about 2% with Nebraska having the highest gains of about 6%, however, Oklahoma and the mountain states were lower for the quarter.  This was the strongest gain in over a year primarily due to the livestock rebound.  Interest rates edged down slightly, averaging 6.6 percent.

In reviewing the long-term chart shown in the report, there have only been 3 quarters that have been negative since 1990.  Two quarters were in late 1990 when the Internet bubble was at its highest and one quarter last year.   Owning farmland has been a very good investment over the last 20 years.  We all hope the trend continues for the next 20 years.

New Drought Resistant Seed May Expand the Corn Belt

May 06, 2010

The April 29, 2010 issue of Bloomberg Businessweek had a good article on how the seed companies are developing drought resistant corn seed that may expand the corn belt farther into Kansas, Nebraska, and Oklahoma.

Another benefit of the seed is a reduction in the amount of irrigation that is needed.  This can lead to reduced crop insurance premiums and can boost the value of this crop land.  Also, the article states that agriculture accounts for 70% of global freshwater use and the single biggest issue facing agriculture is the availability of water.  By creating seed that uses less irrigation water or requires less natural water, a farmer can increase their net income, and in some cases, substantially.

Dupont indicates that in their test trials, the new seeds are creating yields that about 6% better than the old seeds.  Syngenta is aiming for a 10% increase in yields.  The seed companies believe that by 2020, over 55 million acres of corn will be planted with the new drought resistant seed. 

If a farmer's old corn yield was 120 bushels per acre and they can create a 10% yield increase at $3.50 bushel price, this would increase the net bottom line by about $42 per acre less any increase in seed cost plus any reduction in irrigation costs.  This can be a substantial increase to the bottom line.

Take Advantage of the New HIRE Credit

May 05, 2010

Congress recently passed the Hiring Incentives to Restore Employment (HIRE) Act.  This act provided a couple of new credits that in a lot of cases will help our farmers.

The first credit is basically a direct reduction in the 6.2% employer FICA cost for new employees hired who have been un-employed after March 18, 2010 and before the end of the year.  This credit will be claimed on your form 941 (or in most cases, the form 943 filed by farmers at the end of the year).  In order to claim the credit, you must get a Form W-11  from the employee that states they have not been employed for the previous 60 days.  This credit can add up fairly fast.

For example, assume a dairy farmer hires three new employees making $3,000 per month who were un-employed.  For the nine months ended December 31, 2010, they would have been paid $81,000 in wages and the employer's FICA portion would have been $5,022.  This cost is completely eliminated by the Act.  This also allows you not to have to make this deposit during the year for these particular taxes.

The IRS has a nice question and answer page regarding this new credit.

The other credit is a general business credit of up to $1,000 per employee hired that you can claim on your 2011 tax return.  To claim this credit, you must have retained the employee for 52 consecutive weeks and the credit is equal to the lessor of $1,000 or the 6.2% of wages paid.  If you pay wages of at least $16,129, then you will qualify for the maximum credit.  Again, this is a business credit, so you are not guaranteed an immediate benefit and you will need to reduce your wage deduction by the amount of the credit.

Again, the IRS has a question and answer page on this particular credit.

What if an Employer Does Not Pay Health Insurance Premiums?

May 03, 2010
One our readers asked me a series of questions in response to our post on the credit for employer paid health insurance.  Their questions are as follows:

What happens if you do not pay any of the employees health insurance premium? What happens if one of those employees gets help from the state or the federal government with their insurance premiums? Does the employer get fined on every one of his employees, even those that do not get help with their premiums?

The answers are as follows:

If you are a small employer (less than 50 full-time employees), you are not required to pay any of your employee's health insurance premiums under the new law.  If you elect to pay at least 50%, then you qualify for the credit as mentioned in the post.

Beginning in 2013, employees of most farmers will be eligible to get premium assistance to help pay for their health insurance premiums, but as of now, any farmer who employs less than 50 employees is not required to pay for health insurance, however, stay tuned since this may change.

Some Interesting Facts About Wheat Production

May 03, 2010
  1. Kansas State University has a site called ag manager info and there is always some interesting tidbits that they have on the site.  They recently posted an article on the world wheat market supply and demand trends.  I thought I would recap the article with what I found interesting.

For the current year, total acres planted to wheat is estimated at about 557 million acres or over 870 thousand square miles.  This acreage is about the size of Greenland. Since the study started in 1987-88, the average acres in production has decreased by about 1 million acres annually.

The 10  largest wheat production areas produced on average about 80% of the world's total wheat production.  The top 5 areas (in acreage terms) were:

  1. Russia - 71 million acres (slightly smaller than Arizona)
  2. India - 69 million acres (about the size of Colorado)
  3. European Union - 63 million acres (about the size of Oregon)
  4. China - 59 million acres (slightly larger than Idaho)
  5. United States - 49 million acres (about the size of Minnesota)

I always thought that Canada was a large producer, however, the country of Kazakhstan has almost twice the acreage in wheat production as does Canada.

The highest average yields per acre are:

  1. European Union (76.9 bu/acre), increasing about 1 bu per year,
  2. China (65.0 bu/acre), increasing by 2.2 bu per year.

United States yield is about 41.6 bu/ac with it increasing by about 1 bu per year.

Total wheat production by the top 5 countries are as follows:

  1. European Union - 5.1 billion bushels
  2. China - 4.2 billion bushels
  3. India - 3.0 billion bushels
  4. Russia - 2.3 billion bushels
  5. United States - 2.2 billion bushels

Even though the United States is the 5 largest producer of wheat, it is the largest exporter of wheat and the top 5 exporters are as follows:

  1. United States - 1.1 billion bushels (50% of production)
  2. European Union - 705 million bushels (14% of production)
  3. Russia - 600 million bushels (26% of production)
  4. Australia - 450 million bushels (55% of production)

Canada exports about 67% of its production.

The top importer of Wheat is North Africa at about 610 million bushels, with the Middle East, South America, Sub-Saharan Africa, Southeast Asia and East Asia next.

Another interesting fact is that China has by far the largest ending wheat stocks at about 1.8 billion bushels.  The United States is the next largest at about 635 million bushels.  China is at about 47% of total ending stocks, while their historical trend is about 30%.

I always find this information interesting and I hope you find something of interest in the data.

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