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April 2012 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.

Sometimes You Lose when You Win!

Apr 30, 2012

The Tax Court recently ruled in favor of a taxpayer regarding a Section 1031 exchange. In the Reesink case (TC Memo 2012-118), the court indicated that the taxpayers were entitled to nonrecognition treatment on the purchase of a house that they ultimately moved into as their personal residence. 

Normally, you cannot sell investment property (such as farmland) and then purchase a house to live in. This is considered to be non-like-kind property. In the current case, the intent of the taxpayers was to purchase the house and then rent it out. However, they were unable to get the rent they wanted and ultimately decided to sell their current home and move into the house they had just purchased as their replacement property.

The primary reason that the taxpayers won was their intent to rent the house out; however, taking this case to Tax Court and winning the victory probably cost them in excess of $50,000 and many hours of effort and heartburn.

If the taxpayers had been diligent in providing the correct information to their tax preparer, most likely this would have never gone to Tax Court and/or never been picked for an audit. They never told the preparer that they were moving into the home and also underreported their rental income by more than $16,000 for the year.

The bottom line is that whenever you have a complicated tax situation, such as a 1031 exchange, you must review it with your tax adviser and, even more importantly, provide all of the information to him so he can prepare a proper tax return.

Maximize Your Farmland Revenue!

Apr 27, 2012

In a meeting with one of my clients in northern Illinois yesterday, we discussed his options for increasing his current land holdings without adding more land. He is in an area where farmland is costing $12,000 or more and none is available. Additionally, land rents are approaching or exceeding $400 per acre.

One option is to put an irrigation pivot on a 240-acre-plus parcel. Although this land is already yielding at least 200 bu. on average, putting in the irrigation system would cost about $200,000. The return would be increasing the yield to around 300 bu. per acre. If the normal variable costs are around $400 per acre, the additional $200,000 investment would yield about $60,000 to $80,000 per year, or a less than three-year payback.

This probably beats paying $200,000 for 16 acres of land.

In your operation, are you doing everything to maximize your current land production before going after other, possibly more costly, options?

What Is the Right Equipment Size?

Apr 26, 2012

I was riding on the tractor on Wednesday with Chris Barron, my fellow columnist for Top Producer magazine, and we had a good discussion about how farming is different from other "manufacturing" operations when it comes to the right equipment size.

In most manufacturing operations, the weather plays no role in the production process. The equipment is housed inside of a building, and other than a tornado or hurricane, the weather does not affect the ultimate production for the day.

However, during planting and harvesting, the weather can have a dramatic effect on the production process. There is a small window in which to get planting done and if the weather is not cooperating, not having the right-sized equipment can prevent you from getting your crop planted. Conversely, having too much equipment can be costly if the weather cooperates and you never need to use it.

There is no perfect answer to this question. If you decide to err on the less expensive, smaller side, there may be years when you will not get the crop fully planted or have to switch to an another crop. However, the reduction in equipment cost may offset this. If you err on the high side, you will always be able to get the crop in, but your overall equipment cost may make your operation less profitable compared to leaner farmers.

I think my tractor riding is done for the trip. since the farmer client I meet in Illinois today just finished planting last night. Tomorrow I am in our Stevens Point office for a meeting, then fly home on Saturday. My wife has already told me we are going for a motorcycle ride on Sunday (so I think everybody knows what I am doing on Sunday).

The Iowa Farmland Premium

Apr 25, 2012

On Tuesday, I had a quick meeting at our Des Moines office. After that, I met Moe Russell at the local Village Inn for a quick cup of coffee (or in my case, a Coke since my mother bred the coffee gene out of me). Moe and I caught up with business and then had a quick discussion on the perceived premium of comparable farmland in Iowa over most other states.

For example, near my farm in northwestern Missouri which might yield on average 165 bu. corn and 55 bu. beans, a 320-acre farm just went under contract for $4,550 per acre. This yield is very consistent from year to year. The same yielding farm in most counties in Iowa would probably cost closer to $8,000-$9,000 per acre or a premium of perhaps 2 to 1 or more.

From a purely business standpoint, it may make sense for certain Iowa farmers to sell their farmland and reinvest it in comparable farmland in other states that cost much less. This, perhaps, makes the most business sense, but most farmers have an emotional attachment to their farm, which in many cases outweighs the purely financial consideration.

In the afternoon, I had a quick meeting at our Cedar Rapids office and then headed up to Rowley, Iowa, to ride on the tractor for about three hours planting corn. For an old farm boy, there is not much that is more therapeutic than to ride a tractor or combine. These new 24-, 36- and even 48-row planters with airfeeds, insecticide attachments, etc., are much more advanced than what I grew up with. We actually used a set of grain drills, and one of my best memories of the farm is taking a gallon coffee can from drill to drill and putting wheat into the low spots. There was no control from the tractor cab to control the feeding of the wheat into the drill. It was all mechanical.

Today, I spend more time in this area and then head over to northern Illinois for a meeting.

The End of Tax Season!

Apr 17, 2012

By my unofficial count, this is my 30th tax season. I worked for a small CPA firm in downtown Seattle during my first tax season (while attending college at the University of Washington and being newly married) and the owner gave me a set of partnership returns to work on. I was so proud of finishing up the returns in a timely manner and presenting them to the owner.

My pride lasted about five seconds as the owner looked at me and asked where my work papers were. I had prepared the tax return without making a copy of any work papers to back up the numbers. Needless to say, my tax returns after that had work papers (although many of my friends still say I keep too much in my head and not enough on paper).

Today is the official end of the 2012 tax season and due to our office changing software, I must say it has been a little more difficult than normal and all of the returns took a little longer than usual, but our employees did a great job and our clients, as usual, gave us some grace.

I just want to take this time to say thanks to all of our readers for their questions during the season. Our readership continues to grow each month, and I look forward to my 31st tax season next year.

I will be traveling to the Midwest next week: Missouri on Monday, Iowa on Tuesday and Wednesday, Illinois on Thursday, and Wisconsin on Friday. Even though it is technically work, it will allow me to wind down doing what I like to do best, and that is visit farmers.

Deferred Sales Contracts

Apr 11, 2012

We had a reader ask the following question:

"I am delivering 5000 bu of soybeans to the elevator today and will price them at today's market. I want to receive the money in Jan. 2013 to keep this income out of 2012. do I need to have anything in the contract with CGB for IRS purposes?"

Farmers are one of the few businesses that are allowed to sell their inventory on the installment method and report their income in the year that they receive the cash (assuming cash method farmer), rather than in the year of sale.

In this case, our farmer needs to make sure that the contract with the local elevator has the following terms:

  • Specifying what is being sold, i.e. 5,000 bushels of soybeans,
  • The price that is being paid
  • The date when the proceeds will be paid
  • Terms that the soybeans have been delivered to the warehouse and this is an actual sale of the product, not a deferred delivery

 

Almost all warehouses use these contracts and the farmer should be able to take advantage of delaying the reporting of the sale until 2013.

Remember, that in may cases you may want to accelerate this income into 2012 even though the cash is received in 2013. 

The Backdoor Roth IRA

Apr 07, 2012

With the expected increase in income tax rates next year due to the Medicare Surtax and the possible sunsetting of the Bush tax cuts, now may be a great time to set up a Roth IRA.  Unlike a regular IRA, a ROTH is completely tax-free when funds are withdrawn (assuming you meet certain requirements on how long the account is open, etc.).  However, when you contribute to a ROTH, you do not get a current deduction.

Farmers age 50 and over can put $6,000 into a ROTH IRA this year, but if your total gross income exceeds $183,000 for a married couple, then you cannot contribute to a ROTH.

There is a "backdoor" way to contribute to the ROTH and assuming you have no regular IRA accounts, it should not cost you much tax.

First, you contribute the maximum amount to a regular non-deductible IRA.  Second, you then convert this regular IRA to a ROTH IRA after waiting a couple of weeks or so.  The only tax owed is on the interest earnings that have accumulated in the IRA account.

If you have large balances in a regular IRA account, this conversion will most likely largely taxable since the non-deductible IRA balance is compared to all of the regular IRA balances and only the non-deductible fraction is used on the conversion.

If you have no regular IRA accounts, your income is over $200k, and you want to make a ROTH IRA contribution, this is the way to go.

Elimination of Estate Tax Bill is Proposed in the Senate

Apr 02, 2012

Senator John Thune, R.-S.D. has introduced the Death Tax Repeal Permanency Act S. 2242, which would permanently abolish the federal estate tax.  The Senate bill is identical to H.R. 1259 introduced by House Representative Kevin Brady, R-Texas.  The tax is currently set at 35% on estates over $5 million.  However, beginning January 1, 2013, the rate will increase to 55% on estates over $1 million.

Many farm organizations including the National Cattlemen's Beef Association calls the estate tax an unnecessary tax on small businesses and farmers.  Many of these farms are asset rich, however, cash poor in relation to the asset values.  The imposition of an estate tax, in many cases, requires the farm to be sold and eliminate one more farm operation.

According to a study by Douglas Holtz-Eakin, the former director of the non-partisan Congressional Budget Office, the elimination of the death tax could create 1.5 million new jobs and decrease the unemployment rate by nearly 1%.

Remember, this is an election year and both of these bills were introduced by Republicans and it will be extremely difficult to pass any elimination of the death tax this year until after the election and that only assumes a major mandate from the voters.

Also, most states will still have their own estate tax laws and these taxes can be in excess of 10% of the net estate.

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