Oct 1, 2014
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August 2014 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.

Enrollment for Dairy Margin Management Program Begins September 2

Aug 28, 2014

The USDA announced today that the new Dairy Margin Management Program (MPP) will be open for enrollment starting next Tuesday, September 2, 2014. Enrollment will end November 28, 2014 and dairy farmers will be able to retroactively enroll back to September 1 for 2014 and enroll for all of 2015. The elections are separate for 2014 and 2015, i.e. you can elect different coverage levels for each year.

The USDA is also providing a management tool for dairy farmers to help in making this election. This decision tool allows the dairy farmer to play various what-ifs to determine the estimated premium costs based upon the coverage elected and estimated payments assuming various future milk and feed costs. The online section also provides for a Livestock Gross Margin (LGM) for Dairy analysis tool.

Remember that dairy farmers can either elect MPP or LGM, but not both. The LGM is an insurance program, while the MPP is a separate commodity program. If a dairy producer has signed up for LGM that will run past the September 1, 2014 MPP beginning date, there is a transition period available for the producer.

If farmers enroll in MPP, they are locked into using it through 2018. However, the only cost to the dairy farmer is an $100 per year administrative fee if they elect the $4 coverage. Coverage in excess of $4 (up to $8) will result in additional premiums owed based upon the amount of coverage elected. Premiums on up to 4 million pounds of coverage will result in much lower premiums.

The proposed regulations will be published on August 29, 2014 and the USDA is offering a 60 day window for dairy producers to comment and provide feedback to the USDA on how well the program is being administered including whether the regulations adequately address management changes, such as adding family members or inter-generational transfers.

We will keep you posted.

IRS Releases 2012 Income Data

Aug 28, 2014

The IRS recently posted to their website the income statistics for 2012. These statistics break down income into their major components such as wages, interest, business income, etc. Farmers who file Schedule F are also listed. Farmers who file as a partnership or S corporation along with related wages would be lumped in with those other categories.

As usual, Schedule F farmers again showed a net loss for the year. There were 1,835 million Schedule F returns filed showing a net loss of about $5.5 billion. This may seem like a fairly large loss, however, when you divide it among all of the schedule F returns filed, it results in about a $3 thousand loss per farmer. Based on our history of dealing with most farmers, that sounds about right. Farmers like to get their farm income to about break even by taking advantage of Section 179, deferring grain sales and using prepaid farm expenses.

In comparison, the average Schedule C business owner reported net income of about $13,600 for 2012.

547 thousand individuals also reported crop share farm rental income on form 4835 resulting in about $5.8 billion of net rental income. Farmers reporting net cash rental income would be lumped in with other rental income so we cannot break those amounts out.

Total income from all sources was $9.234 trillion with adjustments of about $134 billion and itemized deductions of $1.238 billion (plus standard deductions of about $800 billion) resulted in net taxable income of about $6.4 trillion.

This may be a key reason why the IRS does not spend a lot of time auditing farmer's tax returns. The number of returns filed represent less than 1% of all returns filed and when the IRS looks at the statistics, there is not much there for them to get excited about.

How $563 Cost a Taxpayer $6,320

Aug 26, 2014

In an US Tax Court case released today, a taxpayer (who was not a farmer thankfully) had a very small issue with the IRS. The couple earned well in excess of $200,000 during 2009 and deducted $11,000 for an IRA for him and his spouse. Since the spouse was covered by a pension plan, this IRA deduction was disallowed after the IRS pulled the return for audit. Additionally, the taxpayer had exchanged 50,000 "thank you" points from Citibank for an airplane ticket worth $668.

The IRS increased the taxpayers' tax liability by $563 due to these adjustments. The taxpayers thought this was a great injustice (and against the constitution to boot) and decided to take this matter to the US Tax Court and represented themselves (I think you know where this is going).

When the IRS did their original calculations, they reduced the AMT liability from $2,775 to zero. This resulted in tax only going up by $563 instead of about an $4,000 increase that would normally be owed on an additional $11,668 of income.

If the taxpayers had simply paid the $563 of additional tax owed on the original assessment, that is all they would have been out-of-pocket. However, when they went to court, the IRS determined that they had made a math error in their original calculation of AMT and reassessed the tax owed from $563 to $6,883 or an increase of $6,320. Since this calculation was now correct, the Tax Court honored the IRS calculation and suddenly the taxpayers suddenly owed another $6,320 just for going to court.

The amounts and facts of this case are extremely minor, however, the Tax Court issued a regular opinion on this case to prove a point. My suggestion is whenever you get a letter like this make sure to share it with your tax advisor. I see way too many of these letters where the client pays the tax even though the IRS is wrong. In this case, the IRS was wrong, but it cost the taxpayer $6,320 to prove the IRS "correct". 

Trends in Crop Revenues

Aug 26, 2014

The USDA released updated estimates of net farm income for 2014 today and I thought I would reproduce the chart of estimated crop revenues from 2010 to 2014 below:

CaptureAs you can see, 2012 was the high-water mark for almost all crops over the last five years (2014 is an estimate). Only fruits and vegetables had greater revenues in years other than 2012. Although 2014 is estimated to well under 2011-13 numbers for feed crops (primarily corn), the 2014 levels are still higher than 2010 by about 10%.

Soybean sales are slightly lower than 2012-13, but still much higher than 2010 or 11.

californiaIowaI thought I would then show the crop values for California versus Iowa for 2010-2012 (only years of data provided). As you can see, California has the most amount of crop sales, but the substantial majority of these sales are in fruits and vegetables ($24 billion out of total $32 billion crop sales).

For Iowa, total crop sales are about $16 billion and almost all of these sales are feed crops and soybeans.

The USDA issues many reports that have great value to farmer and those who follow the Ag industry. They sometimes get a knock on some of their reports, but overall, they provide a lot of great value (much better than China reports).

Watch Out for Timing of Hedging Loss

Aug 26, 2014

I hesitate to write this post since I know that most of our farmers who hedge (including their tax advisors) may be technically reporting their hedging loss in the wrong year. In most cases this will not be true, but there are cases where it may happen and if an IRS auditor who knows hedge accounting picks your tax return to do an audit, you may end up with the wrong result.

Under tax accounting for hedging, the hedge gain or loss is not recognized until the futures or options transaction is closed AND the underlying product being hedged is sold or purchased (in the case of feed). Most farmers and their tax advisors simply record the gain or loss when the hedge transaction is closed out. If both the hedge transaction and underlying product sale occurs in the same year, no-harm, no-foul. However, if a hedge loss is incurred right at year-end and the underlying product is sold after year-end, most farmers will inaccurately report taxable income for each year.

Example: Farmer Benson grows corn. She hedges 100,000 bushels of corn in storage on October 1, 2014. She closes out the hedge on December 29, 2014 for a $100,000 loss. On January 15, 2015, she sells her corn for $450,000. Most farmers (including their tax advisors) would report the $100,000 hedge loss in 2014, when technically the loss should be reported in 2015 when the corn is sold.

If the hedge transaction had resulted in a $100,000 gain, then technically the gain would be deferred from 2014 until 2015. In this case, the farmer would have the benefit of deferral until 2015. Remember that the tax laws allow for hedge gains or losses to be deferred until the "hedge" is closed out. The hedge is related to the product being sold not the futures contract. Therefore, all closed hedge gains and losses are technically accumulated and reported for tax purposes when the item being hedged is finally sold or purchased.

Over time, these transactions all wash out and the net gain or loss will be exactly the same, however, the timing of these transactions can cost or save farmers income taxes on an annual basis. The income tax treatment of hedges has many pitfalls and this is just one pitfall that may arise.

(Note: Some commentators may disagree with this analysis, but I know personally this is how IRS agents with hedging knowledge will generally treat these transactions).

How to Sell Your Land and Pay No Tax - MAYBE

Aug 25, 2014

I had a reader ask me questions regarding the taxation of an installment sale of farmland. I helped him out and thought it would be a good idea to do another post on how you may be able to sell farm land (or other capital gain assets) in certain situations and pay no federal income tax on the gain.

When you sell an asset that qualifies for long-term capital gains treatment, any gain that is taxed in the 15% or less federal income tax bracket is taxed at a rate of zero. For married couples, taxable income under $73,800 for 2014 is in the 15% or lower tax bracket. After adding back your standard deduction and personal exemptions, a long-term capital gain of almost $100,000 could be generated on an annual basis and not be subject to any federal income tax assuming the taxpayers have no other taxable income.

Let's work through an example. Assume Farmer and Mrs. Gentry sell their farm land for $1 million. They paid $300,000 for the land several years ago. They sell the land for no down payment, principal payments of $100,000 a year plus interest at 3%. During their first year, they will collect interest income of $30,000 which will be offset with a standard deduction and personal exemptions of about $20,000 leaving $10,000 of taxable income before the capital gain. 70% of the $100,000 principal payment is long-term capital gains which brings their total taxable income to $$80,000. $63,800 of this capital gain is tax-free, the remaining $6,200 is taxed at 15% for net income tax of about $2,500.

Now, in year 2, their interest income drops to $27,000 and exemptions and standard deduction offset all but $5,000 of this amount (difference due to inflation adjustments). The $70,000 of capital gain added to other taxable income of $5,000 now results in $75,000 of taxable income and all of this income is in the 15% tax bracket due to inflation adjustments. Therefore, their net tax is only on the interest income which results in about $500 of total tax liability.

In years 3-10, they would no longer owe any federal income tax on either the capital gain or interest income since the standard deduction and exemptions would offset the interest income and all of the capital gain would be in the 15% or lower tax bracket.

Now, this is an extreme example since most taxpayers would have other taxable income such as social security, but it does show you how you can sell farm land and pay no capital gains taxes assuming the right conditions. I have seen many taxpayers with taxable income of about $70,000 and owe no federal income tax and now you know why.

FBS Conference - Hedging Accounting and Taxation

Aug 24, 2014

I will be presenting at the FBS Systems Annual Conference in Moline, Illinois on Tuesday August 26, 2014. This is a full day workshop in conjunction with Norm Brown (owner of FBS Systems) on hedging accounting and taxation based upon the standards issued by the Farm Financial Standards Council.

This workshop will review the standards, provide guidance on how the tax laws treat hedge gains and losses and then provide practical examples of using FBS software to incorporate the financial standards reporting. I look forward to the conference and I hope the attendees do not get "hedging" fatigue.

On Monday, I will be in Wilmar, Minnesota giving a presentation on the new Farm Bill. I think this is at least my 10 presentation on the farm bill this year and my slides are now up to 60. There is more information being released by the FSA each week it seems and I need to update the slides accordingly.

One-Third of Americans Lack Retirement Savings

Aug 22, 2014

I came across this article recently and it highlighted a retirement savings issue many people face, especially those that are self-employed.

“Many U.S. households are not adequately prepared for retirement, according to a new report from the Federal Reserve that found 31 percent of non-retired respondents indicating they have no retirement savings or pension, including 19 percent of those ages 55 to 64.”

Further, the most commonly reported form of retirement savings is a defined contribution plan, such as a 401(k) or 403(b) plan, which 44 percent of people possess. However, these plans typically are provided by an employer, which is obviously not available if you are self-employed. Here is a quick refresher on some of the more common types of retirements plans for self-employed individuals:

  • Solo 401(k)

o Maximum amount you can put in: 20 percent of net self-employment income plus $17,500, up to $52,000 in 2014; if you’re 50 or older, you can put in up to $5,500 more. This is best for those with no employees and large amounts of self-employed income as the contribution maximums are so high. There is also a Roth option for solo 401(k) plans; If you opt for the Roth version, you put in after-tax dollars and your money grows tax-free - which means it is not taxed upon withdrawal, but you don’t get the upfront tax deduction.

  • SEP IRA (Simplified Employee Pension)

o Maximum amount you can put in: 25 % of self-employment compensation, up to $52,000 for 2014. Again, based on the high levels of allowable contributions this is for those with high levels of self employment income. These tend to be more flexible and simplified plans, but if you have employees you will have to also contribute money for them, however, contributions are discretionary.

  • SIMPLE IRA (Savings Incentive Match Plan for Employees of Small Employers)

o Maximum amount you can put in: $12,000; up to $14,500 if you’re 50 or older. This is best for self-employed people with under 100 employees, although you can also have a SIMPLE IRA if you don’t have employees. If you do have employees, you generally must match up to 3% of their compensation.

These are some of the more common plans available and used, but there are other options available as well. I’d suggest discussing with your CPA and/or investment advisor to decide on the best plan for your situation.

More than 100 but Less than 500

Aug 20, 2014

When a farmer or taxpayer owns an S corporation that incurs a loss, the farmer must show that they have materially participated in the companies operations in order to deduct the loss. The slam dunk test is that the owner works for more than 500 hours. If the owner works for less than 100 hours, then it is very difficult to meet any material participation test. If the owner works more than 100 hours but less than 500 hours, then they are in the dreaded "GRAY" zone.

In an US Tax Court case decided today (Charles and Betty Wade), the Tax Court agreed with the taxpayer that he materially participated in the company's operations even though he did not work 500 hours. The company had been very successful in the plastics industry and dad semi-retired to Florida and turned day-to-day operations over to his son. Although semi-retired, he continued to spend at least 100 hours on company business.

With the great recession of 2007-2008, the company started to lose money and he became more and more involved and actually spent substantial time on R & D and developed a new product for the company in 2008 plus made several trips to the company to reassure the workers they still had a job.

During 2008, the company lost over $3 million and the taxpayer carried the loss back and got a refund of about a $1 million. The IRS audited the amended returns and denied the loss claiming the taxpayer was not materially active in the company. The taxpayers claimed that they met one of two tests (1) he worked at least 500 hours in the business; or (2) he participated in the companies’ activities on a regular, continuous, and substantial basis during 2008. As you can see, the 500 hour test is very objective while the second test is extremely subjective. The Tax Court decided to rule on the second test and agreed with the taxpayers. Based on his 237 phone calls with the plant during the year, his development of a new product, etc. the Court agreed he materially participated in the business.

Most cases involving passive/material participation involve the more objective tests. It is nice to see that a subjective test went in the taxpayer's favor. If you are involved with a farm S corporation, partnership or LLC and work in the operation more than 100 hours or less than 500 hours, make sure to document how you meet this test. If you do, you will be able to keep you tax savings.

Mid West Crop Tour 2014

Aug 14, 2014

Pro Farmer conducts a Mid West Crop Tour each year. There are two legs to the tour. The Eastern Leg starts in Columbus, Ohio this Sunday night and on Monday, about 11 routes are conducted from Columbus to Fishers, Indiana. These routes will go over the exact same roads as in previous years, however, the fields scouted will be at random. We usually stop about every 15-20 miles to get a sample and try to get at least one sample in every county. Tuesday, we go from Fishers to Bloomington, Indiana. On Wednesday, we head over to Iowa City, Iowa and then finally head up to Rochester, Minnesota where we finish the tour.

The Western Leg starts in Sioux Falls, South Dakota, goes the first day to Grand Island, Nebraska. The second day scouts the rest of Eastern Nebraska and ends up in Nebraska City, Nebraska. On the third, day we head up to Spencer, Iowa catching all of Western Iowa and on the last day catch Southern Minnesota and meet up with the Eastern Leg at Rochester.

Each night, there is presentation to local farmers on the results of the tour and Pro Farmer will report their estimated yields for each section they cover during that day, etc.

I have participated on the Crop Tour for the last four years and this year will be my fifth tour. This really comprises my summer vacation (I know some of you think that is a sick way of doing a summer vacation, but there are enough of you out there to understand my addiction).

The participation by the scouts on Twitter has gotten greater each year and due to the large anticipated crop this year, I am expecting the Twitter feeds to be at an all time high. If you want to follow my Tweets, my Twitter handle is @FarmCPA and the Hash Tag should be #pftour14. If that is not correct, I will post an update.

I should be posting a recap of each day as it occurs. Sometimes, the evening activities get a little hectic and I might not post until the following morning, but I will keep you updated next week.

Sale of Gifted Grain Can Be Tax Free

Aug 13, 2014

We had a reader ask the following question:

"We want to gift our daughter (she is not a dependent) some grain that is from the 2012 growing season. We plan to have the elevator issue her a contract to show ownership and then she can call them and sell the grain when she is ready. She will sell the grain this tax year. My question is: Because we have already held the grain for over a year, does she qualify to take the income as a capital gain or will she have to take it as ordinary income? "

When a farmer gifts grain to a child or grandchild, the basis in the grain carryovers to the donee. If the grain was harvested in the prior year, then the cost basis is zero. If the grain is donated in the year of harvest, then the farmer must allocate a portion of their expenses to the donated grain. Therefore, most farmers try to make sure to donate previous years grain.

When the donee sells this grain, it will be reported as a capital gain. If time after harvest of the grain and the time of sale is less than a year, it is short-term. If this time is greater than a year, then it is long-term. It does not matter how long the donee/child owns the grain. What is important is the time from harvest until sale.

If the child is a dependent of her/his parents, the kiddie tax rules apply which means we have to pretend that the child's income is added to the parent's income to arrive at the correct tax liability.

In the case of our reader's question, we know that the grain was harvested in 2012. Therefore, the holding period is at least a year plus, so we know this is long-term capital gain when the daughter sells the grain. The reader also indicated that the daughter is not a dependent, therefore, if the gain from the sale of the grain falls with the 15% tax bracket (up to about $36,000 of taxable income for a single taxpayer), then the capital gain will be taxed at a zero rate. This will most likely result in the daughter paying no federal income tax on the gain (unless she has a fair amount of other income). Most likely the worst case is the gain will be taxed at 15%. Additional state income taxes would apply.

This is one more reason why it is a great idea to gift grain to your children. It reduces your income and self-employment taxes and in many cases if the grain is held long enough, the gain will be tax-free to the child and taxed at favorable capital gains rates (even if the kiddie tax applies).

Three Years is the Normal Statute of Limitations, But Not Always

Aug 12, 2014

I get a phone call or email many times during the year asking how long a taxpayer needs to keep documents. The answer is "it depends" as is usually the answer for all tax questions. The IRS generally has three years from the due date of your tax return to assess additional tax. Therefore, if you filed your 2013 tax return without an extension, the IRS has until April 15, 2017. With an extension, the date would be October 15, 2017.

Now, in the case of fraud (assuming the IRS can prove fraud), the IRS has six years to assess additional tax. Now, if you invest in a partnership that is subject to certain rules that were put into place many years ago, this 3 or 6 year period can be dramatically longer as was shown in an US Tax Court case released today.

In the McElroy case, the taxpayers had invested $37,500 each year during 1996, 1997 and 1998 in partnerships. The partnerships took the money from the partners, acquired cemetery sites, held them for a year and then donated them to qualified cemeteries to pass through a charitable donation. For example, in 1999, the partnership acquired sites with a value of about $95,000. Without waiting a year, the partnership then donated the sites and then passed-through to the partners a charitable donation of $1,864,850 or about 20:1. As you can probably guess this was sham and the operator of the partnerships suddenly found himself in hot water and finally ended up serving some type in the Federal Pen.

The taxpayer had invested $37,500 each year expecting net tax benefits of at least $50,000 a year. He filed his returns and the normal 3 year statute passed fairly quickly. The partnerships were subject to rules passed back in 1982 that required a tax matters person (TMP) to be appointed. That person was Mr. Johnson who agreed with the IRS to extend the statute of limitations through 2008 as the TMP for the partnership. After being sent to jail, the TMP was transferred to Mr. McElroy who continued as the TMP until he declared bankruptcy in 2010.

The partnership audits were finally settled in 2013 (at least 15 years after the first individual return was filed) and the IRS then assessed additional taxes on Mr. McElroy. He claimed that the statute of limitations had expired clear back in 2002. However, one of the nasty features about these types of partnerships is that any item that is ultimately resolved at the partnership level is then passed through to the partner (assuming the IRS assesses the liability within a year of the final assessment). That happened in this case and the Tax Court agreed with the IRS that Mr. McElroy owed the additional tax assessment even though it happened more than 15 years after the deduction.

When investing in any partnership where you are a limited partner or member, the fine print will usually spell out the possibility of this happening, although most people never read or understand those sections. Therefore, this can happen to you. If you invest in a partnership that promises substantial tax benefits; don't breathe a sigh of relief when the normal three-year statute of limitations passes since you may be required to pay your tax savings plus interest plus penalties more than 15 years down the road.

How Does Section 179 Work?

Aug 11, 2014

A reader sent us the following question:

"I am wondering how many dollars worth of used machinery I can purchase and use for 2014 income deduction. I do not understand Section 179."

I get this question fairly often especially regarding how much Section 179 farmers can use for 2014. The current law is that a farmer can deduct up to $25,000 of equipment purchases incurred in 2014, however, if the farmer purchases more than $225,000, then they will not be able to take any Section 179 at all (it is phased-out dollar-for-dollar above $200,000).

As mentioned in previous posts, we believe that Congress as part of their lame-duck session after the Mid-Term elections and before December 31, 2014 will enact legislation to increase Section 179. Now whether this is back to the old $500,000 level (the amounts for 2010-2013) or a number lower (or perhaps higher), nobody knows right now. Two years ago, Congress did increase it back to $500,000 in December, and both the Senate and the House have proposed making it $500,000 or even a $1 million, but none of those proposals have made it to law and Congress is officially on vacation until September and even when they get back, no tax laws will be passed before the election.

Now for how Section 179 works:

  • This is a special upfront deduction that is allowed on the purchase of any farm asset with a life of 15 years or less (about everything other than farm buildings);
  • It is based on your year beginning in (so November 30, 2014 year-end corporations still have a $500,000 deduction limit since their year began in 2013);
  • After the deduction is taken, if the equipment is new, then 50% bonus depreciation will be taken (assuming that comes back into play);
  • After any bonus depreciation is taken, then the remaining amount is subject to normal depreciation rules.

Let's go through an example:

Farmer Anderson purchases a new tractor for $350,000 in 2014. Under current law, he could no take Section 179 on the tractor or any bonus depreciation. If the 2014 law was the same as 2013, he could take Section 179 expense on the whole tractor or any portion thereof. Let's assume he takes Section 179 of $100,000. This reduces his cost basis to $250,000. 50% bonus depreciation would be $125,000 bringing this cost basis for depreciation down to $125,000. This is depreciated over 7 years with an assumption of a half-year depreciation in year one on a 150% declining balance method (faster than straight-line). This results in a depreciation deduction of about $13,400. Therefore, under the old 2013 law, Farmer Anderson could deduction a total of $238,400 (he could also deduct the full amount). Under current law, he can only take depreciation of about $37,500.

If the tractor had been used, then no bonus depreciation would be allowed.

Split ARC and PLC to Maximize Payments

Aug 10, 2014

Under the 2014 Farm Bill, a farm will need to decide between ARC and PLC on a covered crop-by-crop basis. However, many farmers have multiple farms registered with the FSA office(s). These farms may be composed of operations in multiple counties or states; multiple entity ownership; or for a number of other reasons.

Since the election is by the farm and not the individual operator, this gives the farmer much greater flexibility in maximizing their options. There is an overall $125,000 limit per individual (whether in multiple entities or not) for combined ARC and PLC payments. Therefore, if a farmer has multiple farms, it will make sense to consider signing up for both ARC and PLC. We are fairly certain that ARC will make payments for 2014 and 2015 crop years if the price stays below $4 for corn. However, if the price does not drop below $3.70, there will be no PLC payment.

In 2016-2018, if prices stay low (under $3.70), then PLC will start to make a payment and ARC perhaps will not make a payment. If the farmer has multiple "farms", they should consider having enough farms elect ARC to maximize their payment for 2014 - 2016 and elect PLC on the remaining farms just in case prices remain low in 2016-2018. Here is an example:

Farmer Stevens and her husband farm 6,000 acres in Iowa that has been primarily corn-on-corn for many years. Due to farming in multiple counties and with multiple farm entities, the Stevens have 10 farms registered with the FSA and on average each farm has about 600 acres in it. Assuming prices remain below $4 for 2014-2018 and the Stevens elected ARC on all 10 farms, they would maximize their 2014 - 2016 payments at $250,000 (they would need about a $49 per acre payment to maximize and 2016 might not quite get to the maximum level).

However, if prices dropped under $3.70 in 2016-2018, they would most likely receive an ARC payment for 2016, but little or nothing for 2017-2018. Now, if they elect PLC on all of their acres, they would only receive a payment in those years where prices drop below $3.70. Now, if they elect ARC-CO on half of their farms and PLC on the other half, they will still get close to a maximum payment for 2014 and 2015 assuming prices remain around $4 for each year (3,000 base acres times 85% times $90 per acre equals $229,500) and if prices continue to soften to below $3.70 for 2016-2018, they will get payments for the years where ARC-CO does not make a payment. Let's assume their payment yield is 185 bpa and the price for 2017 and 2018 averages $3.25. At that price, ARC-CO may pay a little bit (could be as high as $40 per acre depending on pricing for 2014-2016), however, PLC will pay 45 cents a bushel on 3,000 base acres times 185 bpa times 85% or about $212,000. This amount plus the related ARC-CO payment should hit their maximum payment limitation of $250,000.

As you can see, if the farmer elects ARC on all of their acres, there is a very good chance that little or no payments will be made in 2017 and 2018. However, by electing ARC-CO on those farms to maximize their payments for 2014-2016 and electing PLC on the remaining farms, a farmer should be able to hit their maximum payment level for all five years of the farm bill assuming prices stay low. If prices exceed $4 for all five years, then only ARC-CO will make a payment, but farmers will most likely be better off than relying on a program payment.

Cotton Transition Assistance Program Enrollment Begins Next Week

Aug 08, 2014

The USDA announced today that the cotton transition assistance program (CTAP) enrollment will begin next week. The 2014 Farm Bill provided cotton growers with a new Stacked Income Protection Plan (STAX) beginning with the 2015 crop year. Since this program is not in place for the 2014 crop year, there will be a cotton transition payment for the 2014 crop year.

This payment amount has been calculated at 9 cents per pound and will be paid on 60% of the cotton base acres. If the STAX program is not in place for any county in 2015, the transition assistance payment will be available on 36.5% of the cotton base acres.

It appears that any applications approved before October 1, 2014 will be reduced by an automatic 7.2% and if approved after that date, the reduction will be 7.3%. These reductions relate to the passage of the Budget Control Act of 2011.

Based on the verbiage contained in the release from USDA, I would assume that USDA will also reduce any ARC/PLC payments by these same percentages. We will keep you posted on that as we get additional confirmation.

Another Conservation Easement Tax Court Case - Mostly in Taxpayer's Favor

Aug 06, 2014

There are multiple Tax Court rulings on conservation easements each year. In the Schmidt v. Commissioner case issued today, the Tax Court ruled mostly in favor of the taxpayer, but not totally.

The Schmidt's lived in Colorado for many years and purchased about 40 acres of land in northern El Paso County. They attempted to get this acreage along with another 60 acres platted as a 2.5 acre lot sub-division. However, before they got the final plat, they decided to grant a conservation easement on the property and turn it into one 40 acre home lot.

When valuing a conservation easement, you must determine the value of the property before the easement and the value after the easement. The difference in value becomes the charitable deduction amount. In the case of the Schmidt's, their apprisal determined the before easement value was $1.6 million and the after easement value was $400,000 for a net contribution deduction of $1.2 million.

The IRS audited the return and assessed additional income tax of about $500,000 for tax years 2003-2006 and additional penalties of about $100,000. Since the charitable deduction was so large, the Schmidt's could only deduct it over a four-year period. In the IRS original assessment, they disallowed the entire charitable contribution claiming it did not meet the requirements under Section 170. However, the parties had agreed that it met the requirements and the only dispute was the value of the contribution easement.

The IRS appraiser valued the property at $750,000 for the before easement value and $270,000 for the after easement value for a net deduction of $480,000. As usual the Tax Court disagreed with both values and came up with their own valuations; however, the valuations were much closer to the taxpayer's values than the IRS. The Court found that the before easement value to be $1,422,445 which was $180,000 lower than the taxpayer's value but almost $700,000 higher than the IRS.

On the after easement value, the court used the IRS value of $270,000 which actually helped the taxpayer since if they had used the taxpayer's value of $400,000 the easement deduction would have been $130,000 lower. The ultimate final charitable deduction was determined to be $1,152,445, which ended up only being $47,555 lower than the taxpayer's original deduction. This resulted in the taxpayer not owing any penalties at all and instead of owing $600,000 of taxes and penalties, the final number is probably about $20,000 plus interest.

One final interesting nugget from the decision was reference to the "Preble's meadow jumping mouse" which has been listed as a threatened species. This mouse is about 9" in length with large hind feet and a tail that is about 6 inches long. The issuance of the final plat had been delayed by the presence of this mammal.

Many of these conservation easement cases go against the taxpayer. It is always nice to review one where the taxpayer wins (or at least the win was 96% of the original deduction).

IRS Provides Two Optional Methods for SE Health Insurance Deduction

Aug 05, 2014

Self-employed farmers are allowed to deduct their health insurance premiums in arriving at their adjusted gross income (AGI). However, beginning in 2014, many of these same farmers will also be eligible for a premium tax credit based upon their income. The premium tax credit is on a sliding scale and phases out at a maximum of 400% of the federal poverty level. For larger families, the premium tax credit may apply with income approaching $100,000. Since most farmers have that genetic chip that does not allow them to pay much income tax, many farmers will qualify for the premium tax credit, however, this credit is based upon AGI; which is based upon the amount of allowed SE health insurance deduction; which is also affected by the allowed premium tax credit.

As you can see, this results in a circular function. The IRS realizes this and has just released Revenue Procedure 2014-41 to allow for two option methods in calculating both items. The methods are described in the revenue procedure and to outline each method is beyond the scope of this post. However, it is worth noting that the examples used in the post involves a family of 4 who obtain family coverage costing $14,000. After applying the methods contained in the procedure, the actual premium tax credit was approximately $7,000 with an allowed deduction of about $6,000.

Under the 2013 tax laws, the farmer would pay $14,000 and get a $14,000 deduction. Under the 2014 tax laws, the farmer only gets a deduction for $6,000, however, their out-of-pocket cash costs for health insurance is now approximately $7,000 instead of $14,000. Since they are most likely in the 15% tax bracket, the tax credit saves them about $6,000 overall.

On a Personal Note

Aug 04, 2014

As most know, I attended the Farm Financial Standards Council annual meeting in Billings last week. This ended at about 11 am on Thursday and that afternoon, I got a tour of the Padlock Ranch which is about 400,000 acres of ranch land located in Northern Wyoming and Southern Montana. A lot of the acres are located on the Crow Indian Reservation which is where Custer's Last Stand occurred. The headquarters for the ranch is located near Dayton, Wyoming and the nearest city is Sheridan, Wyoming.

The headquarters is located right on the Tongue River which appears to have gotten its name from the local Indians who said the source of the river in the Bighorn Mountains looked like a Bison's tongue. The picture above shows a photo of the river. We took a tour of the ranch with Steven Severe, who is the Ranch's CFO and now treasurer of the Farm Financial Standards Council. He gave us about a 4 hour driving tour around part of the ranch. I would guess we only saw about 20-25% of the ranch at the most during the drive.

On Friday, I flew into Spokane from Billings and then headed over to the big down of Dixie, Washington (population less than 200) to operate the combine for my cousins for a couple of days. When you operate a hillside combine and are dumping grain on the go while on a hillside, you always lock the leveling system into manual. This prevents the auger from dropping down and hitting the grain cart as you dump the grain. When you are done dumping, you then put it back into auto and go on your merry way.

Well, of course, I was about ready to dump a load of grain and put the combine into manual mode. I then decided I could cut one more small patch on the steepest part of the hillside (probably about 35% plus slope). I, of course, forgot to put it back into auto mode and while going over to cut the last little patch, I suddenly felt the combine start to tilt downhill and slide about three feet down the hill before I finally realized I still had it in manual mode. As you can guess, this puckered me up a little bit, but I did not forget to put into auto after that. That occurred Saturday morning.

At about noon, we moved over to another field that had much better yields (I am guessing around 130 or so). There had been warnings about possible thunder storms. At about 5:30 pm, we had a first drop of rain and then suddenly lightning hit near us since we heard the thunder almost as soon as we saw the lightning. Well, you can guess, we high tailed into the shop area and my cousin's son spotted a lightning strike about 100 feet from our combines. We then saw about 10 fire engines go flying up the road to put out the fires caused by the lightning.

It seems that every time I cut wheat for my cousins, something happens. But again, this is my idea of a vacation. The photo above shows me cutting wheat down a 30% plus slope. The photos are always hard to tell how steep the ground is, but when you feel the rear wheels come up off the ground a little bit (since you can no longer steer the combine), it is steep.

FSA Extends 2012/2013 Emergency Assistance to August 15, 2014

Aug 04, 2014

The FSA announced today that they are extending the deadline for Emergency Assistance for Livestock, Honeybees and Farm-Raised Fish Program (ELAP) deadline for 2012 and 2013 losses from August 1, 2014 to August 15, 2014. This deadline applies to assistance for damages incurred between October 1, 2011 and September 30, 2013 (the governments fiscal years).

ELAP was authorized by the 2014 Farm Bill and will also be available through 2018.

If you incurred losses related to livestock, honeybees or farm-raised fish during these dates, make sure to get your application into the local FSA office by August 15,2014.

Financial Fraud Can Happen to You

Aug 04, 2014

A recent article in the Journal of Accountancy discusses the importance or fraud prevention and detection that is important for businesses of all sizes. In the article, the individual was able to misappropriate $8 million all because he had the ability to request AND approve checks. Given the nature of many farmer’s operations, they may have a bookkeeper or a very small team helping with the accounting function where one person may have access to writing checks, approval and even recording transactions and this creates an opportunity for fraud to occur.

The most important control a smaller organization can have in place in management oversight of the day-to-day operations. For a farmer, this may include signing all checks, reviewing bank statements and cancelled checks, reviewing and approving invoices, etc. Reviewing periodic financial statement information is a great high level control that can highlight a problem areas. Even creating a budget and comparing actual results to the budgeted results is a great control. These may seem like time-consuming activities, but they are important controls in place that can help combat fraud and most likely will help operations as well.

As the organization grows and the control tasks need to be spread over other people, hiring competent and ethical employees and segregating duties between different people are two of the most important controls in preventing fraudulent activities.

Fraud is unfortunately something that you can never 100% protect you or your business from, but you can put procedures in place that will help to detect and hopefully deter it from happening. I would recommend discussing with a CPA if you have a question or concerns around this area in your business. Most importantly, never ignore it or think it can never happen to you.

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