Sep 19, 2014
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September 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.

Day 68 and Counting

Sep 17, 2014

I am a member of the Emerald Club through National Car Rental. It appears that so far this year I have been in a rental car with that company for 68 days. As a direct result of that (and other related days away from home) my wife has talked me into taking her on a cruise. Therefore, we fly to Miami tomorrow and spend Friday roaming around Miami and then hop on the newest Norwegian Cruise Line ship on Saturday and will be gone for 7 days. We stop in St. Marteen, St. Thomas and the Bahamas.

This has nothing to do with farming, but I wanted to let everyone know that the blog may not have any posts next week. If this cruise is like others I have taken, the access to the internet is extremely limited and I may not be able to post during that week.

On a perhaps more positive note, I do believe that my wife will like me more at the end of the week than the beginning. If I do get access, I will post on anything that seems of interest. Many of you are in harvest and are probably not spending a lot of time reading the blog, but the timing of the posts should be back to normal the week of the 29th.

September 26, 2014 Date Clarification

Sep 16, 2014

In my post yesterday, I indicated that you need to update your farm structure by next Friday September 26, 2014 to ensure that your ARC or PLC decision for this year would be the one you wanted, not necessarily the one you got stuck with. We have gotten a few questions on this and after reading my post again, I can see why it might be a bit confusing. The ARC/PLC decision will not have to be made until late in 2014 or most likely sometime in 2015.

The September 26, 2014 date refers to the timing of your updated farm information that will be used in making the ARC/PLC decision. If you do not get it right and you have just one landlord that will not sign off on the election, then you and all of the other landlords (assuming crop share) will not get a payment for 2014 and will be locked into 2015-2018.

Update Your "Farms" by Sepember 26

Sep 15, 2014

I previously wrote on this subject recently, but want to reinforce that you need to take action before September 26, 2014 in order to make sure you do not end up losing any PLC/ARC benefits for this year. The election for ARC or PLC is done on a farm-by-farm basis which includes the operator (the farmer) and all of the related landowners. The election must be unanimous and if one landlord will not agree with the farmer and all of the other landlords, the penalty is very steep.

You will lose any payment for the 2014 crop year and be locked into PLC for 2015 through 2018. Let's see how an example might work:

Farmer Jones farms 4,000 acres in Kansas. He has 17 landlords and his current farm structure is that all of these are reported under one FSN with the FSA. He originally did this to save on paperwork filing. For 2014, he and 16 of his landlords would like to elect ARC. Farmer Jones expects this election to max out his and his wife's payment limitation of $250,000 and since he crop shares with most of his landlords, the landlords are expecting a healthy payment. However, one of the landlords is extremely opposed to any governmental payment programs and will not sign off on any election. Therefore, if Farmer Jones does not reconfigure his FSNs with FSA, he will lose out on $250,000 of payments this year and his other landlords will lose their share also plus all being locked into PLC for 2015 and beyond. To solve this problem, Farmer Jones goes down to the local FSA office(s) and reconfigures each landlord into a new FSN. Farmer Jones will now have 17 (or more) FSNs which creates additional paperwork, however, it will allow him and his landlords to receive maximum payments in 2014 and elect into ARC for 2015-2018.

As you can see, if you do not act now, you can lose a lot of payments and be locked into an election for four years that is not your preference. If this situation applies to you, make sure to act now.

Dairy Margin Protection Program Update

Sep 14, 2014

I spent Friday in Denver (I found wearing shorts to Denver this time of year may not be a good idea since it was "cold") getting training on the new Dairy Margin Protection program. The various state universities involved in the online tools development have done a very good job of providing good information that should allow you to make an informative decision. Dairy producers have until November 28, 2014 to sign up for 2014 (September to December) and for 2015. Most likely there will be no payments for 2014, so most producers will make a decision to either sign up for 2015 by that date or wait until later next year to sign up for 2016. Under current estimated milk prices and feed costs for 2015, there is a very slim chance that any payment would be made in 2015. Therefore many dairy producers would probably make a decision not to sign up until next year. However, there are two reasons why it may make sense to sign up now. •The cost of signing up for the very lowest margin protection of $4 is $100. This is the annual fee that the USDA will receive for administering the program. This is a fairly cheap cost to insure against very low margins. Also, since the program provides for payments during 2 month chunks of time, there may be a case where one or two payments could be made to offset your premium costs. •By delaying you lose the ability to adjust upward your production history for 2015. Your Production History (PH) is the highest of your actual production for 2011, 2012 or 2013. If you sign up for 2015, you are allowed to update this PH by multiplying it by 1.0087. This would increase the amount of protection that would be available. The rules regarding the new Dairy Margin Protection program have still not been finalized. Most of the confusion surrounds how "affiliated" farms will handle their production history and related premium options. The goal of FSA appears to get these rules issued by the time the 2015 sign up is completed. The consensus was that premium pricing for 4 million pounds of production is by far the best deal for dairy producers. For larger farmers, the higher premiums may make the choice tougher. The consensus also was that the $6.50 premium level was most likely a better deal than even $8. Although $8 netted a dairy producer slightly more than the $6.50 level on a historical basis, the premium outlay at the $8 level was almost 4 times higher than for the $6.50 level. Under one example we reviewed the net gain for a good size producer in 2009 (when the maximum payment would be made over the last 15 years). For the $6.50 to $8.00 level, the net gain to the producer was about $700,000 (payouts in excess of premiums paid), however, the $8 level required an upfront premium of almost $400,000 whereas the $6.50 level only required a premium slightly in excess of $100,000. Since farmers have until November 28 to make a decision this year, it will pay to wait as long as possible before signing up. However, don't wait till the last day to make up your mind and spend some time now using the online tools available. It will be worth your while. The online tools provided by the FSA are located here. Additional online analysis is available here.

Have Funds to Cover Your Check

Sep 12, 2014

The US Tax Court released a case yesterday that Joe Kristan from the Tax Update Blog did a great job of recapping so I will not go into too much detail since he covers the facts.

However, the key point from this case is as follows:

  • If you issue a bonus check at year-end that the corporation does not have enough funds to cover and the IRS audits the return, the whole face value of the bonus may be disallowed and we now have a Tax Court case reaching that conclusion. In the case, the corporation had about $815,000 of taxable income before the bonus and issued a $815,000 bonus to its 100% shareholder to get income down to zero. The bank account had substantial funds in the account (almost $300,000) but the corporation did not have sufficient funds to clear the net $460,000 check to the owner/officer. Instead of disallowing the portion in excess of the funds in the account, the Tax Court denied the whole bonus.
  • The Tax Court touched briefly on whether the bonus to the owner was "reasonable" compensation, but did not fully address it since they disallowed the whole bonus based on the facts shown above. Even though this is a personal service corporation and the assumption is that these corporations can bonus out all income of the corporation; I am not sure if the court agrees with this conclusion or not, but based upon my reading between the lines of the case, I am not quite sure they do.

Many farmers write checks at year-end and may not have sufficient funds in the account to fully cover the check. This case now gives the IRS additional ammunition to go after those farm businesses and not only disallowed the amount of the deduction that is not covered by funds in the account, but if the check is large enough, may in fact, disallowed the full face value of the check. Here is an example:

Suppose a farmer issues a check to the local coop for $325,000 for prepaying farm expenses at year-end. The bank account had $320,000 in the account when the farmer wrote the check and by the time the coop received the check, the farmer had deposited another $25,000 to cover the check. The IRS audits the return and instead of disallowing $5,000 (the amount that was not covered by funds in the bank), it disallows the full $325,000 check. Based on this court case, the IRS will most likely win their argument.

Therefore, use care at year-end to make sure you have sufficient funds to cover any checks you might mail out.

Cite: Vanney Associates, Inc., T.C. Memo 2014-184.

Will Tax Inversion Debate Yield Permanent Section 179

Sep 10, 2014

Congress is currently debating some type of tax inversion bill to make it more expensive to change a company's tax domicile from the US to overseas. This post will not discuss the merits of those proposals, but just let you know there is some discussion that along with the tax inversion changes that Congress will offset these revenue increases with making certain expiring tax provisions permanent. One of those could be making Section 179 permanent at the $500,000 level or even $1 million as previously proposed.

There is some bipartisan efforts to get this done before the completely recess for the election, however, the chances of this happening is still somewhere between slim and none. If it does happen, I would still expect it to occur in the lame duck session after the election and before year-end.

Be Careful What You Wish For

Sep 05, 2014

As part of the new farm bill passed earlier this year is a provision that allows farmers to elect to adjust their APH for any years where the county yield (including contiguous counties) is less than 50% of a ten-year average. These rules were supposed to be put in place in time for the 2015 crop year. The USDA has indicated, so far, that implementation of this will most likely not happen until the 2016 crop year due to the complexity of (1) interpreting how the rules will work and (2) updating the database for all counties in the US for all crops grown and then doing the calculations.

FarmDoc Daily just issued a very informative analysis of how this new feature may impact producers and based upon my review of the article, in many cases, the impact may be negative, not positive. When this provision was being discussed by the House and Senate, there was no provision to adjust premiums based upon the new APH. Most producers and commentators assumed that a producer could throw out the bad yield, keep the new updated APH and pay a premium based on the "old" rate.

Well, the actual provision indicates that the premium must be updated to reflect actuarially reality. Thus, if the old premium per acre cost was $5 and the expectation was that about $5 would be paid out; if the elimination of the bad yields would result in an expectation that the payout would now be $15, then the premiums would need to be increased to $15 (this is before the adjustment for crop insurance subsidies by the RMA).

Therefore, most producers might how assumed that they would now get a potential $15 of expected return by paying $5. Under the new bill, it might cost $15 to get $15. I am not sure how many producers will be eager to pay additional premiums when the original goal was more coverage for about the same cost. Now, this is simplifying the process, but the results are probably very similar to this.

Also, the proposed details indicate that if producers are not in conservation compliance for 2015, then the producer would be denied premium assistance. However, USDA in an interim rule indicates that if a producer is not in compliance in 2015, they cannot re-enroll in crop insurance until the 2017 crop year. This would cause the non-compliant producer to be "naked" for one year. This results in both the loss of any premium subsidy for 2015 and no coverage for 2016.

As you can see from this post and reading the FarmDoc article, there is a lot of rules and procedures still to be hashed out and the final result may not be what producers originally anticipated. We will keep you posted.

A Deduction of Zero is Still Zero

Sep 05, 2014

We had a reader ask the following questions:

"We expense all costs to raise the cattle: vet, supplies, etc. We grow our own feed and expense those costs: seed, fertilizer, etc. We have our farm set up as a LLC. Can we deduct a loss for calf deaths?"

Ranchers who raise their own stock, such as in this situation, are entitled to deduct all of the costs related to growing the calf until it is marketed. However, if they purchase a calf (such as a cow/calf pair), they normally would keep track of the calf cost until it is sold.

Therefore, there are two possible answers to this question. If the calf was born on the ranch and raised there, the tax deduction due to a death loss is zero. Since the ranch is allowed to deduct all of the feed and other costs associated with raising the calf, the rancher has a tax basis in the calf of exactly zero. Therefore, the rancher can deduct zero which is still zero.

However, if the rancher had purchased a calf for $700 and it died later on, the rancher would be entitled to deduct $700. Most cow-calf operations, the deduction is zero. Most stocker operations, the deduction would be $700 (or whatever the purchase price of the calf).

Partner Must Have Basis to Deduct Loss

Sep 04, 2014

In an US Tax Court case that was released yesterday, partners were found not to have tax basis in promissory notes that they "contributed" to the partnership. Farmers will create partnerships to run their operation and since farm tax law allows farm businesses to usually generate a small profit or even a loss; partners must have "tax basis" in order to deduct these losses.

In the VisionMonitor case, two partners had started a company to perform services related to the energy business. The partnership burned up a lot of money in the first few years and they had a corporate partner with deep pockets that was only willing to contribute additional funds if the two partners would put "more skin in the game". They did this by contributing notes to the partnership. The partners elected to sign promissory notes for about $210,000 during 2007 and 2008. By signing these notes, the corporate partner contributed another $900,000 of cash which kept the company afloat and eventually the partnership became profitable and everyone was very happy. Except for the IRS.

They audited the return and determined that the partner's had no basis in the promissory notes that they contributed to the partnership. When a partner contributes cash, they get additional basis based upon the amount of cash they contributed. However, when they contribute property such as these notes, the basis in the partnership that they receive is equal to the basis in the property contributed. Since these notes had no basis, they get no additional basis in the partnership. This results in the loss they originally deducted being disallowed and then suspended.

All is not lost, however. The loss is carried forward and allowed to be offset income earned in later years.

The bottom line is if you show a loss from a partnership, make sure you have enough "basis" to deduct the loss.

Livestock Producers Urged to Enroll in Disaster Assistance Program by Oct. 1

Sep 03, 2014

The USDA is encouraging livestock producers who have suffered grazing losses due to drought or fire between October 1, 2011 and December 31, 2014 to register, request an appointment or begin a Livestock Forage Disaster Program (LFP) application with their county FSA office before October 1, 2014 as the Budget Control Act passed by congress in 2011 requires the USDA to implement reductions of 7.3% to the LFP in the new fiscal year, which begins October 1, 2014.

As an additional aid to qualified producers applying for LFP, the FSA has developed an online registration that enables farmers and ranchers to put their names on an electronic list before the deadline to avoid reductions in their disaster assistance. This is an alternative to visiting or contacting the county office. To place a name on the Livestock Forage Disaster Program list online,

Producers seeking LFP support who have scheduled appointments with their local FSA office before Oct. 1, even if the appointment occurs after Oct.1, will not see reductions in the amount of disaster relief they receive.

See the full release from the FSA here. Due to the sequestering measures passed last year, the USDA will automatically cut benefits paid after September 30, 2014 by 7.3%. This will apply to almost any program payments that may be due to producers. Unless changed, it is highly likely that USDA will even cut PLC and ARC payments owed after September 30, 2015 (for the 2014 crop) by at least 7.3% plus another 7.3% (plus or minus). Therefore, if your calculated payment was $75,000, you may end up with being paid only $64,500.

FSA Grants Date Extension on Filing Farm Structure Changes

Sep 02, 2014

The FSA just announced that the deadline to finalize your 2014 farm structure for all programs has been extended to September 26, 2014. Future 2014 Farm Bill Programs will look at the 2014 farm structure for eligibility and other requirements, so any changes or updates must be in place by this new deadline to be valid.

Even though PLC/ARC signup will not occur until this winter, changes to your farm's structure must be reported to the FSA by September 26, 2014, otherwise, you will be stuck with your old structure.

Since many of these changes can take several days at the local FSA office, make sure to notify your county as soon as possible.

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