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September 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.

Crop Revenue Would Need To Drop 21.7% to Equal 1980s Income Shock

Sep 27, 2012

The Kansas City Federal Reserve just issued a paper on the Nebraska economy and I found a couple of the pages in the paper interesting.  First, to equal a 1980s income shock, current farm revenue would need  to drop by 21.4% and the value of total farm production would need to decrease by 15.7%.

Now 21.7% may not sound that high, but lets assume you are a farmer who raises corn that yields 175 bushels per acre and expects around $6 per bushel.  Your cash rent is $275 and other total expenses are another $700 per acre.  Your gross income is $1,050 and cash expenses are $975.  You are netting about $75 per acre.

Now if your gross farm income was to decrease by 21.7%, it would fall to about $822 per acre of gross income and if all other expenses remained the same, then you now have a net loss of $153 per acre.

The paper also estimated that crop prices would need to drop to the following prices:

  • Corn - $3.49 per bushel
  • Wheat - $3.96 per bushel
  • Soybeans - $9.00 per bushel


One more slide showed the debt-to-asset ratio for 1979 to 2010.  The perception is that most farmers in 1979 were more highly  leveraged than now.  For Kansas farmers, the percentage of farmers with a debt to asset ratio greater than 40% was 19.4% in 1979, but for 2010 it is 6 points higher at 25.6%.  The debt-to-asset ratio of farmers with levels greater than 70% is almost 6% now versus less than 2% in 1979.

Since Kansas has a higher concentration of livestock producers than many other corn belt states, it is my guess that this tilts the analysis a bit, but there are many farmers with high levels of leverage that may not survive a "1980s" income shock.

How does your operation stack up?

IRS Extends Drought Replacement Period for Ranchers

Sep 25, 2012

The IRS announced today in Release 2012-72 that they have extended the period for replacing livestock sold due to drought for another year.  Normally, if a rancher is forced to sell their breeding, draft or dairy livestock  due to drought, any extra sales caused by drought is allowed to be deferred for up to four years. 

This release extends this for another year if the rancher's county was in a drought situation for at least one week during the period September 1, 2011 to August 31, 2012.  This primarily gives relief to ranchers who had to sell their livestock in 2008 since their four year period would be ending December 31, 2012.  They now have until December 31, 2013 to replace these sales.

In some cases, it may apply to years before 2008 if they were in an extended drought that had lasted until at least 2011.

IRS Notice 2012-62 lists those counties that were in this drought situation. 

2012 Interest Rates for Special Use Valuation

Sep 24, 2012

The IRS today posted Revenue Ruling 2012-26 which lists the applicable interest rates  (go to page 3 of release for the actual ruling) available if an estate elects Special Use Valuation in valuing farmland.  Special Use Valuation allows an estate comprised primarily of farmland (or other qualified business property) to elect to value the farmland by capitalizing the net cash rent income generated by the farmland.

In brief, you take the average of gross cash rent income for the last five years, subtract the related average property taxes for this period  and divide by the applicable interest for the year of death.  Since these interest rates have decreased dramatically over the last several years, the potential savings from this election may have diminished.

For example, assume the net average cash rent for Iowa farmland has  been $200, $225, $250, $300 and $350 for the last five years.  The average gross rent is $265.  Assume average property taxes have been $10.  The resulting net rent of $255 would be divided by the applicable interest rate using the table provided by the IRS in Rev. Rul. 2012-26.  Iowa is served the AgriBank, FCB and this interest rate for 2012 is 5.61%.  After dividing by this number, we get a special use valuation of about $4,545 per acre.  If the appraised fair market value of the farmland is greater than $4,545, the estate may save estate taxes by using this lower amount.  The proper amount of cash rent, etc. can get very technical, so these elections must be done by an experienced preparer.  This example is for illustrative purposes only.

The IRS has reduced the number of reporting FCB districts from five to four by dropping U.S. AgBank, FCB.  The four districts left are AgFirst, AgriBank, CoBank and Texas.  All 50 states plus the District of Columbia will fall into one of these four districts.  The lowest interest rate for 2012 is CoBank at 5.15% and the highest is AgFirst at 6.19%.

If Special Use Valuation is applicable, up to slightly more than $1 million in farm land value can be deducted from the estate.  Up to about $350,000 in estate tax savings can result.

Involve Your Kids With Year-End Tax Planning

Sep 19, 2012

Many multi-generation farms have the parents totally immersed in the finances of the operation while the children may be more focused on the actual farm production activities.

Since this is a time of year (right after harvest) to do your year-end tax planning, try to get the kids more involved this year in the actual finances of the operation. Have them meet with your tax or financial advisor. Many times, they will see things in a little different bent that may spotlight something financially that should be changed or altered.

When I get a new piece of technology (such as a new "smart" phone), I get my young sons to help me, it may make sense to get the younger generation more involved and there is no better time than now.

Mistakes to Avoid in Lifetime Giving - Final

Sep 17, 2012

This post has our final mistakes to avoid in doing lifetime giving:

  • If you are doing Medicaid planned gifts, remember that all transfers for less than FMV are subject to a lookback period of 60 months.
  • Avoid gifts of installment contracts to anyone other than a spouse.  A disposition, which a gift is, will result in immediate gain recognition for the different between fair market value and the tax basis in the note.  Even though you are not getting any cash, you get to pay the tax.
  • Be aware of issues in transferring any IRA or other retirement plans.  A gift of an interest in these plans is considered a distribution from the plan and may be subject to the 10% premature penalty tax if the owner is less than 59 1/2.
  • Gifts of income producing property into trusts may cause more of the income to be taxed at the highest tax rate.  Trust income is subject to the maximum federal tax rate at about $12,000 of income.  This may cause unintended extra taxes if care is not taken.


Lifetime giving is well worth the effort, however, there are several mistakes that can occur.  Discussing your plan with your tax advisor makes sense now and in the future.

Mistakes to Avoid in Lifetime Giving - Part 2

Sep 14, 2012

We continue our series on mistakes to avoid in lifetime giving:

  • Be aware of the Generation-skipping Transfer tax on any gifts that may involve your grandchildren.  These gifts can subject you to additional gift taxes that you may not realize apply when you make the gift.  Any gifts in excess of $13,000 to these beneficiaries should be discussed with your tax advisor ahead of time.
  • Watch out for gifts where the donor still retains the right to use the property or have other certain powers.  In many cases, this asset will be included in their estate even though they "gifted" it away during life.
  • If you gift life insurance policies, may sure not to delay.  If the person making the gift dies within three years of this transfer, the proceeds will be included in their estate.
  • Be very careful with appointing yourself the trustee of any trust.  If the agreement is not worded properly or you retain too many powers over the trust, the trust value can be included in your estate.
  • If a farmer wants to take advantage of the special use valuation on their farmland and their percentage is too low, consider making current gifts of cash or other assets to make your farmland qualify.


More to come ......

Mistakes to Avoid in Lifetime Giving - Part 1

Sep 13, 2012

Lifetime giving of appreciating assets is one great tool to use to prevent unnecessary estate taxes.  However, if done incorrectly, these gifts can prove costly.

I will do a multi-series post on some of the mistakes to watch out for in the next few days:

  • If you will pay for someone's education or medical costs, do not make the payment to  them.  Instead, make the payment directly to the college or medical provider.  You are allowed to make unlimited gifts for these items as long as they are made directly.  None of these  gifts will count either toward your annual or lifetime gift exclusion amount.
  • In separate property states, don't overlook using gift-splitting with your spouse.  This allows one spouse to make one payment of $26,000 and they can elect to split the gift on their gift tax return.  However, if you do not want to file a gift tax return, it is better to write one check from each spouse for $13,000  (Note, gifts of community property are automatically considered to made 50% by each spouse, and no gift-splitting consent is required).
  • Avoid giving highly appreciated property shortly before a donor's death.   This will cause the donee to lose the value of the step-up to fair market value when they sell the property.  Instead, the lower basis will carry  over and that is their cost basis when they sell.
  • Avoid gifts of mortgaged property where the mortgage balance exceeds the adjusted tax cost.  The excess will be taxable income to the donor.  Also, due care must be taken when partnership interests are gifted when large amounts of liabilities are inside the partnership.


More to come later.....

Express Saver Shipping Cost Taxpayer Thousands

Sep 12, 2012

A recent US Tax Court case summarizes how a taxpayer who tried to save a few dollars on Federal Express shipping services most likely cost them thousand of dollars.

In the court case, the taxpayer had received a deficiency notice from the IRS on April 8, 2011.  The taxpayer had until July 7, 2011 to mail the appeal to the tax court.  The taxpayer mailed the appeal using Federal Express "Express Saver Third business day" option.

The IRS has a list of approved shipping services that qualify as valid shipping services to be used for timely filed petitions, etc.

Many of the Federal express products such as Priority Overnight, Standard Overnight, FedEx 2nd Day are listed as approved, however, the 3rd day option is not listed.

Therefore, the taxpayer by trying to perhaps save $5 on shipping costs had their whole Tax Court appeal denied and I am not sure how much was involved, but it does not pay to overlook the fine print on IRS and Tax Court appeals.

A Lot of Fighting Words Over Sugar

Sep 11, 2012

We ran across this article on the continued fight between the makers of "natural" sugar (i.e. from cane and beets) and "corn sugar".  The corn processing industry has  tried to change the official name of their product from high-fructose corn syrup (HFCS) to "corn sugar".  The perception is that the word sugar has a better name than HFCS since most of the media appears to be blaming pop containing HFCS for causing most of us to get too fat.

A couple of years ago several "natural" sugar farmers brought a suit against the major corn refiners alleging their product is the real sugar and corn syrup could not be considered sugar.

The judge has ruled that their suit has merit and can proceed forward.  In response, the corn refiners (primarily Cargill, ADM, Tate & Lyle and Ingredion (the old Corn Products company) filed a countersuit alleging that the "natural" sugar lobby has harmed their business and reputation.

I am not a chemist, but I can see both sides of the case.  Although "natural" sugar comes from beets and cane, I have toured a sugar cane plant and their is a lot of work involved in "processing" the cane into sugar.  If this still means the sugar is natural, then I can see how the corn industry could argue that "processing" corn is no different than processing cane or beets.

However, in processing cane into sugar involves simply crushing and splitting the cane until the final sugar comes out.  There is no chemical separation like there may be with "corn sugar".

Again, it is an interesting article to read and sugar does not always make the medicine go down.

Section 179 Deduction for 2013

Sep 09, 2012

We have gotten a few emails in the last few weeks asking what the Section 179 deduction will be in 2013.  The current law is a limit of $25,000 for 2013.

However, both the President and Congress have discussed increasing the deduction up to $500,000 with a phase-out starting at $2 million.  It appears at the moment that the Democrats are pushing this more than the Republicans, but they have other incentives that may provide small business tax relief similar to the Section 179 deduction.

Since we about 2 months away from the election, nothing will likely happen between now and then.  Two years ago, a lame duck tax bill was passed and we may be facing the same type of bill this time.

My estimate is that Section 179 deduction for 2013 will increase, but who knows by how much and this is always subject to the whims of Congress and the President.

What About Hay?

Sep 06, 2012

We seem to write mostly about the main three grain crops in the US (corn, beans and wheat) since they comprise a large portion of US Ag revenues.

However, there are several other very important crops that are harvested every year.  One of those crops is hay.

I have reviewed the data from the USDA site and find the following:

  • In 2011, total hay dollar volume was about $17.7 billion.  There were only three states over $1 billion.  California at $1.7, Idaho at $1.07 and South Dakota at exactly $1.0 billion in gross hay sales.
  • Every state but Hawaii reported hay sales with Rhode Island being the smallest at $3.5 million.  Even Alaska had over $6 million in hay sales.
  • The top 10 states are all concentrated west of the Mississippi river.
  • Peak hay sales occurred in 2008 with almost $19 billion of hay revenues.  During the last 10 years, sales have ranged from a low of about $12 billion up to the $19 billion.  2008 was #1, 2011 was #2 and 2007 was # 3.


Hay is very important to the livestock and dairy industry and much of it is exported to  other countries.  This trend will continue.

Decelerating Trend in Farmland Prices

Sep 03, 2012

The Chicago Federal Reserve Bank issued its 2012 Second Quarter Ag Letter last week and it indicated that the rapid acceleration in farmland prices over the last two years has moderated substantially. For the district, year-over-year prices had risen by 12% in Indiana to a high of 24% for Iowa. However, the increase in prices for the current quarter versus the first quarter of 2012 ranged from 1% to 2%.

Only 4% of the bankers surveyed expected prices to decrease, while 22% expected a price increase and the remainder expected stable prices.

Demonstrating how farmers have become depositors instead of creditors, 1986 was the last time that non-real estate agricultural loan demand recorded a value lower than its current reading of 69.  The index was as high as 109 just two years ago.

The index of funds availability also edged higher, to a new record of 164. Loan to deposit ratios continue to trend lower. The current rate is about 68.1% and banks normally prefer a ratio closer to 78%; 79% of the banks reporting had a ratio lower than this.

Ag interest rates continued to move lower to all-time lows of 5.27% and 4.94% for operating loans and real estate loans, respectively.

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