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December 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.

Top 5 Trend - Estate Tax Law Changes!

Dec 30, 2010

I was not sure if I would be able to write this post a month ago, but Congress and the President came through with some very good changes to the estate law.  Beginning in 2011, the top rate will fall to 35% from 55% and estate will only be come taxable $5 million up from $1 million.

Another great addition is allowing spouses to transfer their pre-deceased spouse's unused exemptions.  This allows couples to easily escape a $10 million estate from being taxed at the federal level.  However, in most cases, states will continue to tax some estate tax on estates under these values.

Now for the drawback to the changes.  It is only for TWO years.  We will most likely be back in the same situation in late 2012 (of course an election year) and who knows what it will look like then.

We will keep you posted.

Beware Your S Corporation Tax Basis!

Dec 29, 2010

Roth and Company out of Des Moines, Iowa has a great Tax Update Blog that Joe Kristan writes on daily.  I try to touch base with his blog each day and he has been running some year-end tax tips that I thought I would pass on to you.

For today, I want to remind our farmers that if they have an S corporation, and they anticipate a loss for the year, it is very important to make sure the farmer has enough "basis" to absorb the loss.

Basis is equal to the amount of cash or property contributed to the corporation plus any income less losses and distributions.  The farmer is also allowed to have basis for the loans made directly to the corporation.  Simply guaranteeing a loan gives you NO basis in the S corporation.

With the new 100% bonus depreciation rules in place, you may find that this deduction will create a loss in your S corporation with no basis available to pass that loss onto your personal return.  However, in some cases, you may want to limit the amount of loss passing through to you this year to take advantage of the 15% tax bracket, etc.  So, in both cases, it is extremely important to know your S corporation tax basis before year end.  Here are some ways to increase your basis:

Contribute cash or capital to the corporation - Contributing cash increases the basis in an S corporation.  Another option is to contribute other assets such as equipment, etc. to the corporation.  This will increase the basis by the amount of the tax basis in that asset.

Loan money from personal funds to the corporation - These loans should be documented with a promissory note and there is a catch if the loans are paid back before the corporation earns back the losses.  In that case, the repayment will trigger taxable income to the farmer.

Borrow money from a third-party and loan it to the corporation -  These can be effective if borrowed from unrelated third parties.  If you borrow from a related party, this can be disastrous to your planning.

If you have multiple S corporations, be careful in loaning any money between these corporations to create basis.  In all cases, review this with your tax advisor before year-end so you know if you can deduct it and if not, what you need to do to deduct it.

Top 5 Trend of 2010 - Equipment Purchase Deduction Options!

Dec 29, 2010

From a farm tax standpoint, one of the biggest trends for 2010 is the expansion of the Section 179 deduction to $500,000 and the introduction of 100% bonus depreciation for new assets bought after September 8, 2010 and before January 1, 2012.

With these two new rules, almost all farmers who purchase new and used equipment during these time periods will be able to completely deduct the purchase if they so chose.  In many cases, the extra deduction may get them little or no tax benefit and cost them money in future years, so it is very important, to try to optimize your tax savings from these two deductions.

Also, for those farmers building ag specific buildings and structures, you will most likely be able to deduct 100% of these costs on your return.  Again, you may not want to do this fully, so it is important to review these rules with your tax advisor.

Can a Farmer Defer Crop Insurance Proceeds?

Dec 28, 2010

We had a reader ask the following question:

"Can you defer crop hail insurance proceeds to the next tax year the same as you can the CRC payments if you normally sell more than 50% of the crop in the year after it is produced? "

Based on the facts presented in the question, the answer should be yes.

Crop insurance proceeds are normally reported in the year of receipt.  However, if a farmer meets the following three conditions, they can defer the revenue to the next year:

  • The farmer uses the cash method of farming.
  • The farmer receives the crop insurance proceeds in the same tax year the crops are damaged.
  • The farmer can show that under their normal business practice, the farmer would have included income from the damaged crops in any tax year following the year the damage occurred.

We are assuming that the farmer in the question meets the first two conditions, i.e., cash method farmer and the proceeds received are for the current crop year.

The IRS has ruled that a farmer who can established a history of reporting more than 50% of their crop sales in the year after harvest would be allowed to defer any crop insurance proceeds for the current crop into 2011.

In order to make this election, the farmer should attach to their income tax return describing the facts of the crop insurance proceeds such as the following:

  • A description of the crop destroyed and when it occurred.
  • Under the normal business practice of the farmer, the income derived from the crop would normally be reported in the following tax year.
  • A description of the crop insurance proceeds as to who paid it, the amount and the timing of the receipt, etc.

 

Remember, if the crop was damaged in 2010 and you receive the crop insurance proceeds in 2011, you can not defer the income till 2012.

Also, if you do elect to report the income from the crop insurance proceeds in the current year, you may be able to dramatically reduce the tax by using farm income averaging.

Top 5 Trend of 2010 - High Commodity Prices

Dec 28, 2010

I think one of the major trends for 2010 and going into 2011 is the continuing high level of commodity prices for most grains, livestock, sugar, cotton, etc.  In 2008, we had high level of prices in the grains, however, the pricing for livestock was much lower and cotton was close to a $1 cheaper than it is now.

For 2011, it appears that these trends may continue and may even accelerate to higher levels.  As farmers, I think we sometimes assume that these prices will be there for much longer than actually happens.  I would suggest at least looking at locking in some of these high prices for your 2011 crops and then still participating in some upside potential by using some out of the money options as cheap insurance.

Anytime you can lock in over $1,200 of gross revenue on good corn acres, you should make an excellent return on your crop input investment.

Top 5 Trend in 2010 - Obama Care!

Dec 27, 2010

We will be posting each day this week a top 5 trend or item for 2010.  It may be related to taxes or other items that have affected farmers either in 2010 or looking forward to 2011.

Our first top 5 item is Obama Care.  This is actually the result of two bills that were passed earlier in the year.  Unless you are a farmer with more than about 50 employees, these two bills will most likely affect you in a positive way for 2010 and 2011.  If you are currently paying health insurance for your farm employees and have fewer than 10 employees making $25,000 to $50,000 on an annual basis, you will be entitled to a credit for up to 35% of what you pay on your income tax return.  Remember that a credit is usually a dollar for dollar offset to your tax.

However, beginning in 2012, under the current law, all farmers will be required to start issuing form 1099 for all purchases to vendors that total more than $600 per year.  Right now, you are required to issue these forms only for services to non-corporate taxpayers.  Beginning in 2012, this will be required for all goods and all types of taxpayers.  There is a very good chance that this will be repealed this year, but it is the law right now.

Another area that had some controversy was the reporting of health insurance paid on employees form W-2.  The requirement is that the amount of health insurance paid for the employee be listed on Form W-2, but not included as part of wages.  This was originally required for 2010 W-2s, but the IRS has postponed this to 2011 W-2s.

We are seeing the fight in Congress now on how to fund Obama Care and I am sure that 2011 will have major changes to it.  We will keep you posted.

We Answer a Question Regarding Deducted a Used Tractor Purchase in 2010.

Dec 26, 2010

One of our readers asked the following question:

"If I purchase a (used) tractor by the end of this year what percentage will I be able to write off? "

This is one those questions where the answer is: IT DEPENDS.

When purchasing a used tractor, the farmer must first decide if they want to take the Section 179 deduction on the tractor.  This deduction for 2010 can be as high as $500,000 and it applies to both used and new equipment.  There are two limitations on the deduction:

  1. The farmer must have taxable income from farm operations and other businesses at least equal to their planned Section 179 deduction (including most wages that they earn), and
  2. They must not purchase more than $2 million in equipment for 2010.  Purchases above this amount start to reduce the Section 179 deduction dollar for dollar.

 

In the case of this farmer, as long as the farm is profitable and net income from farming and after other depreciation is more than the cost of the tractor, then the farmer will be able to completely deduct the cost of the tractor in 2010.  Any amount not deducted under Section 179 will be depreciated over 7 years.

Where Do We Deduct Our Health Insurance Premiums?!

Dec 26, 2010

One of our readers asked the following question:

"Self employed health insurance deductions: does is apply to schedule F, schedule 1040 or both? Will I be able to deduct my health insurance on both my 1040 AND my schedule F or will I have an option of either schedule, or is it schedule F only for 2010."

The Small Business Jobs Act of 2010 added a new provision for 2010 allowing the cost of health insurance premiums for farmers and other self-employed persons to be deducted against self-employment tax.  However,the Act did not change how the health insurance premiums are deducted for regular income tax purposes.  I have reviewed the instructions for Schedule F and they state that these health insurance premiums are still deducted on page 1 of form 1040 on line 29.

However, I have not seen the new schedule SE which is where I believe the actual deduction on line 29 of form 1040 will flow through as a deduction to offset your SE tax.

Therefore, to answer the question, the actual health insurance premium allowed as deduction will be recorded on line 29 of form 1040, but not on schedule F or C, etc.  Any allowed deduction should then flow to the schedule SE to be allowed as a deduction against SE tax.  You will only report the deduction once against actual taxable income.  You will not be allowed to claim the premiums twice as a deduction and they do not go on Schedule F.

Merry Christmas to All of Our Readers!

Dec 23, 2010

Just wanted to make sure to wish all of our Agweb.com blog readers a Merry Christmas and a Prosperous New Year.  Without all of your support throughout the year, our job would be much tougher.

Also, I personally want to thank all of the readers that have sent me questions in the last few months.  That is the part of the blog I enjoy the most.

Again, MERRY CHRISTMAS!

World Corn Production Could Double Using US Methods!

Dec 23, 2010

The Federal Reserve Bank of Kansas City publishes several good Ag related articles each year.  They recently did a quick snapshot of the US Ag Economy and one of the slides represented the current corn production for the world. 

The graph showed the actual production for 2009 and the anticipated production assuming each country would use our corn technology. 

Current world production for 2009 was slightly greater than about 27 billion bushels.  If each country could adopt our corn technology, it is projected that corn production would be about 50 billion bushels.

Sub-Saharan Africa could go from about 2 billion bushels of production to over 12 billion bushels alone.

Therefore, even though the world's population will continue to grow, it should be able to handle the growth for many years by just taking advantage of the technology that we have now.

Lower Income Farm Hands May Owe More Taxes in 2011!

Dec 21, 2010

The Tax Relief Act passed last week provided for a 2% reduction in the employee's portion of the FICA tax.  This dropped the tax rate from 6.2% to 4.2% for 2011 only.  For individuals making more than $20,000 in salary or net farm income, this is an actual net tax decrease.

However, for farm hands making less than $20,000 for the year, this is actually a net tax increase.  Let me explain.  This reduction in payroll taxes replaces the Making Work Pay credit which was equal to the amount of FICA tax an individual would pay up to a maximum of $400 for singles and $800 for married filing joint couples.

Therefore, if a farm hand was single and received wages of $6,452, under the old law, they would have received the maximum credit of $400.  Under the new law, with these same wages, the farm hand would only get a tax savings of $129 or net cost to the farm hand of $271.  It is not until the wages reach $20,000 that the farm hand would break even.

Although the Tax Relief Act of 2010 had many tax goodies for farmers, it does appear to hit lower income employees in some cases.  However, the extension of the higher earned income tax credit procedures and other related individual provisions should more than offset this possible tax increase.

Do We Have to Issue a 1099 for the Purchase of Feed?

Dec 21, 2010

One of our readers asked the following question:

"I bought some high moisture corn from another farmer for feed in my feedlot. Do I have to send a 1099 to the farmer from which I purchased the corn? "

When a farmer purchases services from a non-incorporated taxpayer and those purchases total more than $600 for the year, the farmer is required to issue a form 1099 to the recipient.  Services are generally for items such as legal and accounting services, custom hire, etc.  The purchases of goods does not require a form 1099.  If you think a form 1099 might be required, then you should obtain from the vendor a form W-9 and retain that for your files.  Also, you should issue a form 1099 for cash rent paid to your landlords.

In this case, since the farmer is purchasing feed, which is not a service, then a form 1099 is not required.

However, this is all scheduled to change beginning in 2012.  Under the Health Care Act passed earlier this year, the law requires businesses beginning in 2012 to issue form 1099 on ALL purchases that exceed $600 for the year to any vendor.  This law may get repealed in 2011, but it is the law on the books right now.

Remember that there is no penalty for issuing a form 1099 in error.  The only time there is a penalty (which can be about $100 per 1099) is if you do not issue a form 1099 when one was required.  Therefore, when in doubt, get a form W-9 from the vendor and issue a form 1099 at the end of the year.  For 2012, unless the law changes, make sure to get W-9 from all of your vendors before year-end.

A Trade-In Can Cost You $15,000 in Taxes!

Dec 18, 2010

Many farmers mistakenly assume that if they have a used piece of farm machinery and they want to get a newer piece to replace it, that a trade-in always saves them money at tax time.  However, in many cases, this is not true and in fact, can cost the farmer up to $15,000 in self-employment taxes.

To maximize this tax savings, we would need a farmer who is self-employed and generally makes about $110,000 in net farm income for the year.  If the farmer has a used combine worth at least $100,000 and wants to upgrade, the farmer has two options.

Under option #1, the farmer can go the local implement dealer and do a direct trade with the dealer.  In this situation, the farmer incurs no taxable gain on the trade-in and whatever consideration is made for the excess over the trade-in value is allowed to be depreciated or take the Section 179 deduction on this excess. 

Under option #2, the farmer simply sells the combine for $110,000 and uses the cash to purchase the new combine.  Under this option, the farmer will recognize a taxable gain of $110,000  (assuming the combine has been fully depreciated) which is reported on form 4797 and flows through to the front page of the tax return.  On the farmer's schedule F, they will be able to take Section 179 on the new combine equal to the $110,000 or cash proceeds received on the sale plus any additional consideration paid for the new combine.  What is nice about this option is that the Section 179 deduction reduces the farmer's self-employment tax to zero.  If the farmer normally has net farm income of about $110,000, this self-employment tax savings is at least $15,000.

Now to get this maximum tax savings, you need to have the right fact pattern.  Normal farm income of about $110,000, trade-in value on old equipment of at least $110,000 and the new equipment bought should be for about the same price.  Under this scenario, your tax savings would approach $15,000. 

If you are ready to trade-in some equipment, make sure to run it by your tax advisor to see if makes more sense to sell the equipment and report the gain.

President Obama Signs Tax Relief Act!

Dec 18, 2010

Yesterday, President Obama signed the Tax Relief Act of 2010.  As discussed in previous posts, this bill has many tax benefits for farmers and their families and operations.  We will continue to give you real world examples in the next couple weeks that can save your operation income taxes.

Help! When Should I Sell My Land?!

Dec 17, 2010

A reader just sent us the following question:

"If I had a parcel of farmland for sale, would I benefit by selling it this year 2010 or 2011? I was wondering how capital gains tax would affect what I would pay for both years?"

With the passage of the Tax Relief Act of 2010 late last night by Congress, this question has become even easier to answer.  The answer is that it does not matter from a federal tax standpoint whether you sell the land in 2010 or 2011.  The top capital gains rate for both years will be 15%. 

However, if you wait until January 2011 to sell the land, you are not required to pay the tax on the gain until April 15, 2012.  This gives you an extra year to invest the money and perhaps earn some interest (although in today's interest rate environment, it may not be much).

Another consideration that you must check is if there are any major changes in state income law for your particular state.  Many states have an exclusion for sale of land, however, with the budget deficits that the states are facing, these exclusions may be reduced or eliminated.  Check with your tax advisor to see if the state law might make you want to do the sale in 2010 instead of 2011.

But for federal tax law, the rate is the same.

Congress Passes Tax Relief Act - President Obama to Sign Soon!

Dec 17, 2010

Late last night, the House passed The Tax Relief Act of 2010 with a fairly large majority vote of 277-148.  This is the exact same bill that came over from the Senate so there will be no changes to the Act and President Obama should sign the bill before Christmas.

As discussed in some of our prior posts, this bill has a large number of tax goodies for farmers.  The highlights are:

  • Extension of Bush Tax Rates for two years including capital gains and dividend rates at a maximum of 15%
  • A 2 % reduction in the employee's portion of FICA taxes from 6.2% to 4.2%.  Maximum savings of about $2,100 for each employee at the maximum wage base of $106,800
  • Major estate tax reform (however, only for 2011 and 2012, but it is a start).  Increase in lifetime exclusion to $5 million, top rate of 35% and portability of lifetime exclusions between surviving spouses
  • 100% bonus depreciation for all of 2011 and the last 3 1/2 months of 2010
  • Extension of Ethanol blenders credit to the end of 2011

 

Stay tuned for more analysis in future posts.

When is Land Rent Reported as Income?

Dec 15, 2010

We had a reader send in the following question:

"We own farm land in Iowa. Last half rent has not yet been received though contract states last half to be received by landlord on December 1. If rent moneys are not received until January of 2011 is rent properly reported on tax return as 2010 income?"

The key question for this landlord is for tax purposes, does the contract terms spell out when the rent is income or is it the actual receipt of the rent?

The answer is that income is reported in the year that the rent is either actually received or constructively received, whichever occurs sooner.  In this case, assuming the payer of the rent is not a related party, the landlord will be taxed on the receipt of the rent in 2011 if it is actually received in January.  Even though the contract calls for the last half by December 1, as a cash basis taxpayer, the income is not reported until it is received.

However, if the tenant were to give the check to the landlord on the last day of the year and the landlord could not put it in the bank until 2011, they would still be taxed on the rent income in 2010.

Senate Expected to Pass 2010 Tax Relief Act Today!

Dec 15, 2010

The Senate is expected to pass their 2010 Tax Relief Act today and then pass it onto the House for their review.

The only expected snag in the House is related to the Estate Tax portions of the bill.  Some of the more liberal House Democrats do not want to raise the lifetime exemption to $5 million or have a top rate of 35%.  If they succeed in lowering the exemption or raising the rate, the bill will have to be reconciled between the two chambers and a final bill may not get done before the new year due to the Christmas break.

However, I am assuming the President Obama has behind the scenes gotten enough of a promise that this bill will pass and he is simply letting these Democrats voice their displeasure for their constituents.

We will keep you posted as it progresses.

Another Estate Tax Goody in Proposed Tax Act!

Dec 14, 2010

One of the newly proposed estate tax rules in the proposed tax act is the allowance of estates to combine both spouses lifetime exemption to maximize the estate tax savings.

Under current law, if the first spouse passes away and if their estate is less than the current lifetime exemption, the excess is lost forever.  For example, if a farmer passes away worth $2 million and leaves the farm to the spouse and then the spouse passes away with the farm worth $8 million dollars, the second estate will pay estate taxes on $3 million or about $1 million in total estate taxes (this assumes a $5 million lifetime exemption for both).

Now, under the proposed new law, when the second spouse passes away, the estate can combine the $3 million not used in the first estate plus the $5 million in the second estate.  This results in a total combined estate exemption of $8 million which is equal to the total value of the estate which means there is no estate tax owed.

As you can see, the new proposed law can easily save the estate $1 million or more.

The Senate is expected to vote on the bill by the end of this week and then send it to the house.  If the house simply votes on the bill as is, we should have the bill in place by Christmas.  However, if the House makes changes, we will most likely not have a bill until after Christmas and it may not become law until right after the first of the year or it may become caught up in the lame duck status of Congress at that time.

 

Coordinate your Section 179 Deduction with Bonus Depreciation

Dec 13, 2010

With the large increase of Section 179 deduction for 2010 and 2011 to $500,000 and 50% bonus depreciation on new assets in 2010 and possibly 100% in 2011, it is now even more important for your tax planning to coordinate these two deductions.

Here are the important rules to remember:

  • Section 179 deduction is available on all new and used machinery (including single purpose ag structures such as a hog confinement facility),
  • Bonus depreciation is only available on NEW purchases with a life of 20 years or less (includes almost all new ag buildings),
  • Section 179 is taken first, bonus depreciation second, and then depreciation third,
  • Section 179 is based upon when your taxable year starts and bonus depreciation is based upon when the asset is placed in service (if calendar year, then no difference).

 

Therefore, here are the general rules that you want to follow:

  1. First, take Section 179 deduction on all of your used equipment.
  2. Second, take full Section 179 deduction on all assets with the longest life.  For example, if you have $100,000 of ten year property and $600,000 of 7 year property, take Section 179 on $100,000 of 10 year and $400,000 of 7 year property.
  3. Third, take your bonus depreciation on all of your NEW assets that qualify.
  4. Fourth, take normal depreciation on the remaining value.

 

If you are placing a large amount of equipment in service in the last quarter of the year, this may make you subject to mid-quarter depreciation which might limit your deduction for the year.  If this might apply, you may want to time your Section 179 deduction on your late in the year assets to maximize the overall depreciation expense for the year.

Which 2010 Estate Tax Election Will You Make?!

Dec 13, 2010

One of the benefits of the proposed Tax Relief Act may apply to any estate arising in 2010.  Under the proposed rules, the estate can elect to either be:

  • Taxed under the current 2010 rules (no estate tax, but limited basis adjustment to fair market value), or
  • Use the new proposed 2011 rules (possible estate tax, but full step-up to fair market value)

We have done a couple of posts on this previously, but I thought I would give you a pertinent example for a farm couple.

Let's suppose we have a mom and dad farm couple that both pass away in 2010.  Under the current 2010 rules, there is no estate tax, however, the estate can only elect to step up $1.3 million for each estate (there is an extra $3 million that can be allocated for assets going to a spouse, but I am not using that allocation in this example).  The couple bought 1,500 acres of good farmland 50 years ago for $500,000 and this acreage is now worth $10 million dollars split between the two of them when they pass away in 2010.

If the estate elects the current 2010 law, they will owe no estate tax, however, their heirs will only have a basis in the farmland of $3.1 million.  This means when they sell the farmland, the gain of $6.9 million will be taxed by at least 15% costing the heirs easily $1 million.

Now, lets assume the estate elects to use the new 2011 laws (if passed as is), there will still be no estate tax since the combined estate equals the two $5 million exemptions and the farmland will be stepped up to the $10 million fair market value, so no capital gains taxes will be owed on the sale of the farmland (up to $10 million, if sold for more, capital gains taxes will be owed on the excess).

Since the estate can elect either option, for any estate in 2010 in excess of $1.3 million, you will want to carefully review these options to see which makes the most sense.

A Deal is Struck on Tax Package

Dec 07, 2010

President Obama and the Republicans struck a deal yesterday on a extension of the Bush tax cuts for another two years along with many other "goodies".  If enacted, the deal will provide the following:

  • Extension of the top tax rate of 35% for 2011 and 2012.

  • Top capital gains and dividends tax rate of 15% for 2011 and 2012.

  • A 13 month extension of unemployment benefits.

  • An estate tax with a top rate of 35%.  The first $5 million would be exempt for estate taxes.  This is also for 2011 and 2012.

  • A reduction in the employee portion of social security taxes from 6.2% to 4.2% for 2011.  For those in the highest wage base, this would save them about $2,100 for 2011.

  • Bonus depreciation of 100% for equipment investments in 2011.

  • An extension for two years of many current tax benefits that were scheduled to expire such as the research and development tax credit.

  • An extension of the AMT patch for 2010 and 2011 to prevent more than 20 million taxpayers from having to pay the alternative minimum tax.

As indicated, this is a tentative deal.  Congressional Democrats are not very happy with the President right now on this deal and the final law may have several changes.  Based on the current deal as structured, there are many welcomed provisions that might save farmers and their families thousands if not millions in taxes for 2011 and 2012.

We will keep you updated as the deal progresses.

When Do We Have to Issue a 1099 or W2 to a Grandchild?

Dec 06, 2010

One of our readers wrote in the following question:

"How much can I pay grandchildren without generating 1099 or w2 ?"

This is a question that we seem to get periodically throughout the year and the answer depends on what type of services are being performed.

If a grandparent (or parent) is having a grandchild or child perform services on their farm, they should issue a form W2 at the end of the year for all work performed even if it is only $10.  This is what the law requires and it also gives social security credit to the grandchild for their retirement (assuming social security is still around).  If a farmer pays wages to their child who is less than age 18, these wages are not subject to social security and Medicare taxes, however, you still should issue a W2.  For farmers in this situation, this is one of the best tax planning opportunities that can be used effectively.

For contract services that a grandchild performs on the farm such as spraying services that they provide to the grandparent and other farmers, if the payment is less than $600 for the whole year, no 1099 is required.  If the total payments made to the grandchild exceeds $600 then a form 1099 is required.  Remember, that if you are controlling how the grandchild performs the service (i.e. it looks more like wages than contract services), you are required to treat these payments as wages and not contract services.

The penalties for not reporting on these forms is getting steeper each year.  In some cases, the penalty can exceed $100 for each violation.

IRS Announces 2011 Standard Mileage Rates

Dec 06, 2010

On Friday, the IRS published their standard mileage rates for 2011.  These rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical and moving purposes. 

The 2011 rates are:

  • 51 cents per mile for business miles driven
  • 14 cents per mile for charitable purposes
  • 19 cents per mile for moving and medical reasons

 

The business rate is one cent higher than in 2010, the moving and medical rate is up 2.5 cents and the charitable rate remains unchanged.

This rate is effective with mileage incurred on or after January 1, 2011.

IRS Adds New Form for Health Insurance Credit

Dec 06, 2010

The IRS has released final guidance for claiming the new health insurance premium credit on your tax return for 2010, along with new Form 8941 (Credit for Small Employer Health Insurance Premiums) and related instructions.  Remember that if you employ 10 or less farm employees and their average pay is less than $25,000, you can get a credit for up to 35% of the health insurance premiums that you paid during 2010.

You will file Form 8941 to make this claim and it can reduce your income tax dollar for dollar.  However, the trade-off is that you must reduce your farm expenses by the amount of the credit which may increase your self-employment taxes.  If your taxable farm income is over the social security wage base of $106,800, you will almost always take the credit.  If your taxable farm income is less than $50,000 with no other income, then you may not want to take the credit due to the increase in self-employment taxes.

In all cases, you will need to run your income tax projections with and without the credit to see which case results in the lowest overall tax.

Does a Machine Shop Qualify for Section 179?

Dec 05, 2010

We had a reader just send in the following question:

"We have built a machine shed with part of it closed in as a farm shop. This part will receive concrete, electric, heat, etc. I have been told this qualifies under the section 179 deduction. Is that correct? "

This is an area of the tax law that is always getting mis-interpreted constantly.  Most farm buildings are allowed to be depreciated over 20 years and for 2010, the farmer will be allowed to take the 50% bonus depreciation on the building if it was built and put in service during 2010.

A farmer who builds a new single purpose agricultural structures (SPAS) is entitled to take both (1) Section 179 on the cost and (2) depreciate the structure over a 10 year period instead of 20 years.

In order to qualify as a SPAS, it must meet the following tests:

  • Single purpose livestock structure - can only be used for housing, raising or feeding one type of animal, or
  • Single purpose horticultural structure - A greenhouse or structure used for the production of mushrooms.
  •  
  •  

In general, a hog confinement facility, chicken coops, milk parlors, and greenhouses will be classified as a SPAS and qualify for Section 179.  However, if the facility is used for more than one purpose such as a hog confinement facility also feeding chickens, it will not qualify for Section 179 and be depreciated over 20 years, not 10 years.

In addition, if a SPAS includes a work space for machinery, etc. it must solely be used for:

  • The stocking, caring for, or collecting of livestock or plants or their produce, or
  • the maintenance of the enclosure or structure, or
  • the maintenance or replacement of the equipment used for the livestock or produce housed in the structure.
  •  

This means that if the SPAS simply has a work area to solely help in the operation contained in the structure, then this area will qualify for Section 179.  However, if it is a general shop area or has multiple purposes, then that area will not qualify for Section 179 and may taint the overall SPAS for the whole structure.

Therefore, in this case, it would be my opinion that the area does not qualify for Section 179 since it is simply for machine shop with a farm shop portion.

Optimize Your Section 179 Deduction!

Dec 03, 2010

Farmers with larger profitable operations have an unique opportunity this year and next year to have substantial tax savings.  The Small Business Jobs Act passed earlier this fall increased the Section 179 deduction from $250,000 to $500,000 for this year and 2011.  As most farmers know, Section 179 allows you to deduct up equipment purchases during the year up to the $500,000 limit.  It starts to phase out once you purchase $2,000,000 of equipment.  For almost all farmers, this phase-out will not be an issue, however, you must have taxable earned income greater than your Section 179 deduction.

For example, if you purchase $250,000 of farm equipment and your net farm income is only $150,000 (including your wages and other earned income), your Section 179 deduction is limited to $150,000.  You can still take the $250,000 deduction, but the excess is carried over to the next year and subject to the same income limits then.

Buying two new large tractors and a new combine could easily get you to the $1,000,000 level. 

Now to optimize your 2010/2011 planning, it is important to purchase no more than $500,000 in equipment this year and then purchase the remaining $500,000 next year to fully maximize your Section 179 deduction for both years (or make sure you have at least $500,000 of equipment purchases in each year).

Let's see how this might work for a farm operation.

If we have a farmer that purchases $1 million of equipment in this year and none in 2011, they can expense $500,000 this year under Section 179 and depreciate about $54 thousand for a total deduction this year of $554 thousand.  In 2011, they can depreciate about $96,000 for a total deduction between the two years of $650 thousand.

Now, if the farmer purchases $500,000 this year and $500,000 next year, they will be able to deduct the full $1 million over the two years.  This is an extra deduction of $350,000 or tax savings of about $125,000 if they are in the highest tax bracket.

If you live in a state with an income tax, you may not be able to deduct the full amount for state income tax purposes, but you will not lose the federal deduction.

Remember to optimize your equipment purchases for this year and next to take full advantage of the Section 179 deduction increases.

Don't Let AMT Bite You!

Dec 01, 2010

Now that it is the first day of December, we must make sure that our year-end tax planning is in full gear.  Over the next few weeks, I will post various items related to year-end tax planning that you need to review and deal with now.

First, many farmers assume that the alternative minimum tax (AMT) applies only to either (a) rich people, or (b) those with a lot of deductions, etc.  This viewpoint can be very costly to our farmers.

For 2009, Congress had passed a patch to increase the AMT exemption up to around $70,000 for married couples.  For 2010, it is scheduled to go back to its old exemption amount of about $45,000 for married couples.  If this happens, it is projected that upwards of 26 million taxpayers would be subject to the AMT, including several thousand farmers.

You must review your year-end tax planning to make sure that the AMT does not bite you.  If you live in a state with high income taxes and you normally prepay your state income taxes by year-end, you may want to consider not paying until 2011.

Also, if you buy equipment, taking Section 179 expense on these purchases does reduce your AMT burden.

All in all, you need to review your year-end tax planning with your advisor to make sure that the AMT is minimized as much as possible.

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