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October 2011 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.

Buildings Must Be On The Depreciation Schedule!

Oct 31, 2011

We had a reader ask the following question:

"My husband is a full time farmer and we are currently building a tool shed that will be done by the end of 2011. Will we be able to deduct the whole cost of the building or will it need to go on a depreciation schedule. Thanks for your time."

 

A new qualified farm building placed in service before January 1, 2012 is allowed to be deducted in full using 100% bonus depreciation.  However, the asset must still be entered on a depreciation schedule and the resulting depreciation deduction flows through to form 4562.

The bottom line is that this deduction is still part of overall depreciation expense.

Just a reminder, a farmer only has two months left to either purchase any new equipment or construct a new farm building to take advantage of 100% bonus depreciation.  For both types of assets, the asset must be placed in service before January 1, 2012.  Simply purchasing the equipment and not taking delivery of the equipment will not work.

How Does My State Treat Bonus Depreciation?

Oct 26, 2011

One of the traps that we as tax advisors run into from time to time is sometimes forgetting the differences between federal and state rules for income taxation.  For example, my state of Washington does not have a state income tax, so most of the time I do not deal with state income taxes for the majority of my clients.  However, I think at my last count, I had clients in over 35 states, so I need to know how these differences affect those clients.

We have discussed numerous times the 100% bonus depreciation available to our farmers for qualified new equipment and farm buildings purchased or built in 2011.  However, there are only 12 states that actually follow the federal rules.  29 states do not allow any bonus depreciation at all.  Rather, the farmer adds back the federal deduction then depreciates over the normal life or takes Section 179 if allowed.

To help our farmers, I am reproducing a table here that shows how each state handles bonus depreciation.

Allow 100% and 50% bonus AL, AK, CO, DE, KS, LA, MO, MT, NE, NM, ND, UT
Allow 100% but not 50% bonus IL
Allow 50% but not 100% bonus None
Add back bonus and compute MACRS AZ, AR, CT, DC, FL, GA, HI, ID, IN, IA, KY, ME, MD, MA, MI, MS, NH, NJ, NY, NC, OR, PA, RI, SC, TN, VT, VA, WV, WI
Add back a portion of bonus then depreciate five-year straight-line MN (80%), OH (5/6)
Add back 80% of bonus then depreciate four-year straight-line OK
Decoupled from bonus and from MACRS; generally follows pre-1981 ADR CA
No income tax NV, SD, TX, WA, WY

 

The first line shows that states that follow the federal law and allow 100% and 50% bonus depreciation.  For some reason, Illinois allows 100% but not 50%.

The fourth line shows all of the states that do not allow either 100% or 50% bonus deprecation.  For these states, you must add back the bonus depreciation taken and then either take Section 179 if allowed and depreciate over the useful life.

The next three lines shows those states that have special rules including the fact that California does not follow the IRS on almost any depreciation rules.  The last line shows the states that do not have any income tax.

These rules are generally as of October, 2011 and each state has its own unique rules and interpretations, therefore, this is only a guide.  You must check with your tax advisor to see if these rules apply to your situation.

Driving or Running a Combine - It is Still FUN!

Oct 14, 2011

I have had a couple of readers tease me about using the term driving a combine.  They would normally use the term operate or run, but all I know is that I am looking forward to getting in the combine (and I think all four that I will be in are green for those who keep track of these details), putting the rotor and header in gear and getting out in the field and cutting some corn or beans.

I am old enough to remember when the combine I operated in the late 1970s had a cylinder and not a rotor.  Those were always very fun to plug up with wet green morning glory.

I am also looking forward to getting in that sugar cane harvester and cutting some sugar cane.  I will let you know what they call it down in Louisiana when I get there.

To enlighten me, any readers who want to share with me what they call "driving the combine", if I get enough responses, I will let the readers know.

The Ultimate Farm Trip

Oct 13, 2011

For this CPA, the wild deadline is not April 15, it is Oct. 15. This is the time of year when it can be very difficult to get information from our taxpayers, and it is always a wild scramble to the finish line. I think the latest I have gotten out of the office so far this week is 3:30 a.m., but it is almost done.

To celebrate, I am headed off on my annual fall farm trip. This year, I will leave Yakima, Wash., Sunday morning and fly to Kansas City to stay a couple of days. I will drive my partner's combine on Monday. On Tuesday, I head up to Mason City, Iowa, to visit with a farm consultant, and the goal is to drive a combine in the afternoon. On Wednesday morning, I will stop by the Pro Farmer office in Cedar Falls, Iowa, and then meet up with another farm consultant/farmer and drive that afternoon.

On Thursday, I start driving to Baton Rouge, La., where I plan on meeting one of my farm clients and the goal is to drive a sugar cane harvester for the first time. On Friday, I meet up with my oldest son in New Orleans and two of his friends (I hope I can keep up with them) and on Saturday, we attend the LSU/Auburn game in Baton Rouge. The original goal was to watch the New Orleans Saints/Indianapolis Colts game on Sunday, but since Peyton Manning is not playing, I think we are going to play golf.

As you can see, for this farm boy, the ultimate vacation is to drive three combines and a sugar cane harvester. I will keep you updated on the trip, since I will have my iPad with me and can post anytime I want.

Watch Your Section 179 Deduction from Multiple Entities!

Oct 11, 2011

With the increased Section 179 deduction of $500,000 available in 2011, farmers need to be very careful if they have ownership in multiple partnerships and S corporations that will be purchasing large amounts of used equipment and deducting it under Section 179. The partnership and S corporation have an overall $500,000 Section 179 limitation on deducting at their entity level and when this amount flows through to the farmer, there is another $500,000 limitation level on his tax return.

If more than $500,000 of Section 179 expense flows through to the farmer, the excess amount is permanently lost as a deduction. In this case, the farmer should have one or more of the entities look at amending their tax return to take a lower amount of Section 179 or if it is new equipment, the 100% bonus depreciation rules would apply and it would result in the same deduction to the entity.

Another trap to watch out for is if the farmer has multiple C corporations that he controls, the Section 179 rules require the $500,000 limitation to be allocated among all of the C corporations that he controls. This will result in only $500,000 being able to be deducted among all the C corporations.

If you think these limitations may apply to you, make sure to review it with your tax adviser. The worst thing that can happen from a tax standpoint is to permanently lose a tax deduction that can be prevented.

Senate Proposes Some Farm Tax Savings In Millionaire Surtax Bill

Oct 10, 2011

The American Jobs Act introduced in the Senate last week (commonly known as the Millionaire Surtax bill) contains some provisions that will help out our farmers. These are:

  • Extend the 100% bonus depreciation until Dec. 31, 2012. It is currently in place for all of 2011 and at 50% for 2012. This would make it 100% in 2012.
  • Cut the employer portion of the Social Security tax from 6.2% to 3.1% on the first $5 million of wages paid. The maximum savings would be $155,000. This tax cut would also apply to self-employed farmers on their personal earnings.
  • Create a new credit to completely offset the employer Social Security tax on the wages in excess of the wages paid in the previous year. For example, if a farmer paid $500,000 of wages in 2011 and increased these wages to $750,000, the 6.2% employer Social Security tax on the $250,000 excess would have a credit of $15,500 to offset the tax. This would apply on up to $50 million of excess wages. (I think this would cover most of the farmers in the U.S.)
  • Cut Social Security taxes in half in 2012 for all workers from 6.2% to 3.1%. Currently for 2011, it is at 4.2%.
  • Provide incentive work credits to hire unemployed veterans. These credits could be as high as $9,600.

In order to pay for these tax cuts, the act imposes a surtax of 5.6% on taxpayers earning more than $1 million beginning in 2013. (It is interesting how these tax increases always seem to apply right after a presidential election.) This is the so-called Millionaire Surtax provision.

All in all, there do appear to be several tax goodies in the act for our farmers and almost everybody else who works for a living in the U.S. If it passes, we will keep you updated on any changes.

If It Sounds Too Good to Be True -- It Usually Is!

Oct 05, 2011

Two recent Tax Court cases reinforce the old saying "If it sounds too good to be true, it usually is."  In the cases, two relatively wealthy taxpayers consulted with a Big 6 CPA firm and entered into transactions to convert a regular IRA with assets in excess of $1 million into a Roth IRA and not pay any taxes on the conversion. As we have previously discussed, many taxpayers in 2010 converted their regular IRA into a Roth IRA and elected to spread the tax over 2011 and 2012. 

In these cases, the taxpayers with advice and documentation from so-called experienced advisers went to elaborate lengths to switch their IRA to a Roth. The IRS finally got around to auditing the taxpayers and, in one case, they assessed five years' worth of excise taxes and penalties in excess of $525,000. The total value of the IRA at the peak was slightly in excess of $1 million, so more than 50% of the IRA was now eaten up by excise taxes. These excise taxes are owed by the taxpayers and, at some point, they will need to cash in the IRA (since it was not a legal Roth conversion) and will owe federal and state income taxes on top of the excise taxes.

Based on my reading of the numbers, I estimate that the taxpayers will owe more in taxes than the IRA was ever worth.

This is a good lesson for all of us. If something sounds too good to be true, get a trusted second opinion. These taxpayers took one adviser's word as truth and never got the correct advice that might have save them substantial money, time and headaches.

Gifts of Farm Commodities

Oct 02, 2011

A reader asked the following question as a follow-up to our post about gifts:

"Please touch on one more aspect of gifting: gifting grain and the tax owed by the recipient. Thanks, I enjoy your emails."

Cash method farmers have many situations where gifts of farm commodities to family members could be advantageous:

  • Moving income to minor children in a lower tax bracket;
  • Helping with college costs for children of the taxpayer;
  • Supporting parents of the farmers.

 

The expansion of the kiddie tax in 2008 to dependents up to age 23 (attending college) reduced the advantage of making gifts of farm commodities to relatives, but not completely. The farmer still removes this income from his schedule F and, if self-employed, neither the farmer or child will pay self-employment taxes on the gift.

One thing to remember is to gift farm commodities that were raised in the prior year, since there will be no reduction in operating costs related to the commodity gifted. (If gifted in the year of production, you have to reduce your operating costs by the amount attributable to the gift.)

If the family member is not a dependent under age 24 (going to college), the income tax effect for them is very straightforward. The basis in the commodity carries over, most likely zero (unless gifted in the year of production). The grain is considered a capital asset in the hands of the donee and, if sold in less than a year, is subject to ordinary income tax rates. If held more than a year, it is subject to favorable capital gains rates. In the case of parents that the farmer is supporting, they may have only Social Security income and could easily earn another $10,000 to $20,000 of gifted farm commodity income and pay no tax; if held for more than a year, they could easily double or triple that amount in certain situations for 2011 and 2012.

For a dependent child, it is likely that the kiddie tax will apply and the child will pay income taxes on the sale of the grain based upon the farmer's tax rate. Therefore, there is minimal income tax savings, but there can be substantial self-employment tax savings.

One last reminder: Make sure to document the gift properly and that the person receiving the commodity has actual control and ownership before selling the commodity. Review this with your tax adviser to make sure it is done properly.

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