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March 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.

Intended Corn Acres Plantings Up over 7 Million Acres in Two Years!

Mar 30, 2012

I was reviewing the intended corn acre plantings just issued by the USDA, and some of the numbers that jump out at me are:

  • Total intended corn acre plantings of 95.9 million acres for 2012. This is up almost 4 million acres over 2011 and up over 7 million acres from 2010. This is the largest amount of corn acres planted since 1937.
  • There are now three states that will plant more than 10 million acres of corn: Iowa at 14.6, Illinois at 12.5 and Nebraska at 10.3 (I am not sure what those states planted in 1937).
  • Iowa had the largest increase, at 500,000 acres.
  • Soybean acres are down to 73.9 million acres from 75 million in 2011 and 77.4 million in 2010.
  • Illinois leads the way with 9 million acres and Iowa is slightly behind at 8.8 million. This is the first time in a few years that Illinois will plant more bean acres than Iowa.

 

It will be interesting to see how this plays out in the market pricing.  With the smaller bean crop in South America and reduced acres here in the U.S., beans may rally and many market analysts had pegged the corn acres this high, but most were lower. It will be interesting this year on pricing of both crops.

Number of Farms Gets Smaller, But They Produce More

Mar 27, 2012

Most of you are aware that the number of farms in the US continues to get smaller, but they produce more and more.  In the dairy sector, one report from the Idaho Dairymen's Association indicated in 2008, there were over 800 dairies in the state of Idaho.  Just three years later, this number had dropped to 569, a reduction of almost 30%.

However, on the production side, you guessed it, the amount of milk produced in the state continues to climb and the number of dairy cows during this period increased by about 35%.

In 2011, there were 51,481 dairy operations licensed to sell milk in the US.  Just slightly more than 50% of the milk produced comes from dairies with more than 1,000 cows.  Of that 50%, about 70% comes from those with more than 2,000 head.  In essence, 6% of the nations dairy farms produce more than 60% of the milk.

11 counties marketed 25% of the nation's milk.  7 of the 11 were in California and in order, they are:

  1. Tulare, CA
  2. Merced, CA
  3. Kings, CA
  4. Stanislaus, CA
  5. Kern, CA
  6. Maricopa, AZ
  7. Fresno, CA
  8. Yakima, WA
  9. San Joaquin, CA
  10. Lancaster, PA
  11. Chaves, NM

 

This trend of bigger dairies producing a greater share of milk production in the US is not going away anytime soon.

Reprieve for Farmers Filing Late Due to MF Global

Mar 23, 2012

Most farmers file by March 1 of each year to escape having to pay estimated tax payments in January.  This year, many farmers received their Form 1099 from MF Global very late and in many cases after March 1.

The IRS just announced penalty relief for any farmers who had to file their return after March 1 due to MF Global.  This release indicated that the IRS understood the magnitude of the records and associated untangling of MF Global records delayed the issuance of forms 1099, so they have provided instructions on how to get out of the penalty.

The text of this release is located here.

A farmer will need to file form 2210-F with their return, but write "MF Global" at the top of the form and attach a statement indicating they were late due to the untimely receipt of form 1099s from MF Global (a hint for those farmers who want to try this without actually having an account at MF Global; we would highly recommend not doing this since the IRS will match this up in the return).

If it Walks and Quacks Like a Duck, It is Probably a Duck

Mar 21, 2012

A recent Court Case reminded me that sometimes taxpayers and their advisors can sometimes go too far in trying to create favorable tax situations.  For many years now, taxpayers have taking advantage of using cost segregation studies to allocate part of the construction or purchase cost of buildings to items more closely related to equipment which have shorter lives for depreciation purposes and/or may be available for the Section 179 or bonus depreciation.

For example, if a manufacturer builds a new building that requires extra power to run the machines and special hoses and piping, etc., these costs can usually be depreciated over 15 years or less, rather than the normal 39 years.  However, the taxpayer must have a cost segregation study to prove these amounts.

Now for the Court Case.  In the case, the taxpayer had obtained a cost segregation study on a fairly large apartment complex that they purchased.  This study allocated costs to almost every single component in each building, the sidewalks, the landscaping, the swimming pool, etc.  If the taxpayer had been successful, then all of these components would have been most likely depreciated over 5 or 15 years, not 27.5 years.

However, the taxpayer lost since the Court said all of these components comprise what is normally considered an apartment complex which is depreciated over 27.5 years.  They did allow some items to be depreciated over quicker lives, but not much.

The bottom line for me is if it looks like an apartment complex, then depreciate it like an apartment complex, or the old saying "If it walks and quacks like a duck, then it is most likely a duck".  These cost segregation studies are a powerful tax planning tool, but they need to be done correctly and in the proper situation.

 

One Month To Go!

Mar 18, 2012

Today is Sunday March 18, 2012 and tax due day this year is Tuesday, April 17, 2012.  There is slightly more than 4 weeks of tax season left for all of my CPA friends out there.  For our office, it has been a little bit stressful this year since converted to different tax software, but all-in-all, this is my favorite time of the year.

For our farm friends, many view harvest as the best time of year since they finally get to see the fruition of their labors get realized.  It is the same for me.  Even though I may work more than 80 hours in a week (I wish it was that low), as a CPA, this is my harvest season and I know the long hours will end on April 15 plus or minus.

I just want to take time to thank all of our readers for their questions and kind words and keep them coming, even with April 15 only a month to go!

Top Estate Planning Mistakes Farmers Make - Part 3

Mar 12, 2012

We conclude our series on the top estate planning mistakes farmers make today:

  • Treat all the kids the same - In our seminars on this subject, the question of how to treat farm and nonfarm kids can be the most vexing issues for farmers. Many farmers who control the farm and pass it down upon their death leave everything equally to all of the kids, while one or more children actively involved in the operation may not be recognizing the extra value that these farm kids have provided. Generally, we see that the farm operation is split from the farmland rental component; the operation goes to the farm kids and the land is split among all the kids. Many times, insurance is used to equalize this split.
  • Gift away remainder, keep life estate - Many farmers assume if they keep a life estate and leave the remainder to their heirs, this asset will not be included in their estate. WRONG. This asset is included in your estate; the only thing you avoid is probate.
  • Failure to stabilize and maximize values - Does the farm operation maintain key person insurance in case of death or disability? Are proper buy-sell agreements in place?
  • Lack of adequate records - This will drive the trustee/executor crazy! Have you generated a system to keep track of all of these necessary documents and are they in a safe place such as a safe deposit box? Have you sat down with your planned trustee or executor and explained where the documents are and what they mean? The more you do this now, the less expensive and time-consuming it will be later on.
  • Lack of a master plan for your estate - Many times farmers try to do this plan themselves and get in trouble for it. The saying "Would a surgeon do surgery on himself?" also applies to farm estate planning. You need to involve the appropriate advisers and try to meet with them at least annually to update the plan. Conduct an annual "fire drill" to see what the estate and income tax consequences would be.

 
Failing to plan is planning to fail.  Do not fall into this trap with your estate plan.

 

Read Part 1 and Part 2.

Top Estate Planning Mistakes Farmers Make - Part 2

Mar 09, 2012

Continuing our post from yesterday:

  • "I am worth less than $5 million, so who cares?" Well, for one thing, your spouse might care. We have a new estate planning opportunity called portability which allows the unused estate exemption to be transferred to the surviving spouse. Let's assume you passed away in 2011 worth $3 million. If you did not file a return, the extra $2 million is permanently lost. So if your spouse dies in 2012 suddenly worth $7 million (especially if you left her everything in a "I love you" will), she would owe $700,000 of estate tax that she did not need to pay. Many farmers forget to include life insurance that they own in their calculations. They might have an estate of $4 million, but $2 million of life insurance. They think they are worth only $4 million, when they are really worth $6 million.
  • Lack of Liquidity -- Farmers are great at creating nonliquid net worth (farmland, equipment, etc.), but not as good at creating liquid assets to pay estate taxes. Do you know how much your estate is going to cost your heirs and where the money is coming from? Will it negatively impact the farm operation?
  • Proper Ownership of Life Insurance -- If you own or control the insurance, it is included in your estate. Have you considered setting up an irrevocable trust to own the insurance? This gets the proceeds out of your estate and provides liquidity for the estate or income to your spouse for his or her lifetime.

Read Part 1 and Part 3.

Top Estate Planning Mistakes Farmers Make - Part 1

Mar 08, 2012

We have had several requests to recap Nick Houle's presentation at the Commodity Classic last week on the Top Estate Planning Mistakes that Farmers Make. There are several of them, so I am going to break them down into three or four on a daily basis over the next week or so. The first three are as follows:

  • Procrastination - This is something I see all the time. Having unsigned or outdated documents. If you do not have your own will, the state has written one for you and you may not like its terms (assets going to your parents when you wanted them to go to your siblings, etc.).  Farming's complex issues can make this difficult to execute, but make sure your will is updated and you are at least doing your annual gifts. With several kids and grandkids, it is easy to give away $2 million or more in value over a 10-year period without touching your lifetime exemption amount.
  • Property Transfer Rules - A lack of understanding of these rules can be fatal. Most farmers assume their will is in control of transfers. However, IRAs, life insurance, etc., have beneficiary designations and these control what happens if you get a divorce and forget to change the designation from your ex-spouse to your new spouse. The ex-spouse will inherit the life insurance proceeds if you do not fix this. Jointly held property skips probate, but is this what you want or need?
  • "I Love You" Wills - Leaving everything to your spouse upon death. With larger estates, this may cost surviving spouses extra estate taxes upon their death. Should probably still have a provision for a bypass or credit shelter trust, even with the new portability rules. You still love your spouse, but by fixing your will, you love him or her even more.

 

Read Part 2 and Part 3.

You Have 15 Months to Make a Portability Election!

Mar 06, 2012

One of the new features of the federal estate laws passed back in December 2010 is the concept of portability.  Under the old law, if a husband passed away with an estate of $500,000 and the lifetime exclusion was $3.5 million (the 2009 rules), the $3 million excess that was not used at his death is forever gone.

Let's assume his wife passed away after him in the same year and she was worth $6.5 million. Under the old law, her estate could offset $3.5 million against the $6.5 million and the estate would owe tax on $3 million. Under the new law, the $3 million not used by the husband is carried over to the wife, her combined lifetime exclusion is now $6.5 million and none of her estate is taxable.

This is how the new law works; however, the estate must make an election to transfer the remaining lifetime exclusion not used to the surviving spouse. This election must be made even if there is no estate tax due. All estates are required to file an estate tax return within nine months of death or get an extension. Many estates did not make the election for deaths occurring in 2011 and there has been some concern that they were too late to make the portability election.

The IRS has just announced that estates of married individuals where the spouse died between Jan. 1, 2011, and June 30, 2011, now have an automatic 15-month period to file an estate tax return to make the portability election. This extended time is available even if the estate did not properly file for an extension of time to file.

If this applies in your case, make sure to review it with your estate tax adviser. In most cases, making the portability election is the correct thing to do; however, every situation is unique and you need to understand your options.

 

My First Tornado Warning!

Mar 05, 2012

I got into Nashville late Thursday night. Friday morning, I headed over to the Gaylord Opryland complex. Wow, what a facility. There were probably five acres or more of glass roofing, and it felt like a 10-minute walk from my car to the convention center.

I was able to attend the last part of the speech by Secretary of Agriculture Tom Vilsack. There appeared to be at least 3,000 people in attendance, and I think I heard that over 5,000 were signed up for the Classic.

The trade show had more than 100 booths and I was able to walk around most of it on Friday and early Saturday, but I must admit that I did not get to every booth.  It was nice to see several farmers that I had met over the last couple of years and get caught up with what is going on with their farm operation.

Friday afternoon, I attended the learning sessions. Midway through the third session, I noticed some noise on top of the ceiling and about two minutes later, a guy walked in and told us there was a tornado warning and we needed to evacuate to the basement. We headed down to the basement, where there were about 1,000 people. I had downloaded an app to my IPhone and was able to watch the cell pass over our location and get real-time weather updates.

After about an hour, the warning was over and we were able to go back to normal. However, by that time, the day was over.

On Saturday, my partner Nick Houle gave a two-hour seminar on the Top 10 (there were 11, though) mistakes that farmers make in estate planning. Nick and I had met up the night before and we discussed that attendance might be on the low side since this was the last seminar of the event and many people would have already left. We were wrong. Attendance ended up being almost standing-room only. Many great questions were asked, and I think Nick and I answered them all.

All in all, the Commodity Classic is a great event for any farmer to attend, and I look forward to going next year.

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