In the Morehouse Tax Court case just issued yesterday, the court ruled that the receipt of CRP payments by a non-farmer are subject to self-employment taxes.  The case involved a taxpayer located in Minnesota who inherited property in South Dakota and continued to invest in additional farm land in that state.  At all times, the taxpayer never "farmed" the property, but instead either rented the land out or participated in CRP.  Over the years, the taxpayer placed additional land into CRP.

The court ruled that the payments were subject to self-employment tax since the taxpayer was in the business of farming primarily due to his participation in the following activities:

• Satisfied seeding and weed control obligations;
• Visited properties to ensure that the properties maintained their status as CRP properties;
• Filed annual certificates;
• Participated in emergency haying programs;
• Requested cost-sharing payments; and
• Made decisions regarding the profitability of keeping the properties enrolled in CRP.

Additionally, the court indicated that taxpayer was engaged in an "environmental friendly farming operation".  It seems to me the taxpayer was simply trying to make more money from enrolling the land in CRP than he could get from cash renting the property. 

The Court also ruled that the taxpayer was not a farmer, but "was engaged in the business of participating in the CRP and that he enrolled, maintained, and managed multiple properties subject to CRP contracts with the primary intent of making a profit."  It seems under this logic that the court could easily extend this definition to any rental activity that has some type of contract with a governmental agency such as low-income housing, etc.  This may become a slippery slope by the court.

The Court also overruled its own Wuebker decision in arriving at its current ruling in this case.  Courts are like people, they can change their mind.

Under the ruling of this case, it appears that almost any farmland enrolled in CRP will be subject to SE tax (at least in the Eighth Circuit) unless the case gets appealed and overruled which may take a couple of years to resolve.  We will keep you posted with any update on the case, but for now, if you have land enrolled in CRP, make sure to discuss this case with your tax advisor.

Many farmers have taken advantage of a self-insured medical reimbursement plans or other similar plans.  In many cases, a farmer is able to deduct medical expenses that they might otherwise not deduct due to the 10% of AGI limitations or they do not itemize their deductions.

As part of the Affordable Health Care Act (ObamaCare), there is now a new excise tax effective as of 2012.  It is based upon the number of participants enrolled or covered by the plan and the tax is $1 a person if your plan year ends between October 1, 2012 and September 30, 2013 and rises 100% to a $2 per person tax for plan years ending by September 30, 2014 with an undetermined per person fee thereafter.

If a farmer has one of these plans that covers him, his spouse and four children, then the fee is $6, however, there are two methods of how to calculate the numbers covered and you may end up with a slightly different number under each method.  The filing deadline for this tax is July 31 and is based upon your year-end ending in the previous calendar year.  For example, a plan that had a calendar year-end for 2012 is required to file by July 31, 2013.

There is no de minimis exception to this filing and a penalty may apply for not making the required filing.

CliftonLarsonAllen LLP has provided additional information regarding this filing and you may access that information here.

Also, here is a link to the federal form 720 needed for filing.

Gary Schnitkey of the University of Illinois just released an excellent analysis of the projected crop payments under the old ACRE program or the proposed Senate ARC or House RLC or House PLC programs.  As most know, under the old Farm Bill, a farmer could elect to participate in the ACRE program in return for giving up 20% of their direct payments.  With the new Farm Bill (either Senate or House), the ACRE program goes away.  We had many wheat farmers in our area get almost a $100 per acre payment about three years ago from this program.

Under the new Farm Bill proposals, the farmer can elect either a revenue option (Senate ARC or House RLC) or a price option (House PLC) that will kick in if prices get low enough.  Gary ran some numbers for an Illinois sample farmer with an average yield of 182 bushels per acre.  Gary assumed a long-term trend price of $4.50, $4.00 and $3.50 for each year from 2013 to 2016 and then crunched the numbers to determine respective payment amounts.

At the $4.50 level, the only program that made any payments was ACRE.  Over the 4 year period, $117 of total per acre payments would be collected by the farmer over the four years.  None of the other programs made any payments.

At the $4.00 level, ACRE would pay out $289, ARC $110, RLC $50 and PLC zero.

At the $3.50 level, ACRE would pay out $498, ARC $291, RLC $248 and PLC $100.

As you can see for corn farmers, the old ACRE program is much better than any of the new programs offered.  For other farmers, such as peanut and rice farmers, the difference may be much smaller or even tilt toward the new programs, but for corn, bean and wheat farmers, it appears the new programs will pay-out much lower than the old ACRE program and in many cases, there will be no pay-out, even with lower prices.

We got the following question from one of our readers:

"Are payments for prevented planting deferrable into the following year for income tax?"

Most farmers are aware that crop insurance proceeds can be defer to the following year if you meet the following basic qualifications:

• You use the cash method of accounting;
• You receive proceeds for damage to crops in the current year (if you receive the proceeds in the year following the crop damage, you cannot defer it); and
• You business practice is to normally sell more than 50% of your crop in the following year.

You need to meet all three of these requirements with certain nuances related to the last one.  Additionly, the crop insurance proceeds needs to be for damage related to some type of weather event (drought, flood, hail, etc.).  "Prevent Plant" insurance on the face of it might not meet this requirement since in order to have a crop, you must plant it.  However, there is a provision in the Code that indicates proceeds related to prevented plantings qualifies as crop insurance for purposes of the deferral.

Therefore, as long as you meet the normal crop insurance requirements you can defer "Prevent Plant" proceeds.
 

Following up on our post regarding gifts of commodities to children and grandchildren, we had a reader ask the following question:

"In your example of Eric gifting to his grandson, does the grandson have to report this gift as income in either case (gifting in the current crop year or the following year)?"

In general, the receipt of the gift by the child or grandchild is not reported as income until they sell the grain. The child will receive a basis of zero (assuming a gift of a prior year crop) or a basis equal to the amount of cost allocated to the grain gifted. In our Eric example, he allocated $4,000 of cost to the 1,000 bushels of corn, so his grandson would have this as his cost basis.

If his grandson holds the grain for at least a year from the time of harvest, this will qualify for long-term capital gains treatment, otherwise, it is short-term. In most cases, the "Kiddie" tax will apply and the (grand)child will have to use the tax bracket of their parents. This almost always applies for kids that are in college or younger and being supported by their parents.

Also, if the fair market value of the grain gifted is greater than $14,000, you will be required to file a gift tax return. You will not owe any gift tax, but a return is required (unless you have gifted more than $5.25 million during your lifetime, then gift tax will be owed).

Example #1 - Eric's grandson is gifted 1,000 bushels of corn (from the previous year). The value at the time of the gift is $7,000 and the his cost basis is zero (since this is the previous year's crop). The grandchild sells it a month later for $8,000 and will report a short-term capital gain of $8,000. His tax rate will most likely be based on his parent's marginal tax bracket. If the grandson had held the crop until at least a year had passed from the time of harvest, it would be taxed as long-term capital gains.

Example # 2 - Same facts as number 1, except this is a gift of the current crop. In this case, $4,000 of basis is allocated and the grandson will have a short-term capital gain of $4,000 instead of $8,000.