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May 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.

MF Global Recovery at 72% and Should Exceed 92%

May 31, 2012

It appears that most of the MF Global customers have received about 72% of their claims to date.  When a large company such as MF Global enters bankruptcy, there is an active market in buying and selling these claims.  Many hedge funds will purchase these claims with the expectation of making a profit when the claim is finalized.

In the case of MF Global, there are about 26,000 claims that have been filed with the bankruptcy court, however, only 242 claims have traded hands to date.  This is primarily due to the small size of the claim (most are under $100k) and the complexity of the claims since they may involve futures, options on futures and other contracts.

The trustee overseeing the case has agreed to turn over $168 million of  "excess collateral" and is seeking more money from JP Morgan Chase.  This is expected to increase the 72% recovery rate to slightly more than 80%.

As a result of this, active claims that are trading hands right now are getting between 92 and 94 cents on the dollar.  In February, similar trades were going for 88 cents on the dollar.

If you have a claim with MF Global, it does appear that your final loss should be less than 10% other  than the aggravation of dealing with the situation and the delay in access to your funds.

Free Money Not Taken

May 30, 2012

The GAO just reported that for the 2010 tax year 170,300 small employers claimed the small employer insurance tax credit, but the number of eligible small businesses that could have taken the credit ranged from 1.4 million to 4 million.  The average credit claimed was about $2,700. 

According to a Medical Expenditure Panel Survey (MEPS), up to 83% of employers who may otherwise be eligible for the full credit do not offer health insurance.

The study found that the small amount of potential credit and the paperwork burden involved in gathering the data to fill out the form is not a big enough incentive for small employers to provide health insurance.

I have prepared several returns taking advantage of the credit and their is some paperwork involved, but I find that if your records are in good order and you have less than 20 employees, it really only takes a few minutes to do the proper input.

If you do provide health insurance to your farm employees, review this with your tax advisor.  You may be able to claim the credit and reduce your tax by several thousand dollars.

Be Careful if You Have a Foreign Account

May 29, 2012

Many farmers and business owners may have an investment in businesses located overseas.  If this investment is in the form of mutual funds or other passive holdings, there is usually no extra reporting to the IRS or Department of Treasury.  However, many of these same farmers own corporations with farm operations in perhaps Canada or Brazil.  In these cases, the farmer is required to report these holdings or the mere right to having signature authority over the company to the IRS, etc.

Also, if you own a foreign bank account, securities account, etc. and the value of these accounts exceed more than $10,000, than this needs to be reported, both to the IRS and to the Department of Treasury.  The reporting to the IRS is included with your tax return and the reporting to the Department of Treasury is on a separate form that is due by June 30 of each year with no extensions and it must be received by that date, not postmarked.

If you forget to report these holdings, in many cases, the penalty for not reporting these accounts can actually exceed the value of the account, so it is extremely important to review these accounts or companies with your tax advisor.

Supreme Court Rules Capital Gains Tax Owed in Chapter 12

May 18, 2012

The Supreme Court just issued a ruling that any capital gains tax owed as a result of selling farmland in a Chapter 12 bankruptcy filing is not dischargeable in bankruptcy and will remain a debt of the farmer.

Chapter 12 is a special type of bankruptcy for farmers.  It allows them to reorganize their assets and liabilities and in most cases allows the farmer to continue farming.  Sometimes, however, the farmer will need to sell part of the farmland to payoff the debt.  If the farmer had incurred income taxes before the bankruptcy, in many cases, this debt for taxes is forgiven as part of the bankruptcy process.

In the current case, the farmer argued that the capital gains tax arising from the sale of farmland should also be forgiven.  The IRS disagreed and the case went all the way to the Supreme Court.  The 5-4 decision was very close, but the final ruling is that this debt is owed by the farmer since the bankrupt estate cannot owe tax.

If you are in a situation like this, it is wise to discuss it with your attorney and tax advisor since it may make more sense to trigger the capital gains tax before you file Chapter 12.

Make Sure You Get Your Written Confirmation of Donation!

May 17, 2012

The IRS and Congress has gotten much more aggressive in requiring proper documentation of a charitable donation in excess of $250.  Without this documentation, the IRS has the right to completely deny the deduction even though the taxpayer has a cancelled check AND a letter from the charity.  In order for the deduction to be allowed, the documentation must generally include the following information:

  • The amount of cash donated (if any),
  • A description of any property other than cash that was donated (an estimate of the value of said noncash property is not required),
  • Whether the charity provided any goods or services in exchange for the donation (other than intangible religious benefits), and
  • A description and good-faith estimate of the value of any goods and services provided by the charity in exchange for the donation.

Also, the taxpayer needs to receive this before filing their return.

The most often error that we see is the second item.  Many times, the taxpayer will get a listing from the church of all of their donations, but this statement is not included.  If this tax return was audited, the taxpayer would stand a good chance of losing the deduction.

A recent Tax Court case underlines how much this can cost the taxpayer.  In Marshall Cohan case (TC Memo 2012-8), the taxpayer transferred a first right of refusal on valuable property on Martha's Vineyard in exchange for cash and other assets that were value at less than fair market value.  This difference was valued at $2 million by the taxpayer and charity.  The charity provided a written acknowledgement to the taxpayer of what was transferred to the taxpayer, but for some reason did not completely list the assets that the taxpayer transferred to the charity.

The Tax Court agreed with the IRS that the whole $2 million deduction was disallowed and in addition agreed that the taxable gain should have been $15 million instead of the $9 reported.  Bad!

It also appeared that the taxpayer and the charity were playing audit lottery on purposely not reporting all of the items, so the Court agreed that the 20% negligence penalty also applied.  Double Bad!!

Something as little as not completely listing property transferred on a charity transfer can cost taxpayers a large amount of money.


IRS Notices Will Now be in "English"

May 11, 2012

One of the most painful part of being a CPA was responding to IRS notices.  Most of these notices were written in such a way that even a professional tax advisor had problems in determining exactly what the IRS wanted or needed to be done.

The IRS has now announced that it is in the process of revising all of its correspondence to include a plain language explanation of the nature of each notice and will state the actual action that the taxpayer must take in addressing the correspondence.  Many of these letters or notices can be handled without having to call, write or visit an IRS office.

A listing of these redesigned notices and letters, including the number and description are located on the IRS website here.

I am not why it has taken so long to finally do this on the part of the IRS (probably something to do with their antiquated computer system), but it is long overdue and I look forward to see if it really is in "English".

Make Sure the Trust Owns the Property!

May 09, 2012

We received the following questions from a reader regarding using a charitable remainder trust:

I am retiring from farming and I have equipment valued at 500,000 ,all of which is fully depreciated. I would like to give this equipment to a charitable trust to get 50,000 over the next 9 years (I think they keep 10%) . Do I give title to the equipment to the trust or sell the equipment in my name and give the trust the money? Or do I need to have the buyer make the check out to the trust to avoid the income tax? Also if I want to give the trust 10,000 bushels of soybeans ($150,000) and have the trust give it back to me over 9 years, do I sell the soybeans in the trust name or my name and give them the cash?

We have had some discussions on charitable remainder trusts (CRT) previously, but a brief recap is in order.  A retiring farmer can transfer fully depreciated equipment or unsold crop with no tax basis to a CRT.  The CRT can sell the assets, pay no tax, invest the proceeds and then provide an annual annuity to the farmer as outlined in this question.  The farmer will pay tax on the income as it is received and it is not subject to self-employment taxes.

To answer the farmer's questions, he must transfer the equipment and the crop to the trust and then have the trust sell the assets.  If he sells for cash, he will recognize all of the gain on the sale and then get a small charitable dedution on the transfer to the trust.  This defeats the purpose of using a CRT.

To make the transfer, he should create a bill of sale showing the transfer from him to the trust.  If the grain is stored at an elevator or coop, he needs to make sure that the business creates a new account for the trust and then transfer the grain to the trust account before selling.

Also, make sure to NOT have a pre-arranged sale of the assets already  in writing before the transfer.  If this happens, technically the farmer is required to report the income in most cases.

Maximum Section 179 Remains at $500,000 for Many Farmers

May 08, 2012

With the rapid changes in the bonus depreciation and Section 179 deduction for 2010 to 2012, I thought I would update our farmers on how much Section 179 is available.

For bonus depreciation of new equipment, if the asset is placed in service between Jan. 1, 2012, and Dec. 31, 2012, 50% bonus depreciation is available.

Section 179 rules are a little different, since these provisions are based upon when your fiscal year begins. Many farmers have a C corporation and if their fiscal year begins in 2011, they can take a Section 179 deduction of up to $500,000. For fiscal years beginning in 2012 (including the normal calendar year), a farmer can take Section 179 of up to $139,000, and the phase-out of this deduction begins at $560,000.

Let's show an example:

Farmer Smith has a C corporation with a year beginning Sept. 1, 2011, and ending Aug. 31, 2012. The corporation purchases a new tractor for $300,000 on Nov. 1, 2011, a new combine for $350,000 on March 1, 2012, and two used tractors for $375,000 on June 1, 2012.

The corporation will be able to fully deduct the new tractor bought in November, and then has to make a choice on the new combine bought in March for $350,000. If it does not take Section 179, the 50% bonus depreciation creates a $175,000 deduction plus normal depreciation of $18,750, or $193,750 total. If it takes the full Section 179 on the tractors of $375,000, this leaves $125,000 to apply against the combine, leaving $225,000 available for bonus depreciation, resulting in $112,500 plus depreciation of $12,053, or total Section 179 and depreciation taken of $249,554.  In this case, taking the Section 179 of $125,000 results in a larger total deduction by about $56,000.

If this farmer was a calendar year taxpayer, he would not be able to take any Section 179 on the 2012 purchases, since the total cost of $725,000 exceeds the Section 179 phase-out amount of $699,000 ($560,000 plus $139,000).

Remember, you have to take Section 179 first, then apply bonus depreciation on new assets and depreciate any remaining amount using normal tax depreciation methods.

What "Exhausted" Means for Social Security

May 03, 2012

We had a reader respond to our last post on the trustees report about Social Security. In that post, we mentioned that the trustees are projecting that the Social Security "pension" fund will be "exhausted" by 2033, three years ahead of previous projections.

Social Security is a form of a pension plan and it has three major components that make up the fund. Two are positive and one is negative. The positive items are contributions (i.e., FICA taxes) and earnings. The negative is benefits paid out. Right now, the Social Security fund totals about $2.7 trillion.

The trustees project that more revenue will come into the fund (taxes and earnings) than is being paid out through the year 2021 or so. This will result in the fund increasing to almost $3.1 trillion. Beginning in 2022, the benefits being paid out will start to exceed the amount of income coming in, and this deficit will increase each year. The trustees are projecting that the surplus of $3.1 trillion will be completely gone by 2033.

It is at this point where the fund is "exhausted." After that year, the money coming in will not be enough to cover the money going out and the fund will run at a deficit, which will be covered in some way: either directly, by additional taxes being paid by employers, employees or taxpayers, or by a cut in benefits, or some combination of both.

The trustees would like to see this happen now and not in 2033, when it is too late.

Social Security Wage Base Expected to Be $113,700 in 2013

May 03, 2012

The Social Security Administration (SSA) has projected that the wage base for 2013 will increase to $113,700 ($110,100 in 2012) due to an increase in average wages. However, the projection may change slightly when the actual increase is announced in October. The projection is part of the annual report that the SSA's trustees gives to Congress each year.

As part of the report, the trustees project that the fund will be exhausted in 2033 (three years sooner than earlier projections). The report also includes the following recommendations for keeping the Social Security program solvent:

  • Increasing the combined employer and employee contribution from the current 12.4% (10.4% in 2011 and 2012) to 15.01%, which is a 21% increase;
  • Reduce scheduled increases in benefits in a manner equivalent to a reduction in benefits of 16.2%;
  • Draw on alternative sources of revenues (i.e., other types of taxes);
  • Or a combination of the three.

Click here to read a copy of the report.  It is only 252 pages long.

These changes are very politically tough to do and it will be interesting to see what happens and when.

States Want Their Share of Taxes on Gambling Winnings

May 02, 2012

I came across a new Wisconsin Tax Bulletin release the other day and thought I would share with you how states are being much more aggressive in demanding their share of tax from gambling winnings.

If you are a resident of the state of Wisconsin and receive a form W-2G for gambling winnings, you are taxable on those winnings when you file your return. Now, if you gambled in Iowa and received form W-2G (assuming it was a large enough amount), you must file a return in Iowa, report your winnings, and then claim an offset on your Wisconsin tax return for any tax paid to Iowa. In most cases, you will not pay extra tax, but you will be required to file an extra return.

The unique part about taxation of gambling winnings is that you can only offset gambling losses against gambling winnings based upon the net winnings from a "gambling session." Each gambling session is treated as a separate taxable event, and if you have a net loss in one session, you cannot offset any of that net loss against your net winnings.

For example, let's assume you go to a Wisconsin casino in the morning, sit down at a slot machine, take one spin of the wheel and hit the jackpot for $10,000. You decide to cash in and go golfing for the rest of the day. That evening, you go back to the casino, take your $10,000 and start to play the slots. You have a bad night of it and end up losing the full $10,000 plus another $5,000.

In the eyes of the state of Wisconsin (and most likely other states), you are taxable on the $10,000 won in the morning and cannot deduct any of the net loss of $5,000 in the night session. So you are out of pocket $5,000 plus Wisconsin taxes on the $10,000 winnings, which could easily be $1,000.

This can add up to a lot of extra state taxes at the end of the year, even if you lost money gambling during the year.

The key thing about this notice and others like it is that if you gamble infrequently, you probably do not need to worry about it too much. However, if you gamble on a regular basis, the IRS and each state you gamble in will want their "fair share," and maintaining adequate records of your gambling sessions is very important.

The Pace of Planting

May 01, 2012

I am not an expert on planting progress, but I thought I would share my observations from my trip last week from Kansas City to northern Wisconsin.

In northwestern Missouri and northeastern Kansas, most of the corn appeared to be planted or fairly close to being done. Some farmers were going to wait a few days before planting beans since they were still early compared to other years.

Heading into Iowa, the planting progress appeared to be much slower. In my travels around the Waterloo area for two days, I saw very few planters in the field and rain was expected by that weekend. With the newer, larger planters, farmers can plant many more acres than in years past, but Mother Nature still needs to cooperate.

In northern Illinois, corn planting appeared to be almost done and the farmers that I met with had just finished planting the night before I arrived.

With 2011 being a record year for farm income, you should be looking at your farm budget for this year to see if you can lock in prices that approach last year and at least cover your input costs. If the U.S. really ends up planting 96-million-plus acres of corn and harvests a 160-plus-bushel crop, prices will most likely go down, and this can materially affect your bottom line.

Also, if you are late getting in your corn, with bean prices near $15, you may want to consider switching to beans and locking in these good prices now.

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