Jul 13, 2014
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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.

Watch Out for Spousal Inherited IRAs

Jul 10, 2014

Spouses who inherited IRAs have a couple of elections available to them that non-spouses do not have. However, care must be taken to make sure that the 10% early withdrawal penalty does not apply when distributions are finally taken.

When a spouse passes away owning an IRA whose beneficiary is the surviving spouse, that spouse has an election that can be made. This election allows the surviving spouse to rollover the IRA into their own IRA which would allow them to stretch-out distributions over a possibly longer span than would be normally allowed to other non-spouse beneficiaries. However, if the surviving spouse is younger than age 59 1/2, these distributions would then be subject to an early distribution 10% penalty (unless the distributions are exempt under any of the other exemptions).

Therefore, the surviving spouse may want to consider leaving the IRA in the name of her/his deceased spouse. This allows the spouse to take a distribution without incurring the penalty and it also allows a rollover into her/his IRA after age 59 1/2 to take advantage of the longer lives available to them.

This whole area can be very complicated and if this situation applies to you, I would strongly suggest getting guidance before any rollover occurs.

The 12 Day Business Trip

Jul 09, 2014

Today starts my (its seems annual) 12 day business trip to the Midwest. I start in the Minneapolis office for a couple of days of meetings with CLA staff and then head over to the Sioux Falls area for meetings with clients and prospects.

I then head down to Omaha for a Monday seminar I am giving for the Farm Journal Media Legacy Project. I have a dinner meeting that night and then head over to Des Moines where I will be one of the break-out session speakers for the Leading Edge Conference for Pro Farmer. I will give a 30 minute talk on ARC and PLC and as you can tell from my most recent post, I am eager to update farmers on that topic.

I then head over to Moline, Illinois on Wednesday morning to give the same speech I did in Omaha, then head up to Cedar Falls, Iowa area to give another talk on the farm bill. Thursday, I have meetings all day with clients and then drive up to Austin, Minnesota either that night or early Friday to give the same (Omaha/Moline) speech again.

After that, I head down to the Waterloo area to give a speech to a peer group of farmers on the farm bill, entity planning and whatever else they want to discuss. Finally, I get up early Sunday; drive to Minneapolis; fly home and hope my wife still knows who I am.

If any of our readers will be at any of those events, please make sure to come up and introduce yourself. That is probably the most rewarding part of my business is meeting our readers at events and farms all over the US.

ARC-IC Allows for Maximizing Flexibility (Perhaps)

Jul 08, 2014

Under the new farm bill, Agricultural Risk Coverage (ARC) has two elective components. You can either elect county coverage on a covered crop by crop basis (ARC-CO) or elect to have ARC apply to all crops grown on your farm (ARC-IC). If you elect county coverage, you will be paid on each covered crop's base acres and the payment will be 85% of those base acres. Let's assume we have an Iowa farmer with 1,250 corn base acres and 1,250 soybean base acres. If there is a soybean ARC-CO payment of $10 per acre, the total payment would be $10,625 ($1,250 X 85% X $10). If there is a corn ARC-CO payment of $25 per acre, the total payment would be $26,562.50 (1,250 X 85% X $25).

Now, if the farmer elects ARC-IC, they will be paid on 65% of total base acres (which are the same), however, the ARC-IC payment calculations will be based upon the weighted average of actual planted crops each year. This may actually allow a farmer to take advantage of years where the estimated ARC payment for corn is dramatically higher than soybeans or vice versus.

I ran some sample numbers for an Iowa farmer with the same base acres (1,250 soybeans and 1,250 corn). The Olympic county average for corn was about 172 bushels per acre and the Olympic farm yield was 171 bushels per acre. To be conservative, I assumed the county yield for 2014 would be 175 bushels per acre, but I increased the farm yield to 190 (as yield goes up, the ARC payment goes down). I then ran the numbers assuming an average mid-year price between $3.70 (when PLC kicks in) and $4.10. In my assumption, I assumed the farmer would elect to plant 2,500 acres of corn this year and no soybeans. Under ARC-CO, it does not matter how many acres are planted, but with ARC-IC, it does matter.

The maximum payment allowed for ARC-CO was $97,315 comprised all of corn. I assumed a $10.75 price for soybeans. In order to receive a soybean payment, the price would have to drop to below $10.35. However, the maximum payment for ARC-IC was $150,963 which is about $53,000 higher than ARC-CO even though the payment is based on 65% of base acres, not 85% of base acres. ARC-CO starts to make a small payment at a corn price of $4.50 while ARC-IC does not receive a payment until corn prices drop to about $4.10. At about $3.90, the payment for ARC-CO maxes out at $97,315 and the payment for ARC-IC is about the same. Between $3.90 and $3.71, ARC-IC continues to rise until it maxes out at $150,963. As you can see, even though ARC-IC is making payments based on much lower base acres, the actual payment allowed can be much higher under ARC-IC than ARC-CO if the farmer anticipates the correct crop to plant in its rotation.

If we assumed the farm yield would be the same as the county, ARC-IC makes even more economic sense. In that case, the farm would start collecting a payment at a price of $4.55 of about $4,000. At $4.25 ARC-IC would be paying $89,635 and ARC-CO would only pay $46,708. At $4.03, ARC-IC maxes out at $150,963 and ARC-CO is still only paying $87,614.

Now if we assume that the farmer's yield is only 160 bushels per acre, the payoff is even quicker. In that case, the farmer would start to get a payment if the average price of corn is at $4.99 (I think most farmers would take $4.99 right now) and would hit its maximum of $150,963 at a corn price of $4.41. At that price, ARC-CO is only making a $16,958 payment.

If the farmer had elected PLC, no payment would be owed until corn drops below $3.70 and soybeans drop below $8.40.

For many farmers, their rotation over the last few years has leaned toward corn-on-corn. Since it is likely that ARC will make larger payments for corn than soybeans, they should consider making the election to update their base acres to the 2009-2013 average . This may allow them to maximize their ARC-CO payments for 2014 and 2015. After those years, the crystal ball is very cloudy.

IRS Modifies Offshore Voluntary Disclosure Program (OVDP)

Jul 07, 2014

On June 18, 2014, the IRS announced new updated procedures for the voluntary disclosure program and new streamline filing procedures which in many cases substantially reduces the penalty exposure for non compliant taxpayers to 5% of the highest balance in foreign accounts and non-declared assets. I have personally worked with clients that were involved in the old voluntary disclosure program and I can tell you it is not a pleasant experience.

Under the old program the penalties could easily exceed 25% or more the assets held in the foreign accounts even if all of the income was reported on the income tax return. With many farmers holding accounts in Canada or farm operations out of the country, it is extremely important to properly report these accounts. The penalties for not reporting them can be extreme, although the new modifications do seem to reduce these substantially.

Changes made to the existing 2012 Voluntary Disclosure Program are as follows:

  • Requiring additional information from taxpayers applying to the program;
  • Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
  • Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
  • Enabling taxpayers to submit voluminous records electronically rather than on paper;
  • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.

For full details of the IRS announcement, you can access it here. If there are new changes, we will keep you posted.

The Continued Attack on Section 1031 exchanges

Jul 03, 2014

In the FY2015 budget proposal released by President Obama back in March of this year was certain provisions of importance to farmers. One provision is the permanent extension of Section 179 at the $500,000 level. This would be a welcome change, however, as previously discussed in several posts, this will not happen until after the mid-term elections.

Another provision that is also of importance is major proposed changes to Section 1031 exchanges. Under current law, a farmer is allowed to sell farmland (or other assets) for unlimited gains and as long as the proceeds from the sale is rolled over into other qualifying property, the gain is fully deferred until the property is fully disposed of (or if the person dies, a full step-up in basis will remove the gain from taxation permanently).

President Obama's budget proposal would limit the amount of gain from real property that could be deferred to $1 million on an annual basis (indexed to inflation). Here is the actual wording on the reasons for the change:

There is little justification for allowing deferral of the capital gain on the exchange of real property. The difficulty in valuing exchanged property is a primary historical justification for1031 deferral. However, this rationale has limited appeal. For the exchange of one property for another of equal value to occur, taxpayers must be able to value the properties. In addition, many, if not most, exchanges affected by this proposal are facilitated by qualified intermediaries who help satisfy the exchange requirement by selling the exchanged property and acquiring the replacement property. These complex three party exchanges were not contemplated when the provision was enacted. They highlight the fact that valuation of exchanged property is not the hurdle it was when the provision was originally enacted. Further, the ability to exchange unimproved real estate for improved real estate encourages “permanent deferral” by allowing taxpayers to continue the cycle of tax deferred exchanges.

I have underlined some of the reasons that I would like to expand upon:

  • In my opinion "the difficulty in valuing" property was not the primary historical justification for 1031 deferral. Simply, the law was intended to allow the taxpayer to exchange real property for other real property and defer the gain since the taxpayer would be in the same shoes after the exchange (and not have cash to pay the tax).
  • Taxpayers were always able to value the properties since if they did not value the property, why would they do the exchange. If they sold property for $1 million, you can count on the taxpayer knowing the value of the replacement property being $1 million.
  • The qualified intermediary (QI) was brought into existence by Congress in response to the "Starker" case. Congress could have just as easily written the law to provide for rules applying a 45 day identification rule and 180 rollover rule without the need of the QI. You can't state that the three party exchanges were contemplated when the provision was enacted when in fact, Congress created the provisions.
  • The Section 1031 rules do encourage "permanent deferral" and that is not necessarily a bad idea.

As you can see, President Obama has "reasons" for these changes, but it is fairly obvious this is not a correction of a "loop-hole" but rather an attempt to raise revenue. We will keep you posted on these proposed changes, but again, this will not happen before the mid-term elections. however, all bets are off after those elections and before December 31, 2014.

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