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December 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.

Happy New Year!

Dec 30, 2011

We wish all of our readers a very happy New Year.  We started this blog almost three years ago and every month without fail we have ever increasing readership.  From just having a couple of comments and questions per month to probably having at least 10 a week, we have enjoyed every day of interacting with the readers.  We hope the information has been useful and look forward to providing even more in 2012.

We wish everyone a prosperous New Year and we shall see what surprises 2012 brings.

Crop Insurance Proceeds - Update

Dec 29, 2011

An alert reader let me know that one of my points on how to defer your crop insurance proceeds was not written as well as it could have been.

In my original post, I had indicated that each crop is a "separate" business unit, then each crop is looked at separately.  This separate business unit definition is really based upon how the farmer accounts for his grain operations.  Almost all farmers account for their grain operation under one business unit which includes the production of corn, soybeans, wheat, cattle, etc.  Under these conditions, the farmer if they elect to do so, is required to defer all crop insurance proceeds for those crops that qualify for the deferral. 

Therefore, if the farmer has one business unit and crop insurance proceeds are received on both corn and beans, the eligibility test for deferring crop insurance proceeds is based on the aggregate. If together more than 50% of the crop sales are normally reported in the year after harvest, then the farmer can elect to defer all of the insurance proceeds to the following year.  

If the farmer, however, has more than one business unit with multiple crops, then each business unit can review its situation and decide if it wants to defer the crop insurance proceeds.  For example, a farmer may run his farm as a sole proprietor and have another farm operation with a brother in a partnership.  Both his crops and the partnership crops are damaged by hail and receive crop insurance proceeds.  The farmer can elect to defer his crop insurance proceeds, while the partnership can elect to not defer or vice versus.

As you can see, crop insurance deferral rules can get a little bit complicated and each situation can be a little bit different.  Always review this with your tax advisor and thanks to the alert reader for requesting clarification.  

 

 

 

 

When Do I Report My Crop Insurance Proceeds?

Dec 27, 2011

We had a reader ask the following question:

"I was flooded on one farm & hailed on another so received multi-peril income this year. How much of our MPCI can be deferred?"

Without knowing all the facts here, we can give general advice on how much crop insurance proceeds can be deferred from one year to the next.  There are several rules that must be followed:

  • The crop insurance must be for damage to the crop, not reimbursing you for a reduction in crop prices. 
  • The general rule is that more than 50% of your crop sales normally occur in the following year.  For example, if you harvest corn in October, normally sell 35% at harvest and the remainder in the following year, you can defer your crop insurance proceeds.  However, if normally sell more than 50% of your crop at harvest or in the current crop year, you cannot defer the proceeds.
  • First, the crop insurance proceeds must be received in the year of the actual crop damage.  If the crop was damaged in 2011 and the crop insurance proceeds were received in 2011, then you may defer the income to 2012 as long as you meet the other rules.  If the proceeds are received in 2012, you have already deferred the receipt by one year and thus it is taxable in 2012 and cannot be deferred to 2013.
  • Each crop is a separate "business" unit, so each crop must be reviewed to see if the crop insurance deferral rules apply.  You may have one that qualifies and one that does not.  Therefore, if one crop (perhaps corn is sold more than 50% in the next year) and one crop (soybeans is sold more than 50% in the current year), then corn would qualify to be deferred and beans would not.
  • You cannot pick and choose the amount that you can defer.  If you elect to defer the crop insurance proceeds, you must defer all proceeds received during the year for that particular crop.

 

These are the general rules and will cover almost all situations, however, there are usually some anomalies out there and you always need to review this with your income tax advisor.

Payroll Tax Cut Extended For Two Months - Sortof!

Dec 24, 2011

President Obama signed late yesterday a new law extending the payroll tax cut for the first two months of 2012. This means for January and February 2012, the employee's portion of the FICA tax will be 4.2% instead of the normal 6.2%. For self-employed farmers, for net SE farm income up to $18,350 shall be at the reduced rate (this is reduced by any other wages earned during the period). If the payroll tax cut is not extended for the rest of the year, I am assuming the W-2 would have to be revised to reflect any wages earned between January 1, 2012 and February 29, 2012 (what a mess that would be).

However, the new law has a recapture provision for any wages earned during the first two months in excess of $18,350. This recapture provision provides for a tax of 2% on all wages in excess of this amount earned during the first two months. The $18,350 is one-sixth of the FICA wage base of $110,100 for 2012.

The IRS will interpret this new section including how this tax would be paid. We will keep you posted.

For Building to Qualify for 100% Bonus Depreciation It Must Be Complete in 2011

Dec 23, 2011

We had a reader ask the following question:

"I put a deposit on a building in Nov 2011 thinking that it would completed and paid for by 12/31/11. The builder has not started the building yet and says it will most likely be completed mid January. What can i do to get the 100% cost deduction for 2012? Could I just pay for it now, or does it have to be 100% complete by 12/31/11?"

In order for a farmer to construct a new farm building in 2011 and be able to take 100% bonus depreciation on the building, it must be completed by December 31, 2011.  Usually having the occupancy permit that shows the completion date on or before that date will be sufficient, but in several states, the local county does not issue occupancy permits on many farm buildings.

In these cases, I would try to take photos of the property and get them date stamped and put in some type of file showing that the building was completed.  To prove the date, etc., you may want to hold up a copy of the local newspaper showing the date so that there is no question on what date the photo was actually taken.

In this case, since the construction will not be finished by year-end, then 50% bonus depreciation will apply in 2011, not 100% bonus depreciation in 2011.  There might be a chance that the construction is of two separate buildings.  For example, a machine shop may be one building and a shop located next to the machine shop may be a separate building.  If one is done in 2011, it would qualify for 100% bonus depreciation, but this does not appear to apply here.

Merry Christmas to all of our readers and we wish everyone a Happy New Year!

Use of a CRT for Retirement Income - Update

Dec 21, 2011

In my post yesterday, I need to clarify one tax aspect of the post.  When a farmer contributes all ordinary income assets such as unsold grain, farm equipment, etc. the deduction that the farmer may get is limited to his cost basis in the assets.  Since unsold grain for a cash basis taxpayer has a basis of zero and most farm equipment has been fully depreciated, there may be little or no tax deduction by creating the CRT.

However, the power of the CRT is the deferral of the income from the sale of the grain and the equipment, not the income tax deduction on creating it.

Thanks to a reader for catching this for me.

 

Use a CRT for Retirement Equipment Sales

Dec 20, 2011

We had a reader ask the following question:

"Is there any way to reinvest money from the sale of equipment(retirement) rather than pay ordinary income tax on it?"

Most farmers when they retire have a large amount of income from selling the final crop and their equipment and many times very little expenses to offset it with.  This results in a large amount income tax being owed, thus reducing the farmer's after tax cash flow.

One method that we use to reduce and spread out this tax burden is the use of a charitable remainder trust (CRT).  The farmer will contribute their equipment and unsold grain inventory to the CRT.  Based upon the term of the trust, the farmer will get a tax deduction for this transfer.  The CRT will the sell the equipment and grain and owe no taxes on the sale.  Rather, this gain is accumulated and as the CRT makes payments to the farmer, they are taxed on the distributions when they receive the payments.  These distributions can be fixed at a certain annual amount or a percentage of the trust value each year.

In order to be a valid CRT, at least 10% of the assets transferred into the trust must be expected to go to charity at the end of the trust term.  A CRT is a great method to defer the tax for several years on the sale of farm equipment and final grain sales.

If this is something you are interested in, you need to review it with your tax advisor since there several calculations that must be made.

One example is as follows:

Farmer is retiring and has $1 million of farm equipment and $750,000 of final grain inventory to sell.  He does not need the cash immediately and wishes to use this as retirement income.  If the farmer sold the equipment and inventory for cash in his name, the total taxed owed would be about $750,000 assuming a top federal and state tax bracket.  He would have $1 million left over to reinvest at lets say 4% a year or $40,000.

By putting these assets in the CRT, it could sell the equipment and grain and pay no tax.  The CRT would have $1,750,000 earning 4% or $70,000 per year.  The CRT would then distribute this income and some principal out the farmer each year and it is likely that the farmer would be in a lower tax bracket on that income.

Get Ready for the Payroll Tax Teeter-Totter!

Dec 19, 2011

With the wrangling over the extension of the payroll tax between the House, Senate and President, we may not know if the payroll tax cut is in place on Jan. 1, 2012, or not. There is a chance that the extension of the law may occur early in 2012 and be retroactive to Jan. 1, 2012. We hope that this does not happen, but recent history shows there is a good chance of it occurring.

The primary issue for our farmers is whether the payroll tax software they use is timely updated for these changes. Right now, the law says there will be NO payroll tax cut in 2012; therefore, most of the software companies have programmed their software for this. However, if a new law is passed either at the end of this month or early next month, the software may not get updated for your first payroll. This may cause it to be wrong and changes will need to be performed to get the right amount of pay to your employees and report the right taxes on your Form 943 at year-end or Form 941 for the first quarter.

We hope it does not get messy, but want to warn you that it might.

What Happens If I Don't Know My Cost Basis?

Dec 16, 2011

A reader asks the following question:

"How do you prove what you paid for a land asset that is subject to capital gain purchased long ago if no records exist? The land deed only shows the deed tax paid at the recorder's office, with no stated value."

 

Although the requirement for keeping records in most cases is three full years, this is one of those situations where you want to keep the closing statement on any land or property purchases until three years after the year of sale, and I would highly suggest keeping these records in your permanent file.

However, as in this case, many times these records are lost.

First, we must make sure that this property has not been inherited after the original purchase.  For example, if my father purchased 160 acres of land in 1960 for $50,000 and I inherited it in 2001, the new cost basis in that property is what it was worth on the date of my father's death, not what he paid for it in 1960. Therefore, if the reader has inherited this property, it does not matter what was paid for it.

Also, we need to verify that it was not partially inherited as in the case of a husband and wife, with one spouse inheriting the other's interest. Then, half would be based on original cost and the other based on the value at the time of death. (For a community property state, it would normally be like the first example on a full step-up in basis.)

If neither of these circumstances apply, we must try to find substantiation for what the original cost was. In this case, I would try to track down who recorded the deed at the courthouse and, if it is a title or escrow company or attorney, contact them; in many cases, they will have the original cost and closing statement. Also, in some cases, the county will have a record of that sales information -- it just would not be recorded on the deed. If your state had an excise tax due on sale for that year, you may be able to get the information from the state or county.  Every state and county is different.

If none of this works, then we normally try to use our best judgment on what the original cost of the property might be and realize that if this return gets audited, the cost may be disallowed.  Every case is different, and you need to review with your tax adviser.

 

Think about Paying a Tax Estimate on Jan. 17

Dec 15, 2011

With most farmers net income for 2o11 being most likely higher than 2010, you may want to consider paying a tax estimate payment on January 17, 2012 to give you until April 15, 2012 to file your return.

Most farmers try to get their tax return filed by March 1 of each year.  If a farmer files and pays their income tax on or before March 1, there is no requirement to make any estimated tax payments for the year.  However, many farmers have invested in other operations such as an ethanol plant and many times they have to wait until after March 1 for the k-1 or the farmer has investments and the form 1099 does not even show up until after this date.

This causes the farmer and tax preparer to get in a huge hurry and many mistakes can happen.

If a farmer knows that his tax liability for 2011 will be higher than 2010, they can simply pay last year's tax amount on or before January 17, 2012.  The required amount to be paid in is last year's tax amount or 66.67% of this year's tax (net of any federal income tax withholding including any overpayment applied from 2010), whichever amount is less.

With today's low interest rates, paying in some tax on January 17th, with the remainder on April 15 will most likely have about the same interest cost of paying all of it on March 1 and save the farmer and their income tax preparer a lot of headache.

If you think this might apply to you, make sure to review your situation with your income tax advisor to determine what amount of tax to pay on January 17, 2012.

IRS Announces New Standard Mileage Rates

Dec 14, 2011

The IRS announced this week the new standard mileage rates for 2012.  Most of the rates remained the same as the last six months of 2011.  For regular business use, the rate is still 55.5 cents per mile (don't ask me where they came up with the half cent).  For charitable purposes, the rate is 14 cents and for moving and medical expenses, it is 23 cents per mile.

You can use these rates to reimburse your employees for their business miles and or deduct businessuse of your personal vehicles on the farm.

Here is the announcement.

Year-End Equipment Flexibility

Dec 13, 2011

We had a reader ask the following question:

"If I purchase and take delivery of a tractor in December 2011 but do not want any of the depreciation until 2012 can I still get the section 179 and bonus depreciation in 2012?"

 

In order to depreciate equipment such as this tractor in 2011, the farmer must both purchase the tractor (either for cash or financing it) and place the tractor in service.  Generally at year-end, the tractor needs to be delivered to the farm and available for use on the farm.  The farmer does not have to actually use the tractor in the field before year-end, but it must be available for that use.

If the farmer meets both of these tests, then the tractor is depreciated in 2011 either using bonus depreciation, if new, or using Section 179 and regular depreciation on the remainder, if used.

Now, if this farmer does not want to depreciate it in 2011, then he can purchase the tractor, but not place it in service.  He may simply have the tractor delivered to the farm after year-end and this would make it eligible for bonus depreciation and Section 179 in 2012.

However, the farmer needs to understand that bonus depreciation in 2012 is only 50% not 100%, and Section 179 is only available on $139,000 of assets, not the $500,000 available in 2012.  Now, these numbers may change and go back to the 2011 amounts, but this is not law yet.

Will We See 100% Bonus Depreciation in 2012?

Dec 12, 2011

A reader asked the following question:

"President Obama's proposed Jobs Act includes an extension of 100% bonus depreciation through 2012; however, it excludes qualified real property. Does this include farm buildings?"

 

First, I think there is a very good chance that we will see 100% bonus depreciation sometime in 2012. However, we are dealing with politicians in Washington, D.C., and this decision may not get made until after next year's election. This is what happened in 2010. For planning purposes, we currently have 100% bonus depreciation for 2011 and 50% for 2012. Those are the numbers I would use for now.

Second, qualified real property relates more to retail lease space and restaurant property, etc. All farm buildings have either a 20-year life or perhaps a 10-year life for structures such as a hog confinement building. Under the section of the code dealing with bonus depreciation, all assets with a life of 20 years or less qualifies for bonus depreciation. So the bottom line answer is that farm buildings would qualify under President Obama's proposal.

 

Some Questions about Section 179

Dec 07, 2011

A reader asked the following question:

"Do I have to take 100% of the cost of  property when opting for the Section 179 depreciation, or am I also allowed to take any % less and then use normal depreciation for the remainder? Also, if it is placed in service in 2011 and paid for in 2012, is it all reported on the 2011 taxes?"
 
You are not required to take 100% of the cost of an asset for Section 179. Section 179 is an election that a farmer can make. By using the election, the farmer will list the asset that he wants to take the deduction on and how much of a deduction he wants to take. For example, if you purchase a tractor for $175,000, you can elect to take a Section 179 deduction of anywhere from $1 to $175,000 (depending on your income limitation). The remaining amount after the Section 179 deduction will be depreciated normally. For 2011, if the tractor is new, the remaining amount will be 100% bonus depreciation and, if used, it will normally be depreciated using a seven-year life.
 
If you purchase new equipment, we would normally suggest just taking the 100% bonus depreciation for this year. Reserve Section 179 for any used assets.
 
For the second question, as long as the equipment is placed in service before the end of the year and the farmer has incurred a debt (to be paid after year-end), the equipment is available for Section 179 or 100% bonus depreciation if new and Section 179 if used.

It Might Not Pay to Do Equipment Trade-in

Dec 06, 2011

Most farmers automatically assume that it is always better to trade-in their farm equipment to save on income taxes.  However, for 2011, if your total farm equipment purchases is going to be less than $500,000, then in most cases it would almost always be better to sell your farm equipment for cash and then buy equipment for full face value from a tax standpoint.  I will explain here, however, in many states (such as Washington), you are not subject to sales or use tax on the trade-in value.  In these states, the savings on not paying sales tax may outweigh the income tax savings.  You would need to review this in each situation.

Let's say we have a farmer who is self-employed and has earned $100,000 for the year and has a tractor currently worth $100,000.  The tractor is fully depreciated.  The farmer can trade it in for a tractor costing $100,000 or he can sell the tractor for $100,000 and use these proceeds to purchase the newer tractor.  If the farmer trades the tractor in, he recognizes no gain on the tractor and has no additional depreciation to take.  If he sells the tractor for $100,000, he recognizes a gain of $100,000 on form 4797 and he can take Section 179 or bonus depreciation, if a new tractor, of $100,000 on his Schedule F to bring the net bottom line income back to the same as the trade-in. 
 
Now most farmers are asking "What's the difference"?  The difference is that with the sale of the tractor, this income is not subject to self-employment tax.  If the farmer had made $100,000 on his schedule F, he has now converted this income to $100,000 on form 4797 and zero income on Schedule F.  During normal years, the self-employment tax savings would be close to $15,000 (in 2011, it would be about $2,000 less).  All the farmer has done is move $100,000 of income from Schedule F to Form 4797 and save about $15,000 in self-employment taxes.
 
If the farm is operated inside of a corporation (either C or S), there would be no material tax savings.  This really only applies to a sole proprietor or partnership where the farmer would be under the maximum self-employment base of approximately $107,000.  If the farmer exceeds this amount of net self-employment income, then the savings would be slightly less than 3% of the trade-in value.
 
Also, remember that the sales tax cost may outweigh the income tax savings, so you must review this with your tax advisor to see if it applies to your situation.

Don't Forget the New Veterans' Tax Credit!

Dec 05, 2011

A new tax credit for farms that hire unemployed veterans is in effect now that President Obama has signed the legislation officially eliminating the 3% withholding on government contractors that was scheduled to begin in 2013. I think I have seen more laws get initiated and eliminated in the last three years than I saw in my first 20 years of being a CPA.

The credit amount varies with how long the veterans have been unemployed. It's 40% of the first $14,000 of wages for vets ($24,000 if disabled) who have been jobless for six months or more in the year before they were hired, and 40% of the first $6,000 of wages for vets who've been out of work at least four weeks but less than six months.
 
The credit applies for eligible veterans starting work after Nov. 21, 2011, and before Jan. 1, 2013.
 
Forty percent of $14,000 is $5,600, which can be a good-sized credit, plus we are helping get those veterans back to work after serving our country. This can be a win/win for both the farmer and the veteran.

Executive Women in Agriculture Conference - Recap

Dec 04, 2011

After a long flight home Friday night, I have had a couple of days to reflect on the the First Annual Conference for Executive Women in Agriculture and here are my conclusions:

  • American Agribusiness should be proud of the women who are active in running a farm or an agribusiness.  Based upon the women that I met at the conference, these farms are in very capable hands.
  • Management of a farm operation from a women's perspective seems to be more about active communication between management and the employees.  In my observations of most farm operations, one of the things most lacking is communication.  Farm management still requires there to be a boss, but equally important is letting the employees know what the boss needs to happen and these women can do a better job of this, however, if us men engage our right side of our brain more often, we can catch up.
  • The newer generation coming up is very comfortable with having a woman as a boss and for a lot of our younger male farmers and employees out there, the idea of work-life balance is extremely important.  The days of expecting our male employee/managers to work the hours that us "older" management workers are used to and expect are most likely gone.  We find this to be true in our CPA firm also.
  • From a speaker standpoint, I found the conference very enjoyable since the women attending my two breakout discussions were extremely competent with their questions and actually asked them.  I have spoke at a couple of conferences where there were only male attendees and there were times when I was not sure if I would get any questions (although if I am talking on taxes and farming, I always get questions).  It was very easy to get feedback from the women and this helps maintain a very vibrant give and take.
 
In conclusion, American Farmers should be proud of the women that attended and I look forward to next year's conference.

Executive Women in Agriculture - Day 1

Dec 01, 2011

I was an attendee at the First Annual Top Producer conference for Executive Women in Agriculture in Chicago.  There were well over 100 women executives in  attendance and the speakers lined up for today were outstanding. 

American agriculture is well represented by these woman executives and I look forward to more getting involved in the future.

Several of the sessions were focused on their role in the farm and management, but almost all of the topics discussed were applicable to all farms, whether managed by a man or woman.
 
I have two break-outs sessions on farm taxes in the morning and I look forward to the interaction with the group.
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