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April 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.

If the Bubble Busts, How Long to Recover

Apr 28, 2011

There has been a lot of talk lately in the press about whether farm land prices are entering a bubble phase similar to farm land in the early 1980's or tech stocks in the late 1990's.

I decided to take a look at farm land prices for good Iowa farmland from 1950 to 2010 and see how long it took for prices to recover back to the old peak.
 
Good farmland in Grundy County, Iowa peaked out in 1981 at approximately $2,947 per acre.  It bottomed in 1986 at $1,047 or a drop of about $1,900 or 65%.  It took from 1986 until 2003 or 17 years for the average price of farm land in Grundy County to top $3,000. 
 
From start to finish, it took about 22 years for the cycle to finish.  Now, what is not factored into this is that farm land continued to return cash rent each year.  This probably averaged a 3% or so return each year.
 
Most crashes from any bubble usually correct from about 50-65% each time.  Therefore, if prices are around $10,000 right now and this is the top, farm land may not fully stop sliding until it hits $3,500 - $5,000 in value.
 
I am not suggesting that we are in a bubble right now, however, all prices of stock, bonds, commodities and farm land do tend to go in cycles, so if we are in a bubble, it may take several years for prices to fully recover. 

Don't Taint Your Farm Building

Apr 27, 2011

We had a reader ask the following question:

"Does a construction company putting up a building get the same 100% bonus depreciation for 2011 like is on Ag buildings"
 
The quick answer to this is "no".  A construction related building is not considered to be 20 year property and therefore is normally depreciated over 39 years on a straight-line basis and is not available for 50% or 100% bonus depreciation.
 
This does bring up an issue that farmers need to be aware of if they are constructing new buildings on their farm property during 2011 and 2012.  If the purpose of the building is 100% farm related, then the building will always qualify for the bonus deprecation.  However, if the building is used partially for farm purposes and partially for non-farm purposes, then none of the building may qualify for bonus depreciation.
 
For example, many farmers have several other businesses that they operate.  They may have a:
  • Trucking business to transport their own grain or others grain,
  • A tile laying business,
  • A construction business,
  • Excavating, road-building, and related business,
  • Fence erection business, etc.
 
Most farmers would consider that most of these businesses are related to farming, however, in most cases the IRS would consider these to be non-farming business.  Therefore, if a new farm machine shop that is erected and the use of this building includes these non-farm operations, then the building may not be considered a farm building for bonus depreciation purposes.
 
There is no one answer as to how much incidental non-farm use you can have and still have it qualify for bonus depreciation, but if any of these non-farm operations apply to your operation and you are planning on building a new farm  building this year, make sure to review with your tax advisor.

It's Total Farm Compensation - Not Wages - That Counts

Apr 25, 2011

I think that every farm operation should have an employment contract with each of their farm employees including all family members employed in the farm operation.  As part of this document, there should be an exhibit that outlines the total compensation package to each employee.  Most farm operations offer much more than a wage such as housing, medical insurance and medical expense reimbursements, meals, and other non-taxable fringe benefits.

This is especially true with family members and sometimes the family members are not aware of the actual pre-tax value of the compensation provided to them.  Some may look at the paycheck and think they can do much better working off the farm, however, when the total compensation package is presented, in most cases it is usually better than what they can do off the farm.
 
For example, let's assume a son works for his dad on the farm and receives a $2,000 per month salary.  In addition, the farm provides the following (with monthly values):
  1. Housing        $1,500
  2. Utilities             300
  3. Food                  600
  4. Med. Ins.           900
  5. Med. Reimb.      500
  6. Farm Truck        500
 
The total monthly value of these items is $4,300.  On a pre-tax basis assuming a combined 30% federal, state and payroll tax rate, this results in an annual pre-tax value of $73,715.  This plus the annual salary of $24,000 results in total compensation of about $97,715.
 
As you can see, this farm worker would need to make close to $100,000 off the farm to be equal to what they are making on the farm.
 
It is important to let your employees (including family members) know what their true compensation package is each year.

Deduct Your Tiling This Year

Apr 11, 2011

We got the following question from one of our readers:

"IF A TENANT TILES OUT LEASED FARMLAND CAN THE TENANT DEDUCT THE COST OF THE DRAINAGE TILE AND LABOR DURING THAT TAX YEAR ON SCHEDULE F?"
 
2011 provides a great opportunity for either an operating farmer or landlord to put in new tile and deduct 100% of the cost under the bonus depreciation rules.
Tiling is usually allowed as a deduction for Section 179 expense, however, sometimes there are income limitations and other restrictions to using Section 179.  The nice thing about bonus depreciation for new tile is that there are no income limitations and 100% of the cost is allowed as a deduction.
 
However, if a landlord's farm rental is considered a passive activity and they incur too much cost for the year compared to their passive income, they will only be able to deduct the tiling to the extent of their income.  The excess is allowed to be carried forward to 2012 and most likely deducted then.

Goodby Pesky New 1099 Reporting

Apr 06, 2011

As we have posted here several times, last year, a new law was put into place that required reporting of all transactions over $600 to any vendor in a year.  This included paying gas to the local coop, buying your fertilizer, etc.

Yesterday, the Senate passed a bill which President Obama is expected to sign quickly a repeal of this new law.  This is great news for all farmers and anybody in business.
 
However, please note that the old form 1099 reporting requirement for services is still in effect.
 
On a personal note, this tax season has gotten even busier for me and I will try to get back to my normal routine, but it may be a couple of more weeks to go.  I hope everybody has a good grip on their income tax situation since I know 2011 is looking even more profitable for farmers.
I hope to start posting more very quickly.
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