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December 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.

Be Careful of Fiscal Year Section 179 Issues!

Dec 30, 2012

Section 179 and bonus depreciation provisions are based upon a different set of dates for your asset purchases. Bonus depreciation on new equipment is based upon the date that you actually purchase and place in service the asset. For new assets bought between January 1, 2012 and December 31, 2012, you are entitled to use 50% bonus depreciation on these assets. After December 31, 2012, bonus depreciation is no longer scheduled to occur.

Section 179, however, is based upon when your fiscal year begins. For most individuals, you have a calendar fiscal year (there are some unique individuals that do not have a calendar year), but many entities such as corporations may have a fiscal year-end of any month in the year.

When you have fiscal year flow-through entities such as an S corporation, you must be careful to not pass through too much Section 179 to the individual. For fiscal years beginning in 2011, the maximum Section 179 was $500,000. For fiscal years beginning in 2012, this amount dropped to $139,000. Therefore, if you have an S corporation whose year began in 2011 but ends in 2012, they may elect to take the full $500,000 and pass it through to their shareholders. This may result in the shareholder getting a deduction greater than $139,000 and this excess is not deductible in 2012 on their personal return and the excess in almost all cases is completely lost.

For example, let's assume Farm, Inc., an October 31, 2012 S corporation has two shareholders and passes through $250,000 of Section 179 to each. The excess over $139,000, or $111,000 is not allowed and is most likely lost.

Usually the farmer is involved with the preparation of the return, however, in many cases, they are not. If too much does get passed through to you, an amended tax return can be filed for the entity to reduce the Section 179 deduction. However, other shareholders may need the deduction and this may create issues between the owners.

If you have fiscal year S corporations, make sure you know how this affects all shareholders before finalizing the return. It may save you headaches later.

Farm Income Not Cash Rents

Dec 27, 2012

Continuing our farm income averaging trend, we had a couple of readers ask if they could farm income average their cash rented ground.  The short answer is no.  In order to use farm income averaging, you must have "farm income" which is comprised primarily of the following items:

  • Direct farm income from Schedule F,
  • Flow-through farm income from partnerships and S corporations,
  • Crop share income, regardless of whether the taxpayer materially participates, as long as there is a written agreement in place before the tenant begins significant activity on the land,
  • Gains from the sale of farm personal property (sale of farmland is not included), and
  • Wages a shareholder earns from an S corporation that is active in farming.


Cash rent income based upon a fixed rent are not allowed for farm income averaging.  The use of a flex rental arrangement may or may not allow the farmer to use farm income averaging depending on the terms of the lease.  Rents based on farm production (whether in cash or crop shares) qualify for farm income averaging, but many of the flexible rental arrangements that we have seen are usually a form of cash rent with an adjustment for market price changes, not production changes.  Therefore, these types of rent arrangements would probably not qualify for farm income averaing.

As you can see, this can get fairly complicated, but if the Bush Tax Cuts do expire, making a change to your form of farm rented ground in 2013 may save you some money.  As usual, review this with your tax advisor.

Update on Farm Income Averaging

Dec 26, 2012

We did a post a few days ago on how farmers may not be affected by the increased tax rates for 2013 if they use farm income averaging.  In that post, we used an example of spreading $1 million of farm income over four years, $250,000 in 2010-2013.  An observant reader reminded us that a farmer could spread even more income, if desired, to the period 2010-2012 to take advantage of the lower rates for those years.

Farm income averaging allows farmer to take an elected amount of income for any year and spread it over the prior three years.  They are limited only to the amount of farm income generated in the current year as long as this income is greater than their taxable income.

Therefore, even if a farmer in 2013 had a substantial amount of income for 2010-2013, they could elect to take their 2013 income and spread it over the prior three years.  As an example, lets assume a farmer had generated $1 million of taxable income for each year from 2010-2013 and all of this income was related to farming.  If they did not use farm income averaging for 2013, their federal tax would be about $358,000.  If the Bush tax cuts were extended into 2013, the net federal income tax would be about $318,000 or a $40,000 increase in taxes.

However, the farmer can elect to take up to $1 million of farm income and carry it back evenly to 2010-2012.  Since the farmer was taxed at a marginal rate of 35% in each of those years, they will elect to carry back about $777 thousand of 2013 farm income (the point when income is taxed at 36%).  This income is then taxed at 35% or about $272,000.  If it had not been carried back, the tax paid in 2013 on this income would be about $301,000 or a savings of almost $30,000.  The farmer cannot eliminate the whole $40,000 increase in taxes, but it is able to save about 75% of the increase.

If the farmer had very low income in 2010-2012, then most likely they could have avoided almost the whole increase in taxes.

Remember, even if the Bush tax cuts expire for 2013, if most of your income is from farming, you will be able to mitigate at least 75% or so of this increase by using farm income averaging.

One Week To Go Checklist

Dec 24, 2012

Since there is about one week to go in the year, we thought we would present a quick checklist for accounting and tax related items:

  • Make sure that all checks for 2012 expenses are written and mailed by December 31
  • Make sure that any gifts made at year-end are deposited into the donee's account before year-end
  • Make sure that all equipment bought before year-end is available for use.  Simply writing a check to the dealer does not make the equipment eligible for depreciation in 2012.  The equipment must be placed in service by December 31, 2012.
  • Properly deposit all grain and other crop sale checks by year-end or denote in your accounting system as deposits-in-transit.  These items are income if you have constructive receipt by year-end.  Simply waiting to 2013 to deposit will not delay income recognition.
  • Have your budget prepared for 2013.  If you wait until January to start, that is too late.
  • Review your deferred payment contracts.  Do you have the right mix to allow you to increase your 2012 income if needed.  Remember, the Fiscal Cliff may happen, but it may be very late into 2013 before we know for sure.  Make sure you have income tax flexibility.
  • Review your prior three year's tax returns.  Have you used farm income averaging in the past.  With this year's expected large increase in farm income, make sure you know if you qualify.  Also, for 2013, farm income averaging may get you out of any tax increases.
  • If you have installment sales from prior years, have you reviewed electing out of them to lock in the lower rates now.  Certain steps must be taken before year-end.  Review those with your tax advisor.
  • Have you reviewed your crop insurance reporting options.  You may need to perform certain steps before year-end.  Check with your tax advisor.


There are some of the major items that should be done before year-end.  If any apply to you, make sure you know what to do and it would not hurt to touch base with your tax advisor.  We would rather have you talk to us now that wait until January 2 when it might be too late.

Annual Exclusion Update

Dec 19, 2012

I was talking with a reader from North Carolina today about our post from yesterday.  He was not sure if the annual exclusion amount was or was not included in the lifetime.  So, I have decided to do one more update on this subject. 

The first $13,000 ($14,000) of gifts that you give to everyone person each year are exempt for any gift taxation.  It is only when you go  above the this level, that you then start to eat into the lifetime exclusion. 

For example, if you give $12,000 of cash to Jim and $15,000 of cash to Jane, Jim's gift is part of the annual exclusion and is not reported to the IRS at all.  Jane's gift must be reported to the IRS on form 709 and the first $13,000 is exempt and the remaining $2,000 is then used to reduce the lifetime exclusion.  For 2012, assuming you had never made any gifts, your lifetime exclusion would drop from $5,120,000 to $5,118,000 after filing the gift tax return.

In brief, if you make gifts under $13,000, no reporting to IRS and no reduction in your lifetime exclusion.  For gifts over $13,000, only the amount over $13,000 is used to reduce your lifetime exclusion amount.

Remember that these rules are on a donee by donee basis.  So 10 gifts of $12,000 to 10 children/grandchildren/friends are both not reported to the IRS and do not reduce your lifetime exemption.

Annual Exclusion Does Not Eat Into Lifetime Exclusion

Dec 18, 2012

We had a reader ask the following question:

"Am I correct in that this accumulation of gifts during lifetime does not include those under the Annual Gift Tax Exclusion ($13,000)?"

It seems like most of my posts lately deal with estate and gift taxes, but this is a very important subject and with the end of the year less than two weeks away, we do not have much time to make major gifts.

As the question indicates, there  is both an annual gift exclusion amount and a lifetime exclusion amount.  These two items are mutually exclusive.  This means that any gifts  that fall under the annual exclusion amount will not reduce your lifetime exclusion totals. 

For example, in 2012, the annual exclusion is $13,000 which increases to $14,000 in 2013.  The  current lifetime is $5.12 million scheduled to drop back to $1 million on January 1.  If a married farmer has five children and ten grandchildren, he can give 15 gifts of $13,000 each to each child and grandchild or $195,000.  The wife can give the same amount.  This equals a gift of almost $400,000 in one year that still leaves their lifetime exclusion amount at the same balance. 

That is why we are able to transfer substantial amounts of land values to our heirs during lifetime by using appropriate discounts on LLC or LLP interests AND the annual exclusions.  In the above case, if the land was in an LLC and it was subject to a 35% discount, the farmer could gift $300,000 and his wife the same in gross land values and it still would not eat into his or her lifetime  exclusion.

Over time, the proper use of the annual gift exclusion amount can be extremely more valuable than the use of the lifetime exclusion amount.

What Does Unified Credit Mean?

Dec 17, 2012

We have gotten a few questions lately on how the lifetime gift and estate tax exclusion are tied together. In brief, transfers made during your lifetime are called gifts and reported on a gift tax return while transfers made at death are also a "gift", but reported on an estate tax return.

The gifts made during lifetime are accumulated with the gifts made at death and totaled together. If this total (lifetime and at death) exceeds your lifetime exclusion then either gift or estate tax is due. For 2012, the combined exclusion amount is $5.12 million. If you make $2 million of gifts during your life, no gift tax is due, however, if you are worth $4.12 million at death, the combined amount of $6.12 is $1 million greater than your lifetime exclusion and thus $350 thousand of estate tax is owed (2012 rates).

These rules apply for federal tax purposes. Many states have an estate tax but no gift tax. Gifts during lifetime may result in lower taxes than waiting until your estate. However, some states that do not impose a gift tax will bring these gifts back into the estate and "tax" those amounts then.

There is some discussion on whether a "clawback" will occur if the current lifetime exclusion drops from $5.12 to $1 million beginning in 2013. This "clawback" might occur if you make a large gift in 2012 and the lifetime exclusion in effect at that time of your estate is less than this gift. Most commentators agree that this clawback will most likely not occur, however, nothing is certain right now with this issue.

Remember, even if a clawback occurs, substantial estate tax savings may result. For example, if you gifted $5 million of farm land in 2012 and at the time of your estate the land is worth $10 million and the lifetime exclusion was $1 million, the maximum amount that would come back into your estate is only $5 million (the 2012 gift value), not the $10 million it was worth at the time of your estate. In this case, you have completely eliminated the estate tax on the $5 million of appreciation created after your gift ($2.75 million of estate taxes eliminated) and if there is any clawback, the payment of it has been deferred for many years.

Conclusion - All gifts are added together, whether made during life or at death, and this total is what you may be taxed on. The 2012 lifetime total not subject to gift and estate tax is $5.12 million. It is not $5.12 million during life plus $5.12 million at death, but simply $5.12 million in total. For 2013, this amount is scheduled to drop to $1 million, but Congress may change it soon.

Another Nice Feature of a Living Trust

Dec 16, 2012

We have gotten some feedback on my previous post about revocable living trusts.  One of the features of a living trust versus a will is that the trust can be set up to provide for "guardianship" of your affairs during your lifetime should you suddenly become disabled, etc.

You can create other forms of documents that may accomplish the same, but by using the trust, you may be able to make this much easier on you and your family.

The primary intent of my post was to make sure that farmers understand that simply having a revocable living trust does not save estate taxes over what a properly drawn will would.  In many cases, setting up a revocable living trust makes a lot of sense, just do not expect it to generate large estate tax savings.

Generally the key to estate tax savings is the gifting of appreciating assets during your lifetime that will eliminate these assets being included in your estate.  A revocable living trust does not accomplish that.

As usual, please continue to send your comments and questions to the blog.  That is the best part of writing the blog.

Revocable Living Trusts - Do They Save Estate Taxes?

Dec 14, 2012

Nick Houle, one of our Estate Planning partners in our Minneapolis office, gave an one hour presentation on estate tax planning at the South Dakota Soybean Association annual meeting in Sioux Falls, SD yesterday.  I attended the event with Nick and talked to many farmers about succession and estate planning.

One of the questions that was asked at the speech and during the convention was whether a revocable living trust will eliminate or save estate taxes.  Much of the marketing material surrounding the use of a revocable living trust tends to lead farmers to this conclusion.

The reality is that a properly drawn will result in paying the same amount of estate taxes as using the revocable trust.  The primary benefit of the revocable trust is the elimination of most probate costs, especially if you own real estate in multiple states.

Since a revocable trust can be changed at any time, there has not been any gift made so whether you own assets in a revocable trust or not, they will still be included in your estate.

To properly save estate taxes during your lifetime involves either making direct gifts to your heirs now (to prevent appreciation of these assets from being in your estate) or putting them into an IRREVOCABLE TRUST.

Sometimes if it sounds to good to be true, its not.

Some Interesting Ag Cooperative Facts

Dec 13, 2012

The USDA issues a bi-monthly newsletter on the Farm Cooperative industry and the latest issue had some interesting facts:

  • Minnesota has the highest number of coops (a distinction held since 1900) with 203.  Texas is second with 187 followed by North Dakota and California.  These numbers are based upon the number of Coops with headquarters in each state, not the total number of locations.
  • There are about 2,200 Ag Coops in the USDA database.
  • Iowa has the largest amount of total sales with about $22.4 billion with Minnesota just behind at $22 billion.
  • Five Midwest states comprise number 1-5 with total dollar volume of about $83 billion.
  • Total dollar volume for all 2,200 Coops in the database was about $215 billion.


The Ag Coop industry continues to be an integral part of the American farming industry and should continue this for many more years.  There is a continuing trend of consolidation in the industry, however, the benefit to the farmer/members remains.

File Your Gift Tax Return

Dec 12, 2012

I am in Chicago for a Firm Tax Partner meeting today and tomorrow and then head to Sioux Falls, South Dakota for the annual South Dakota Soybean Association meeting.  One of my partners is speaking at this meeting on estate taxes and we have a booth at the show.  If there are any readers that will be at the meeting, please stop by and say hi.

In one of our breakout sessions dealing with Estate and Gift taxes, I was reminded again that if you are gifting any interests in land, partnerships, corporations or any hard to value property, you must file a gift tax return and you must provide adequate disclosure on these gifts.  If you do not file a gift tax return AND provide adequate exposure, the IRS has unlimited time to challenge the value of these gifts.

Most likely this challenge would happen upon the death of the person making the gift and this may occur many decades after the gift was made and you would need to provide proof of how your arrived at your value.  By filing a return and providing adequate disclosure in the year of the gift, the IRS then only has three years to challenge your valuation.

Therefore, if you are making any of those gifts this year, file your gift tax return.

Will There Be an "Agriculture Abyss"?

Dec 09, 2012

The Economist Magazine based in England writes several good articles a year on items related to farming.  They just recently posted an article dealing with the farm bill making its way through Congress.

Most farmers know that the Farm Bill has technically expired as of September 30, 2012, but many probably do not know that we are now under the 1949 Farm Bill.  Each four-five year extension of the Farm Bill is actually an extension of the 1949 Act.  When the 2008 Farm Bill expired, we technically go back to the provisions of the 1949 Act.

This Act has various support prices and some of these prices are extremely high.  For example, milk support price is somewhere in the $30 plus range.  Wheat is around $15.  These prices are one of the primary reasons that Congress will either extend the Farm Bill or pass a new one.  The Milk support price would take effect on January 1, 2013.  The others would take effect when the crop is harvested.

I do not think we will have the Agriculture Abyss mentioned in the article, but all of thought that the 2010 no-estate provision would have been fixed long before December, 2010 also.

IRS Wants All Rents Subject to New 3.8% Medicare Tax

Dec 05, 2012

As we posted yesterday, the IRS issued proposed Regulations on Friday November 30, 2012 on how to implement the new Medicare 3.8% surtax that takes effect on January 1, 2013.  In brief, if your income is greater than $250,000 ($200k single), then all of your investment income, including cash and crop share rents, may become subject to this new tax.  Your income from farming as a sole proprietor is already subject to the regular 3.8% Medicare tax.

We originally thought the IRS would allow a grouping election of combining your rental entities with your farm operating entities would eliminate the rental income from the new Medicare tax.  Based on the Regulations just issued, the IRS views almost all rents as being subject to the tax even if you made a grouping election.

Since these are proposed Regulations, they are subject to public comment but the IRS has a history of not making too many major changes.

If you think this new tax may apply to you, now is the time to meet with your tax advisor.


IRS Issues Proposed Regs. on 3.8% Medicare Surtax

Dec 04, 2012

The IRS issued proposed Regulations on the 3.8% Medicare Surtax imposed on investment income.  Tony Nitti, a columnist for Forbes Magazine has a very good initial take on these proposed regulations.  I would suggest reading the column to get a good idea of the major issues involved, but I am going to recap the major ones pertaining to most farmers:

  1. The IRS contends in almost all cases that rents, whether a grouping election has been made or not, are subject to the Medicare surtax.  This means that if you cash rent your farm to an S corporation, then all of the rent income is subject to the potential surtax.  We disagree with this contention and will forward our comments to the IRS, but it may be hard to change their mind.
  2. Items of deductions related to investment income such as (1) state income taxes, (2) investment interest, and (3) investment management and other investment expenses may be used to reduce net investment income subject to the tax.  This can be a fairly complicated calculation and will add time and effort to the preparation of an income tax return.
  3. Charitable Remainder Trusts (CRT) now have an additional layer of income type to calculate.  In addition to the normal "four" buckets of income to be allocated to the beneficiaries, the trust will now need to determine how much of these income items are investment and non-investment income and it is "surprising" that the IRS will want the investment income distributed first (so you can pay the tax quicker).
  4. One possible benefit is that the IRS will allow you to have a "do-over" election on any grouping election.  This do-over will occur in the first year that the surtax might apply to you.
  5. If you have any installment sales that occur  in 2012 or before, you will need to carefully review the Regulations since you may need to make an election to prevent business gains from being subject to the investment sur-tax beginning in 2013 and beyond.


There  are many other proposed items in the Regulations and we will keep you posted in the next few weeks, but since the law will start applying in less than a month, we wanted to get this quick synopis to you now.

These are proposed regulations and subject to public comment.  However, based on history, major changes to the IRS position can be somewhere between slim and none. 

Senator Baucus Urges Extension of Current Estate Tax Laws

Dec 03, 2012

The current lifetime estate exemption is $5.12 million (indexed with inflation).  This lifetime exemption is scheduled to be reduced to $1 million with a top rate of 55% on January 1, 2013.  President Obama has proposed to reduce the exemption to $3.5 million with a top rate of 45%.

Senate Finance Committee Chairman Max Baucus (D-Mont.) split with President Obama on November 30, 2012 by stating that this lifetime exemption and top rate needs to be at least as favorable as the 2012 rates.

Senator Baucus has supported an extension of the current estate tax laws in the past, but this is the first sign that not all Democrats are going along with the President on all aspects of proposed tax law changes.

It is interesting to note that all estate tax law changes (at least since I started as a CPA) have never reduced the lifetime estate tax exemption.  If the exemption is reduced to $3.5 million, this would be most likely the first time.  If it simply goes back to $1 million, that is not technically a reduction, but simply a sunset of the original law passed back in the early 2000s.

We will keep you posted.


What's the Right Trust For Me?

Dec 02, 2012

We received the following question from a reader:

"Which type of estate trusts do you recommend or prefer, revocable or irrevocable, and why ?"

Since this a blog, it would be impossible to fully answer this question, but I am going to give some of my general feedback on this question.

First, a revocable trust means just that. It can be "revoked" at any time during life and it is usually only at death that it becomes irrevocable. There is no completed gift when assets are placed into this type of trust and generally, these trusts are used to avoid probate especially if you have properties in multiple states.

Second, sometimes I will hear a promotion of a revocable trust being much better than a will since it will save estate taxes. Generally, a properly drawn will will provide the same amount of tax savings as any revocable living trust. The primary savings to the revocable trust is the probate savings.

Third, to achieve lifetime gifts using a trust, you will generally need to use an irrevocable trust. Once the assets are placed into this type of trust, you have made a completed gift and any appreciation on these gifts will be excluded from your estate.

Fourth, in many cases, you may want to use what is known as an intentionally defective grantor trust to make lifetime gifts. The benefit of these trusts is that the assets are excluded from your estate, however, the income generated will continue to be reported by you on your income tax return. This prevents some of the issues associated with kids and grandkids getting schedule k1s showing a large amount income and wondering where there cash is. Also, any taxes paid by you are not considered a gift and thus, will continue to reduce your estate.

Fifth, there are many other types of trusts that would take to long to expound upon. In general, if your primary goal is to avoid probate costs, use a revocable trust. If your primary goal is to make lifetime gifts, you an irrevocable trust.

The use of a trust can be extremely complicated and you must discuss this with your advisor, but with the rapid increase in land prices, now is the time for that discussion.

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