Jul 23, 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.

ACA Subsidies: One Court Strikes Down, Another Upholds

Jul 22, 2014

The U.S. Court of Appeals for the D.C. Circuit ruled Tuesday morning that the insurance subsidies granted through the federally run health exchange, which covered 36 states for the first open enrollment period, are not allowed by the law. Subsidies provided by state ran exchanges would still be allowed.

The highly anticipated opinion in the case of Jacqueline Halbig v. Sylvia Mathews Burwell reversed a lower court ruling finding that federally run exchanges did have the authority to disburse subsidies.

This ruling vacates the Internal Revenue Service (IRS) regulation allowing the federal exchanges to give subsidies. The large majority of individuals, about 86 percent, in the federal exchange system received subsidies, and in those cases the subsidies covered about 76 percent of the premium on average.

No more than two hours later, a second federal appellate court, the U.S. Court of Appeals for the 4th Circuit, reached the opposite conclusion, ruling that while the relevant provision of the federal health care law might appear to cut against the federal government, the I.R.S. is nonetheless entitled to the benefit of the doubt from the federal courts.

“We cannot discern whether Congress intended one way or another to make the tax credits available on HHS-facilitated Exchanges. The relevant statutory sections appear to conflict with one another, yielding different possible interpretations,” the 4th Circuit declared in King v. Burwell. “Confronted with the Act’s ambiguity, the IRS crafted a rule ensuring the credits’ broad availability and furthering the goals of the law. In the face of this permissible construction, we must defer to the IRS Rule.”

Due to the circuit split on a fundamental question of the legality of the ACA, I would guess it is likely the U.S. Supreme Court will review the rulings. Until then, stay tuned.

Top 100 Ag Banks

Jul 21, 2014

The American Bankers Association (ABA) posts a quarterly report of the 100 largest Ag Banks (Non-Farm Credit). In the first quarter report for this year, the #1 bank for Ag loans was Wells Fargo with $7.229 billion of farmland ($2.231 billion and $4.998 billion of other ag loans). #2 was Rabobank with $3.957 billion followed by Bank of the West ($3.342 billion), Bank of America ($2.471 billion) and First National Bank of Omaha ($2.050 billion) to round out the top 5 banks.

There are currently 11 banks with more than $1 billion in Ag loans with Bremer Bank based in Minnesota at $1.005 billion being #11. John Deere Financial is # 8 on the list with $1.497 billion of machinery loans and about 77% of its assets are composed of farm loans which is the highest percentage in the Top 50, tied with First Financial Bank of El Dorado, Arkansas. In recent years, having a large concentration in Ag Loans has been a good thing. Over the next five years, maybe not so good. You can understand a bank like John Deere Financial having a large concentration of Ag loans, but a smaller bank like First Financial may face greater regulatory scrutiny.

Banks in the Top 100 banks with exposure greater than 60% that have not yet been mentioned are:

#15 United Bank of Iowa, Ida Grove, Iowa - 76%

#21 American State Bank, Sioux Center, Iowa - 63%

#38 Investors Community Bank, Manitowoc, Wisconsin - 63%

#50 Carroll County State Bank, Carroll, Iowa - 61%

#64 Peoples Bank, Rock Valley, Iowa - 68%

#74 American Bank and Trust, Wessington Springs, South Dakota - 61%

#89 First State Bank of North Dakota, Arthur, North Dakota - 74%

#96 Premier Bank, Rock Valley, Iowa - 70%

#97 Security Savings Bank, Canton, SD - 73%

#99 The Farmers Bank of Prophetstown, Prophetstown, Illinois - 74%

Three of these banks are located in Northwest Iowa and two in the same town of Rock Valley, Iowa (which I drove through a week ago Saturday along with Sioux Center). This is the part of Iowa that has seen farm land prices in excess of $20,000. If you want to see a list of the top 100 Ag banks by loan concentration, see the list here.

Rural Mainstreet Index Continues to Weaken

Jul 18, 2014

Creighton University prepares a Rural Mainstreet Index that measures the economic outlook for the agricultural/rural sector of the economy. An index reading of 50 indicates growth neutral. The index for June 2013 was at 60.5 and for June of this year, it has dropped to 53.6, almost growth neutral. The index is composed of a survey of bankers in a 10 state region comprising Iowa, Nebraska, Wyoming, Illinois, Colorado, North Dakota, South Dakota, Missouri, Kansas and Minnesota.

Nine sub-indexes are calculated to arrive at the main overall index. These sub-indexes include, loan volume, farmland prices, farm equipment sales, home sales, etc. Here are some of the major trends in these sub-indexes:

  • Farm Equipment Sales had an index level of 53.6 a year ago. It has now dropped to 35 which shows substantial negative growth. However, this index actually rose from May's reading of 33.6
  • Farmland Price index has dropped from 58.4 to 49.1 which is slightly below growth neutral.
  • The Confidence index (expectations six months out) dropped from 60.0 to 55.5, however, this is up from 51.6 in May.

Other macro trends are:

  • Farmland values have fallen for seven straight months, however, the rate of decline has receded.
  • Almost half of the bankers reported that higher beef and pork prices were a plus for their local economy.
  • The percent of farmland sold for cash has dropped from 28.4% to 23.7% (this makes sense since a lot of cash has been deployed into farmland purchases over the last few years at higher prices).
  • The percent of farmland purchased by non-farmers continues to decline dramatically from 19.7% to 14.4%.

Although the rural economy remains healthy, it just may not be as healthy as it was a year or two years ago. We will keep you posted on the trends.

Communicate, Communicate, Communicate!

Jul 15, 2014

I was in Omaha yesterday with Dick Wittman and a local attorney doing a seminar for the Legacy Project on succession planning. One member of the audience mentioned that he felt like we had poured 100,000 bushels of corn into a 20,000 bushel grain bin. I know we covered a lot of material, but the key thing based upon questions and feedback from the audience was that the most important part of succession planning and transition is Communication.

Saving estate taxes can be important, however, if the way the estate plan is structured but not communicated to the children involved, the emotional damage and strife can far outweigh any tax savings. Therefore, if you are in process of transition to the next generation, make sure these ideas, plans, documents are all properly communicated. As the attorney said, you can pay me now or you can pay a lot more later from a lack of communication.

Don't let it happen to you.

Help on Updating Your Payment Yield

Jul 13, 2014

Farmdoc Daily released information on Friday on updating your farm payment yields. These payment yields will be used in calculating any PLC payments and will not affect ARC calculations. However, if the option to update yields will result in higher yields, it will usually pay to update the yield since future farm bills may refer to these yields.

Current yields are based upon the 2013 counter-cyclical payment yields which in turn are either the payment yields in place at the end of the 1996 farm bill or the updated yields given to farmers by the 2002 farm bill. Farmdoc daily does a good job of explaining how those yields were calculated and there is a good reference to an economic analysis of those farmer's decisions. As you can guess, farmers updated yields where it would pay them more money.

So, the option is to retain your current yields or update them to your average yields for 2008 to 2012 on a crop-by-crop basis. If any of your yields for any year are less than 75% of the 2008-2012 county average, then you may substitute that yield for your farm yield. As an example:

Capture

As you can see, the low yield of 108 for 2008 was replaced with the county average 148 yield. After running the numbers, the payment yield for corn for this farmer will be 149. The farmer will then need to compare that number to his/her 2013 CCP yield. If the 2008-2012 number is higher, then the farmer will update to the new number, If not, then the farmer will retain the old CCP number.

This option is done for each crop. The farmer is not locked into updating or retaining all yields together, but rather on a covered-by-covered crop basis.

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