Jul 31, 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.

Commodity Wages Save Payroll Taxes for Kids Too!

Jul 31, 2014

In my previous post today, I had recapped the wages paid to children being exempt from payroll taxes in certain situations. In the case presented, the wages in fact, were subject to payroll taxes. The one item I had forgotten to mention is that if commodity wages were paid to the children in any of these situations, these commodity wages would not be subject to any payroll taxes. We have previously posted on how commodity wages work.

Therefore, even if you have a situation where cash wages paid to children or even other farm employees are subject to payroll taxes; by using commodity wages you can effectively eliminate these payroll taxes.

Farmers have greater flexibility than almost any other business operation in how wages are paid and payroll taxes that may be due. A non-farm business could pay wages to their children under age 18 and be exempt from payroll taxes, however, they would be unable to pay commodity wages (in most situations).

Issuing a Fraudulent Form 1099 Can Cost You Money

Jul 31, 2014

When a farmer makes certain payments to service providers and other vendors, they are normally required to issue a Form 1099 if the total amounts paid exceeds $600 in a year. Normally, this is a very straight-forward process, however, if the farmer willfully files a fraudulent form 1099, the penalty for this can be very costly to the farmer. In a recent Northern Illinois court case, we can find out how bad it can be.

In Shiner v. Turnoy, we find two parties that could not agree on about anything. Turnoy and Shiner had agreed to split the commissions from the sale of two life insurance policies. The face values of these policies was not listed but Turnoy decided the commission amount was about $300,000 and sent a check to Shiner for $149,059.91 for his half. Shiner vigorously disputed these calculations and filed suit to obtain his legal share. The check was issued late in December and as of the end of the January when 1099s were due, the check had not yet been cashed. The key issue is that there was language on the check indicating that if Shiner cashed it, he would legally give up any rights to additional compensation.

The Court ruled that Turnow willfully knew that the check was in dispute and that Turnow willfully compelled his CPA to issue a fraudulent form 1099. Under Section 7434(a) of the Internal Revenue Code, a person can bring a civil action to recover damages from anyone willfully filing a fraudulent information return. Damages can equal the greater of $5,000 or the sum of the plaintiff's damages, plus the costs of filing and maintaining the action, and at the court's discretion, reasonable attorney's fees. The Court ruled in favor of Shiner in this case, however, the actual damages were not reported by the Court, but we know the amount owed will be at least $5,000.

I have had several occasions where clients that were not happy with another business partner or vendor and wanted to issue a form 1099 that might not have been totally "kosher". In all cases, I was able to talk them out of this and part of it is due to explaining the risk associated with the penalty under Section 7434(a).

The bottom line is make sure the 1099s you issue each year are in compliance with the rules. If you do something wrong "willfully", it can cost you.

Pay Your Kids; It Saves Taxes!

Jul 31, 2014

We had a reader ask the following questions:

"Have a good understanding of payroll taxes on payroll paid to a child under 18 working in the operation. The laws are not very concise in my situation. Currently my parents and myself are 1/3 owners of a LLC taxed as a partnership. I am divorced with 50/50 custody of child. Since I am an owner in the LLC and "single parent" can the child be paid without withholding payroll taxes? Thank you for your help! "

My brother and I worked on our farm during my high school and college days. We helped with spring and fall planting and I operated the combine from when I was about 15 years old. However, my parents did not pay us in the most efficient tax manner. Instead of paying us a cash wage, they bought my brother and I a new car and paid for college directly out of their pocket. They, instead, should have paid us a wage.

By paying a wage to us for our effort, they would reduce their income by the amount of the wage and during the time we were under age 18, the wages paid would not be subject to any payroll taxes. It would be exempt from FICA, Medicare, FUTA and so on. And in today environment, my brother and I could earn slightly more than $6,000 and not pay any federal income taxes. In some cases, a small amount of state income taxes might be owed.

Now for today's questions. A farmer who operates as a sole proprietor may pay their children under age 18 wages and be exempt from payroll taxes. If the farmer operates as a partnership (either regular or a LLC taxed as a partnership), paying wages to children under age 18 is still exempt from payroll taxes if the only partners of the partnership/LLC are parents of the children. In the current case, since two the "partners" in the LLC are the child's grandparents, the LLC would need to pay payroll taxes on the wages paid to the child.

Even if the LLC/partnership needs to pay payroll taxes, in most cases, it still makes sense to pay the child for services rendered since the child is usually in a very low or no tax bracket.

For additional information on the rules related to paying children in your business, see this link.

FSA Issues Another Update on Base Acres Reallocation

Jul 30, 2014

The FSA issued a release Notice ARCPLC-7 (issued on Wednesday July 30, 2014) on additional information regarding reallocation of base acres. As previously discussed many times in this blog, each "farm" will have an option to update their base acres to reflect the average acres in production during the 2009 to 2012 crop years. This notice provides a couple of examples of how base acre reallocation may happen.

The notice also has a sample letter of the data that will be mailed out (the estimated mailing time appears to be about the first week in August). The producer then has 60 calendar days from the date of the letter to notify the local FSA office of any changes that needs to be made to the data. This is the initial process in updating the farm's base acres.

There is a provision that if the farm has approved double crop acres, both crops will be allowed in the base acre reallocation. If the farm produced double crops in a crop year that was not "approved", the farm appears to be allowed to pick and choose which of those crops it would like to use for that crop year. For example, assume a farm planted 100 acres of corn and then due to weather conditions, etc. replaced the planting with 100 soybean acres. This was not a qualified double crop, therefore, the farm will choose between corn or beans for that year.

There is good data in the notice on how the base acres will be reallocated and it is worth taking a quick look at the notice.

Another Cattle Tax Shelter Bites the Dust

Jul 30, 2014

I have previously done some posts on certain cattle or horse hobby loss cases. The Tax Court released the Gardner case on Monday July 28, 2014. In this case, Mr. Gardner operated a very successful insurance business in North Carolina. In 2001, he met John and David Pearl, who operated several businesses related to cattle and seems to have talked Mr. Gardner into starting a cattle operation to raise genetically superior livestock.

Over the next few years, Mr. Gardner issues numerous promissory notes to Mr. Pearl and various entities. In the tax court memorandum, the listing the various promissory notes ran more than 20 pages (out of a total of 70 pages). Essentially, Mr. Gardner would issue a promissory note to these entities for the purchase of cattle and/or operating expenses and equipment. The promissory notes totaled more than a $1 million, however, it appears that Mr. Gardner effectively paid less than $100,000 on any of these promissory notes. Also, in almost all cases, Mr. Gardner defaulted on all notes and no collection efforts were made to collect.

Mr. Gardner took a net deduction of about $700,000 during 2002-2004. As you can expect, the IRS audited these returns and assessed taxes and penalties. The tax court summarized all of the facts of the cattle operation and then examined whether the cattle operation met the 9 steps normally required under Section 183 (dealing with hobby losses). In our previous posts, we reviewed some of the cases where taxpayers were allowed to deduct the losses since the tax court agreed they were a business and not a hobby.

In this case, I am not even going to list all of these reasons since the taxpayer was essentially found to not have any of the 9 steps be in his favor. For example, the primary goal of Mr. Gardner was to raise genetically superior livestock. This requires meticulous records to be maintained on the cattle being raised. In this case, no records were maintained at all, therefore only commercial cattle values could be used. This value was about $193,000.

The tax court did not view favorably that the cattle loss suddenly rose from about $30,000 or so in 2002 and 2003 to over $600,000 in 2004 when his insurance business netted more than $500,000.

All-in-all, this was not a good case for the taxpayer. In many cases, a taxpayer may owe the tax, but get relief from the penalties which can be at least 20% of the tax owed. In this case, the tax court found the taxpayer liable for the penalty. All-in-all, this was not a good case for the taxpayer.

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