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September 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.

IRS Program to Sniff Out Gift Tax Cheats!

Sep 29, 2011

It appears that the IRS is initiating a program to sniff out gift tax cheaters who are not properly filing their gift tax returns.

The IRS estimates that between 60% and 90% of taxpayers who transfer real estate for little or no consideration to family members fail to file form 709 to report the gift.

The IRS is now checking real estate transfer records for 15 states: Conn., Fla., Hawaii, Nebraska, NH, NJ, NY, NC, Ohio, PA, Texas, VA, WA, and Wisconsin.  So far, over 500 taxpayers have been audited and many more are lined up for audit.

It appears that the California State Board of Equalization would not freely disclose their data, so the IRS went to court to make them comply. 

Remember, even if the gift is not taxable, if it exceeds $13,000 to any one person in a year, you are required to file a gift tax return on form 709.  If you feel like this may apply to a real estate transfer you have made, make sure to check with your tax advisor.

We would expect more states to provide this information soon.

We Are Blessed with a Great Industry

Sep 29, 2011

Just a quick note to say how blessed I feel to be working in the American farm industry. The backbone of this country was founded on farming, including my grandparents and great-grandparents emigrating from Germany and Norway in the late 1880s and early 1910s.

The work ethic of the American farmer and his family is outstanding and, as an accounting firm, we are always pleased to hire kids who grew up on a farm due to this work ethic, etc.

I am looking forward to going to Missouri and Iowa in a couple of weeks to drive combines and then to Louisana to drive a sugar cane harvester. That is my idea of a vacation.

 

How Would You Like to Have 16,958 Landlords?

Sep 28, 2011

While perusing the Admission Document (similar to our initial public offering document and yes, CPAs do like to read these documents for fun) for Continental Farmers Group PLC, I noticed that the company farms about 52,000 acres (20,840 hectares) in Western Ukraine. These 52,000 acres are covered by almost 17,000 individual leases (about 3 acres per lease). In order to keep track of and document these leases, five full-time employees are required.

The yields for the company compare very favorably to yields in the U.S. For example, its wheat yields were as high as 80 bu./acre in the Ukraine in 2008 and an impressive 120-plus bu./acre on its Polish holdings in 2008. The lowest yield it had in the last three years in Poland (for 2008 to 2010) was still almost 100 bu./acre.

Potatoes in the Ukraine averaged about 15 tons/acre and sugar beet yields were in the 20 to 25 tons/acre range. Some of the best "black earth" is in the Ukraine and about 95% of the country is considered flat.

Revenues grew from about $10 million in 2008 to more than $30 million in 2010, with profits of almost $5 million in 2010.

I know of some farmers who have upwards of 25 landlords, but the idea of having almost 1,000 times that amount is daunting. I think we will continue to see more companies like Continental Farmers Group going into Ukraine and other countries to bring more up-to-date farming practices to bear. The efficiencies may have a dramatic effect on overall yields in these countries. The world is getting flatter, and they will continue to catch up to the U.S. farmer.

 

What's My Gift Limit?

Sep 27, 2011

A reader asks the following question:

"Can I give a lot of shares in a family farm corporation to my kids gift-tax exempt? Is this just a one-time thing?"

 

The subject of gifts can be misunderstood for many farmers.  In general, you can give up to $13,000 (the annual exclusion amount) to as many people as you want each year without having to file any gift tax return. This money is generally not taxable to the recipient; however, you are not able to deduct the gift, either.  

You are also able to gift more than this amount by making payments for medical or educational expenses directly to the institution. If you make the check to the individual who then writes the check, the limit for reporting is the $13,000 annual amount. 

You are not limited to making only one gift to a person per year. You can make multiple gifts; it is the total amount for the year that is important. If less than $13,000, no reporting for that person is required.

The lifetime exclusion for 2011 and 2012 is currently set at $5 million. In 2013, it is scheduled to revert back to $1 million, however. Discussions about making a higher amount permanent are ongoing, but with 2012 being an election year, we would not count on this happening soon.

As to the reader's question, an annual gift of corporate stock equal to the annual gift exclusion amount could shield substantial amounts of stock from the gift tax. For example, assume a farmer and his spouse have four children who are married. Each year, the farmer can gift 4 x 2 x $13,000 (gifts to child and spouse), or $104,000 of corporate stock value, and his spouse can gift the same amount. This equals a total of $208,000 annually and, over ten years, would exceed $2,000,000 in value that would escape gift taxes.

Additionally, with the lifetime exclusion being $5 million this year and next, the couple could gift $10 million immediately and not pay any gift tax, and the appreciation in value would escape their estate.

Over ten years, they could easily gift $12 million, and if they take advantage of corporate stock discounts that may be available for the lack of marketability and minority interest, they may be able to gift upwards of $20 million of stock value over a 10-year period.

This is one of my longer posts, but this year and next it is extremely important to review your current gifting program and see if it makes sense to gift more assets to your children and grandchildren. As with all tax-related considerations, make sure to review this with your tax adviser.

 

If You Reconvert - You Lose Your Spread to 2011 and 2012

Sep 25, 2011

We had a reader ask this question as a follow-up to our previous post on ROTH IRA recharacterizations:

"My wife and I converted our traditional IRA,s to ROTH,s in November of 2010. Since the market has gone down we are considering the recharacterization back to Traditional. You mentioned we would have needed to file for an extension to do this. I do not understand what you mean by this extension. Can't we recharacterize by October 15th? If so do we lose the ability to split the tax between 2011 and 2012?"

 

First, on the issue of the extension.  This only applies if you did not file your return by April 15, 2011 for the 2010 tax return.  If you filed timely by this date, then you have until October 17, 2011 to recharacterize your ROTH conversion back to a regular IRA.  However, if you are filing after April 15, 2011, then you must have timely filed an extension in order to still reconvert by October 17. You are not required to  recharacterize all of the conversion amount.  You can elect to do part or all and it must be in the form of a dollar amount.  If you elect to reconvert the whole amount and there are no other ROTH IRA contributions in this account, it is fairly easy to accomplish this with your IRA trustee.  However, if there are other ROTH contributions or you elect to reconvert less than 100% of the contribution, then you must perform a calculation of the earnings (or most likely losses) since the conversion and indicate to the trustee the net amount to be reconverted.

With regards to the last question, this reconversion will eliminate the chance to spread the income over 2011 and 2012, however, if the IRA has decreased dramatically in value, then it still may make sense to do the reconversion.  This can be a very complicated calculation, therefore, we highly recommend that you review this with your tax advisor before making any decision.

If you have previously filed your return, then you will need to file an amended income tax return to let the IRS know how much you are reconverting back to a regular IRA.  If you elected to pay this tax in 2010, then you will be entitled to a refund.  If you elected to spread it out over 2011 and 2012, the amended tax return will simply clarify to the IRS how much is taxable in 2011 and 2012.

You May Want to Unwind Your Roth Conversion

Sep 23, 2011

Many farmers elected in 2010 to convert their regular IRA to a Roth and either pay the tax in 2010 or spread it out over 2011 and 2012.   However, if a farmer had elected to get an extension until October 15, 2011, they have until that date to "unwind" the conversion and treat it as if it never happened. 

The primary reason for considering this is the drop in stock prices from 2010 until now.  By unwinding the conversion, the farmer may be able to then redo the conversion and save substantial tax this year.

For example, let's assume the farmer had $500,000 in his IRA on June 1, 2010 when he converted it into a ROTH.  Now, let's assume the value of the ROTH is only $300,000.  By unwinding the ROTH conversion, the farmer does not pay tax on the difference between the $500,000 last June and the $300,000 value now.  At the highest tax bracket including applicable state income taxes, the total tax savings could approach $100,000.

Remember, this only applies if the farmer filed an extension and you have until October 15, 2011 (technically October 17 since the 15th is on a Saturday).

Cattle Prices Are Posting New Highs!

Sep 21, 2011

Cattle prices are now at record highs of around $1.36 per pound primarily due to herd liquidation caused by the drought in the American Southwest. Bloomberg has a good article on the reasons for the rally in cattle prices and it is anticipated that high prices will continue for some time.

Unlike hogs or chickens where the leadtime on getting a new litter or hatch is less than 4 months, cattle take at least 10 months to give birth and any changes in supply take much longer. Unlike 2008 when feed prices were extremely high and cattle prices were lower, this time feed is high, but cattle prices are much higher.

What if I Don't Reinvest?!

Sep 20, 2011

Our reader from yesterday's post followed up with this question:

"Follow- up on condemned highway tax problem. What happens when the proceeds are not reinvested in like find property?"

 

When you receive proceeds from a condemnation of your farm land, you have three years to reinvest the proceeds to defer the capital gains on the property.  However, if you end up not reinvesting enough of the proceeds, then you have a taxable event.  Also, you do not get to pro-rate the gain, but have to reinvest your original basis first and then any reinvested proceeds after that point reduces your gain.  Whatever gain ends up being realized is reported on the original tax return by filing an amended tax return and paying interest from the original due date until the payment is made.

For example, let's assume our farmer receives $500,000 from the condemnation and his basis in the property is $150,000.  If he purchases property during the three year period that in total is less than $150,000, he has to report the full gain of $350,000 in 2011 by filing an amended tax return and paying tax and interest from April 15, 2012 forward.  If he ends up reinvesting $400,000, then he has to report a final gain of $100,000.  If he invests $500,000 or more during the three years, there is no gain, but his basis in the new property is reduced by the deferred $350,000 gain.

Three Years to Reinvest Condemned Farmland!

Sep 19, 2011

A reader asked the following question:

"I have a new state highway coming through one end of one farm. How is the money received taxed? Do I have any options for reinvestment without paying tax?" 

 

Whenever farmland is condemned (or threatened to be condemned) for a new road or other use, the tax laws are very generous about allowing taxpayers to reinvest the proceeds from the condemnation in other farmland. 

The taxpayer has three full tax-years after the year of the condemnation to reinvest the proceeds in other farmland. However, the taxpayer is allowed, if he so desires, to reinvest his proceeds in other real estate of "like kind." This definition is much broader than the normal similar-use requirement for other types of involuntary conversions such as a fire, etc., which would allow only two years to reinvest the proceeds into similar-use property. This means that the farmer in this case could reinvest the funds in a duplex in town or most any other type of real estate. He is not restricted to reinvesting in farmland.

Therefore, the answer for this reader is that if the condemnation occurs in 2011, he will have until Dec. 31, 2014, to reinvest the proceeds into other real estate. This period may be shortened if there was an ongoing threat of condemnation that started before 2011. In either case, the reader must review this with his tax adviser to make sure the transaction is reported correctly and the gain deferred properly.

What Is Your Total Capital Gains Tax Rate?

Sep 16, 2011

We have gotten a couple of questions lately about what is the capital gains tax rate on the sale of farm land.  To answer that question requires:

  • How long have you owned the land,
  • Is there equipment and fixtures attached to the land such as grain bins, fencing, etc. that you have taken depreciation on,
  • Is there buildings that you have taken straight-line depreciation on,
  • What state do you live in.

Based upon these facts, we can then give you an idea as to what your capital gains tax rate is.

In brief, if you have owned the farm land less than a year, then it is subject to short-term capital gains tax rates which is essentially ordinary income rates.  If you had allocated cost to equipment, farm buildings (20 year life), land improvements, etc., then the depreciation recapture on these items is also ordinary income.  If you had owned a farm house which you rented out and depreciated over 27.5 years, then this is subject to a maximum federal rate of 25%.  The farm land if held for one year or more is subject to maximum federal long-term capital gains rate of 15%.  Then, on top of it, you need to calculate your state capital gains or income tax rate.  Most states tax capital gains as ordinary income, but several states give you a break for the sale of farm land and in many cases, you may pay no state capital gains on the sale of your farmland.

For example, lets assume you bought farm land in Nebraska for $300,000 five years ago.  You allocated $25,000 to fencing and this is fully depreciated.  The rest was allocated to farm land and you are selling it in 2011 for $1 million.  The $25,000 of depreciation recapture is taxed at your ordinary rate.  The remaining $725,000 gain is taxed at a federal rate of 15%, plus the applicable state of Nebraska rate (whatever it might be less any Nebraska capital gains deductions ).

As you can see, the capital gains tax rate can get fairly complicated and you need to discuss this with your tax advisor to pin down what the actual tax might be.

Goodby Pesky Logs for Cell Phone Use!

Sep 14, 2011

I am sure that all of our farm readers realized that a log of all of their cell phone usage up to December 31, 2009.  This log was required to deduct the cost of the cell phone service and any personal use would either not be deductible or would have been included as part of compensation to the employee.

However, the Small Business Jobs Act of 2010 removed cell phones from the definition of listed property (listed property items require a log of use, etc.).  This new law is effective January 1, 2010 and the IRS just issued Notice 2011-72 clarifying how these changes apply to taxpayers.  In brief, as long as the cell phone is necessary for the employee to perform their work for the employer, then the cell phone cost is deductible by the employer and is non-taxable to the employee.  This applies whether the employer pays for the cell phone service directly or reimburses the employee.

I would hazard a guess that almost no farmers or other users of cell phones ever performed the logging of cell phone use in any substantial manner, so this new rule is very welcome.

If you want to get even more detail on this matter, here is a memo that the IRS has issued that provides guidance to their agents in reviewing cash allowances and reimbursements for work-related use of personally-owned cell phones.

Canadian Farmers Vote to Keep Monopoly!

Sep 14, 2011

Canadian wheat and barley farmers have a unique way of marketing their grain.  Unlike the US where each farmer can determine their price each day by calling the elevator, the local ethanol plant and looking it up on the Internet, Canadian farmers belong to the Canadian Wheat Board which is a monopoly for these farmers.

Canadian farmers currently market all of their wheat and barley through this organization.  Federal Agricultural Minister Gerry Ritz has proposed eliminating this monopoly as early as next August.  This did not go over well with the farmers who have now voted 62% in favor of keeping the monopoly.  However, Mr. Ritz indicates this is simply a survey of farmers and is not binding on his decision.

This is headed to court and it will be interesting to see how it turns out.  Having a monopoly in the US would make things easier for marketing your grain, but it seems almost "Unamerican" to me.

Here is an article from CBCNews outlining the vote and the issue.

Land Is Not Deductible!

Sep 12, 2011

We had a reader ask the following question:

"Can I or my S-corp deduct the purchase of farmland as a business expense?"

 

The general answer to this question is no; you cannot deduct the cost of farmland as a business expense. However, you must review your purchase to determine if, in fact, you purchased only farmland. Many farmland purchases include fences, wells, irrigation systems, grain bins and other improvements that may be depreciated. If the farmland does include these items, you would need to allocate cost to these items.

You may be able to take Section 179 on many of these items, but you would need to review them with your tax adviser to determine eligibility. Almost none of these items would be available for the 100% bonus depreciation, since they are not considered "new."

Watch for a State Capital Gains Deduction for the Sale of Farm Assets

Sep 08, 2011

We had a reader ask the following question:

"Does Iowa have a reduced capital gains tax rate on sale of farmland held for 15 years?"

 

If certain qualifications are met, such as holding the farmland or assets for at least 10 years and material participation in the farm (cannot cash rent the land), Iowa does have an exclusion of 100% of the capital when selling your farmland or other farm assets. This also applies to other business-related assets, not just farmland.

I also know that Oregon had a capital gains exclusion for the sale of farmland, although that may no longer be there.

The key when analyzing your total capital gains tax is to review your state requirements to determine if there is a qualified deduction for the sale of farm assets. Many states have these exclusions, but there are almost always different rules for each state. 

Less Than Four Months to get New Farm Buildings Finished!

Sep 06, 2011

Farmers who are in the process of constructing new farm buildings or are thinking about it now have less than four months to go if they want to take advantage of 100% bonus depreciation and deduct all of the cost on their 2011 tax return.

Remember, there is no loss limitations on this deduction unlike Section 179 and a net farm loss can be used to offset other income such as wages, interest, rents, etc.

Also, the building must be finished before the end of the year, not simply paid for.  Usually an occupancy permit from the county should be sufficient to show a "in service" status.  If the building is not finished until 2012, then the deduction will occur in 2012 and the it will be limited to 50%, not 100% (unless they change the rules).

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