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November 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.

Don't Forget Your Form 1099 Responsibilities!

Nov 29, 2012

One thing that surprised us a little bit last year when preparing our farmers' tax returns was new questions that the IRS was asking regarding Form 1099s on all tax returns.  These two questions were asked on Form 1065, 1120, 1120S and schedule C and F.  The two questions asked on the forms were:

  • "Did you make any payments in 2011 that would require you to file Form(s) 1099?
  • "If "Yes", did you or will you fill all required Form(s) 1099?

 

Form 1099s are required for almost all payments for services to non-incorporated entities that you incur during the year if the payments total $600 or more.  Also, if you are making machine hire or contract hire payments, these form 1099s are especially important since major penalties may be incurred if these forms are not filed properly.

Other payments that require Form 1099s are also subject to penalties and these penalties seem to increase every few years and can add up to a major non-deductible reduction to your cash balance.

In some cases, you may be notified by the IRS that you will be required to perform backup withholding on certain payments to your vendor.  Ignoring or performing this task incorrectly can also subject you to additional penalties.

The filing season for these forms is coming up soon (given to vendor by January 31 and normally filed with IRS by February 28) so now is the time to make sure your accounting system is ready for these requirements.

 

The Coming Fiscal "Section 179" Cliff

Nov 28, 2012

We had a reader ask the following question:

"179 depreciation is scheduled for $25,000 in 2013 do you think this will be changed? If not how would it work on a pivot worth $71,000. ? $25,000 first year and remainder $46m over 6 years ?"

I am sure that the major equipment manufacturers such as Deere, Case IH are actively asking this same question.  These manufacturers (and farmers) have enjoyed the benefits of 100%/50% bonus depreciation and Section 179 of up to $500,000.  This year, bonus depreciation is 50% and Section 179 is limited to $139,000.

As the reader says, next year Section 179 drops all the way back to $25,000 and there is no bonus depreciation.  For the answer to his calculation question, he would take Section 179 of $25,000 leaving $46,000 to be depreciated over seven years as follows:

  1. Year 1 - 9.38%
  2. Year 2 - 19.13%
  3. Year 3 - 15.03%
  4. Year 4-7 12.25% each year
  5. Year 8 6.13%

 

These percentages may change a little bit if the mid-quarter convention applies.

Therefore, his total depreciation deduction for 2013 would be $25,000 plus $4,315 for a total of $29,315.

As to his question on whether this will be changed, we may know this by the end of the year or we may not.  With the major push for revenue raisers, it may be tough to get much of an increase, however, when they score this over a ten year budget window, the net effect on the budget is fairly minor due to deduction simply being a timing of the deduction, not an extra deduction.

If Section 179 and bonus depreciation remains as is, the  effect on farmers and farm equipment manufacturers will most likely be dramatic since many farmers will now have a year of little depreciation (all soaked up with bonus and Section 179) and buying equipment at year-end may yield a very minor depreciation deduction.  This may result in their equipment loan payments coming out of cash flow with no or little tax deduction.  This can be the worst case scenario.

We shall keep you posted.

Headed to Chicago for EWA

Nov 27, 2012

I head out for the second annual Executive Women in Agriculture conference sponsored by Top Producer magazine. I spoke at the conference last year and women tend to ask more and many times better questions than men. I look forward to speaking at this year's event and I already have spoken to some of the women that will be there. I think there were about 150 women at last year's event and many more are expected this year.

If you are attending, please come up and say hi.

2012 May Be Last Year for Section 179 Flexibility

Nov 26, 2012

Most farmers know the benefits of the Section 179 deduction. The deduction has been as high as $500,000, is $139,000 for 2012 and is scheduled to drop back to $25,000 in 2013.

What many farmers do not know about is the ability to go back and amend their tax return to change their Section 179 deduction. The reasons for doing this are many:

  • The farmer may be selling a piece of equipment this year that they took Section 179 on which creates a fully taxable sale. They can go back and amend the return to take no Section 179 on this equipment and substitute another piece that will not be sold.
  • The farmer may have a Section 179 carryover that becomes too large on the current year tax return or future return. In some cases, the farmer will loss part or all of this deduction entirely unless they amend prior year's returns to reduce the Section 179 deduction amount. This can happen when the farmer has multiple investments in other partnerships and S corporations and the flow-through from those entities may be more than desired in conjunction with their current Schedule F Section 179 deduction.
  • They may want to increase or decrease the deduction in prior years.
  • They may find that other items of income or deduction were missed on the original return and changing the Section 179 deduction amount will keep their tax liability the same (if desired).

 

Under current law, this amendment is only available for assets placed in service before January 1, 2013. For 2013, once you make the Section 179 election it is irrevocable (unless Congress extends the law). You generally have three years from the due date of your return to make the amended election.

If rates dramatically increase next year, it may be wise to amend your Section 179 deduction for prior years to bring some of that deduction forward into 2013 and beyond. Check it out with your tax advisor.

IRS Bumps 2013 Standard Mileage Rates by a Penny per Mile

Nov 25, 2012

The IRS announced last week (IR-2012-95) a  penny per mile increase in the standard mileage rate for business and medical or moving purposes.

For business purposes, the rate increases from 55.5 cents per mile to 56.5 cents per mile (don't ask me why they do not round it to the nearest penny).

For medical or moving purposes, the rate increases from 23 cents per mile to 24 cents per mile.

The charitable rate remains at 14 cents per mile.

The business rate is based on an annual study of the fixed and variable costs of operating an automobile.  Taxpayers have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates ( I would guess that most farmers use this method rather than the standard mileage rate).

Talk Brewing of Extending the Payroll Tax Cut

Nov 20, 2012

The Employee FICA tax rate for 2011 and 2012 had been cut from the normal 6.2% to 4.2%.  This provision was set to expire at the end of this year and then revert back to the normal rate beginning January 1, 2013.

Allowing this cut to expire in 2013 seemed like a reasonable position several months ago, however, the tepid economy has Congress discussing extending the cut or coming up with an alternative.

This cut costs about $115 billion in revenue each year to the government, however, if it is not extended, it drains this amount out of worker's pockets and some economists predict that this will reduce economic growth by about .6% next year.

House Republican leaders are opposed to extending the cut and coming up with an effective alternative such as a credit has not shown any progress.  A credit sounds good in theory, however, it prevents giving a immediate shot to the consumer since they would have to wait to file their tax return to receive the credit.

Others want to use this cut as a bridge to income tax reform, however, in my experience Congress does not build very good bridges, whether for tax reform or roads.

Don't Forget the Small Employer Health Care Credit

Nov 18, 2012

We tend to talk more about the tax costs of Obama Care and forget about some of the tax savings that are available.  One of those savings is for employers that cover part or all of their health insurance premium costs. 

This credit is allowed in full assuming less than 11 employees and average wages of $25,000.  It is fully phased out if you employ more than 25 employees or the average wage is greater than $50,000.  A 35% credit is available during years 2010-13.  For 2014-15, the credit can be up to 50%.

Many employers have not taken advantage of this credit since there is some paperwork involved.  However, if you pay a substantial amount of your employee's health insurance premiums and you meet both two tests, it is worth the paperwork.  However, if your average wage exceeds about $45,000, it may not be worth all of the paperwork involved.

 

Farm Lending Rose at Fastest Pace in Five Years

Nov 15, 2012

Due to the summer drought spurring much higher feed costs, farm lending activity at commercial banks recorded their fastest pace in five years. According to the Federal Reserve of Kansas City in their National Trends in Farm Lending October, 2012 report, demand for short-term operating loans increased as input costs soared and herd liquidation boosted loans for feeder cattle.

Bankers continue to report increases in land values, but the pace of gains has slowed from the previous quarter. Competition among agricultural lenders remained heated and banks have plenty of liquidity. Average return on assets for banks rose to a four year high.

The volume of short-term loans jumped 36% from this quarter compared to last year which is a new survey high. Due to high prices in the crop sector, loans for machinery remain above year-ago levels.

Feeder cattle loans exceeded 2011 levels by about 60 percent, more than offsetting a drop in other types of livestock loans.

Non-real estate loan volumes at small banks rose by about 10 percent while larger banks saw a 4% drop.

Ag banks saw a return on assets of about .6% which compares very favorably to the .4% for non-ag banks.

Farm land prices continue to increase with Nebraska showing the largest increase at 36.5% and South Dakato not too far behind at 35.85.  The Southern states of Texas and Northern Louisiana saw minimal increases in values.

No AMT Extender May Prevent Farmers from Filing on March 1

Nov 14, 2012

Steven Miller, Acting Commissioner of the IRS wrote a letter dated November 13, 2012 to select members of Congress informing them on the possible delays in processing 2012 income tax returns if the AMT patch is not enacted.

Under current law, it is estimated that 28 million additional taxpayers will pay some Alternative Minimum Tax (AMT) for 2012 tax returns unless the AMT patch is enacted. If the patch is passed, then only about 5 million taxpayers would be subject to the tax.

Mr. Miller explained that the IRS is ASSUMING that Congress will pass the AMT extender bill before December 31, 2012 and if so, they will be able to process returns with minimal delay. However, if Congress does not pass an extender bill or waits until sometime in 2013 to pass it, he indicates that the IRS may not be able to process any returns affecting up to 60 million taxpayers including most farmers until late March, 2013.

The extension of the AMT patch is fairly easy to program into the system since it involves changing a few numbers. If the extender is not passed, then the IRS has to completely rewrite their code to handle the new ordering rule of many tax credits for AMT purposes and this is what would take the extra time.

As we have indicated in many other posts, you may want to consider making a required estimated tax payment on January 15, 2013 and then file your return by April 15. This could save you much time and aggravation, especially in 2013.

We will keep you posted.

IRS Announces It Does Not Like Fixed Dollar Gifts

Nov 13, 2012

Albert and Joanne Wandry had made various gifts or partnership/LLC interests to their children and grandchildren over several years.  When making the gifts, the Wandry's provided specific language in the gift documentation noting a gift of a fixed dollar amount.  It is difficult to value a partnership interest based upon a fixed dollar amount until after the books are closed and a valuation is performed.

As  you can guess, the IRS audited these gift tax returns and assessed additional tax against the Wandry's.  The Tax Court in a ruling back in March found the taxpayers.  The IRS had several novel arguments:

  • The taxpayers wording on the gift tax return indicated a percentage gift, not a dollar amount - The Court indicated the taxpayers had indicated a dollar amount and ruled in their favor
  • The gift documents showed a transfer of a fixed percentage to the donees - The Court ruled the % indicated was soley based upon the dollar amount transferred and ruled for the taxpayer.
  • Last, the IRS indicated that these types of gifts were contrary to public policy - The Court basically said the IRS was wrong and if they did not like the law, get Congress to change it.  Quoting the Court "The Commissioner's role is to enforce tax laws, not merely to maximize tax receipts".  We wish the IRS would follow this rule more often.

 

The IRS just announced formally that they disagree with the ruling and will not be bound by it.  There has been several other fixed value adjustment cases regarding charitable gifts or estates and the IRS has lost most if not all of those cases.  Absent a law change, it seems the IRS is facing a losing battle.

20%/33%/45%/59% - How Much Will Your Capital Gains Rate Go Up By?!

Nov 12, 2012

Assuming that the Bush Tax Cuts are not extended, we know that capital gains tax rates will increase in 2013.  The key question, is by how much.  Here is a brief recap of the increases:

  • 20% - If you acquire property after December 31, 2000 and hold it for at least five years, your maximum capital gains tax rate will be 18% of a 20% increase from 2012 rates. 
  • 33.333% - If you hold property for more than one year and sell it in 2013, your normal maximum capital gains tax rate will be 20% or a 33.333% increase.
  • 45.333% - If you are subject to the new Medicare Surtax on investment income (as discussed in many previous posts) and you acquired the asset after December 31, 2000 and hold it for at least five years, your new rate will be 21.8% (18% plus 3.8% Medicare Surtax) or 45.333% higher than your current rate.
  • 58.667% - If you are subject to the new Medicare Surtax on investment income and hold the asset for more than one year (do not meet the five year rules), then your new rate will be 23.8% or a 58.667% increase.

 

As you can see, at a minimum your capital gains rate is going up 20% and could be as high as a 59% increase.  Also, factoring in possible state income tax increases (California is increasing their top rate by 3% or almost 30%), you could be looking at a 75% increase over your current rate.

How can you prevent this?

  • Consider using a Section 1031 tax-deferred exchange.  If you sell farmland at a large gain, you can roll it over into other real estate and defer the tax.
  • Consider using an installment sale to keep you out of the Medicare Surtax.
  • Consider using a Charitable Remainder Trust (CRT) - See my latest monthly column in Top Producer on how these can work for you.
  • Consider gifting the asset to your kids first and spread out the gain to keep it under the Medicare Surtax threshold.

 

There is a chance that the Bush Tax Cuts may be extended, however, we may not know that until late December or even into 2013.  If you are facing a large capital gains tax increase for 2013, you have less than two months to plan for it.  Get started now.

Surprise! - IRS Does Not Promote "First Time Abatement" Program

Nov 11, 2012

Shortly after September 15 of each year, I spend multiple hours as a CPA writing letters to the IRS in response to late filing notices for partnerships and S corporation tax returns. In almost all cases, after writing the letter, the IRS will abate the penalty and the taxpayer will not owe for the late filing.

However, the client has heartburn from receiving the notice; I have spent time writing and mailing the letter; and the IRS has wasted valuable time and resources responding to the letter.

Instead of all of this wasted time, it would be nice if the IRS would automatically apply their "first time abatement" program to these penalty issues automatically before mailing the notices. This first time abatement applies if in the last three years, the taxpayer had not been issued a penalty for filing or paying late. If they were in full compliance the IRS could automatically waive the penalty. If the taxpayer filed multiple returns (such as 2010 and 2011 at the same time and both were late), then the abatement could apply to the first return.

The Treasury Inspector General for Tax Administration just issued a report admonishing the IRS to apply this program on a consistent basis to all taxpayers. In the report, they noted that in 2010 that approximately 250,000 taxpayers who filed late and 1.2 million taxpayers who paid late could have qualified for this abatement.

Assuming that the taxpayers, CPA and IRS time for each of these penalties is at least $100 (most likely much higher), then we spend at least $150 million dealing with these penalties. The IRS could have easily programmed their computers to automatically deal with this and save all of us time and money.

ObamaCare Here to Stay (at least for four more years)

Nov 08, 2012

I spent three of the last four days giving a seminar on the economic and tax effects of ObamaCare in Yakima, Kennewick and Boise and it was interesting to hear the feedback from farmers and other business owners.  The first two days, the audience wanted to know my opinion on what would happen if Romney won the election.  I think the answer would have been the same as what actually happened.

With the Senate still in Democratic control, there would be no change for at least two years.  Now that we have a status quo election, it will be around for at least four years.  Some of the unexpected consequences of this legislation (even though there is at least a year to go for penalty provisions) are:

  • Lower income workers in retail, farming, hospitality, etc. will most likely need to work at least two jobs to make a living.  These employers will no longer allow these workers to have more than 30 hours of work per week.  Therefore, these employees will need to two jobs to have a chance at making a living.
  • Many owners may consider transferring enough ownership to prevent combination of entities into one "employer" for tax purposes.  This may be a good thing.  It is much tougher for farmers due to family relationships.
  • Many employers may bump up the amount of self coverage that they pay for, but may eliminate or substantially reduce family coverage.
  • Many employers may eliminate health insurance coverage completely.  This will place these employees into the "public" exchange plan.  Employers will consider this since it may be substantially cheaper to simply pay the penalty and adjust pay for upper level employees.
  • Tennessee had a plan similar to ObamaCare and the plan got so expensive that they had to cancel the plan.  My worry is that this plan will get this expensive, but may be too late to cancel.

 

We shall see

Farming and Rural Indexes Grow

Nov 05, 2012

The Rural Mainstreet Index put out by Creighton University climbed to its highest level since June of this year. The index had been flat or lower due to the drought during the previous three months, but with the report released last month, it rose to a solid 56.6 from September's weak 48.3. It was the first time since June that it rose above the growth neutral 50 level.

The negative impacts of the drought are being more than offset by high crop prices, expected crop insurance proceeds and high energy price returns for landowners.

The farmland price index continues to soar higher. The October reading was 71.7 which is the 33rd straight month above 50. Bankers reported about 70% of crop yields lower this year while about 19% are indicated higher.

After expanding for seven straight months, the loan demand index dropped dramatically from September's 70.2 to 44.2.

The hiring pace still remains very tepid at only 51.5 up from 50.9. Bankers report uncertainty surrounding healthcare reform, the elections and the fiscal cliff are all restraining employers from much new hiring.

One in four bankers expect a recession in 2013, however, the elections seem to be clouding the outlook.

Get Ready For The New Medicare Tax Increase on Earned Income

Nov 04, 2012

As part Obama-Care put into effect in 2010 is a provision to increase the employee portion of the Medicare tax from the current 1.45% by .9% to a total rate of 2.35%. This new rate only applies on the amount of earned income in excess of $200,000 for single taxpayers and $250,000 for married couples (another example of the "marriage" penalty).

For farmers, earned income applies to any net farm income reported on Schedule F plus any self-employment earnings received as a partner in a partnership (or LLC taxed as a partnership). In addition, the tax applies to wages the farmer earns from his corporation if any plus wages earned off-farm by him and his spouse.

The final calculation is done on the tax return and if the total exceeds the base amount listed previously, the excess is subject to the new Medicare surtax.

Example #1

Farmer Joe earns Schedule F income of $295,000 for 2013 and his spouse earns $120,000 working in town. Their combined income is $415,000. All of this income is subject to the regular employee Medicare rate of 1.45% or 6,017.50. Additional tax of $1,485 is owed on the $165,000 in excess of the base amount.

Example # 2

Jane earns $250,000 working in town. Her employer is required to withhold an extra $450 for the Medicare surtax on the $50,000 in excess of the $200,000 single level (employers withhold based on single floor even if the employee is married). Farmer Joe has a break even year farming and they are entitled to a refund of the $450 withheld from Jane's wages since combined earned income is exactly $250,000 the married limit.

Note, the employer portion (including the farmer's self employed portion) remains at 1.45% on all of the earned income. The Surtax only applies to the employee. However, if the employer does not withhold the required Medicare surtax from the employee, they are subject to the liability for the tax.

Updated Harvest Prices

Nov 01, 2012

Although the final corn and bean harvest prices have not been officially revealed, the University of Illinois in their FarmDoc daily blog, just released their final harvest estimate. Back on October 11, I posted a guess of the final corn price being $7.55 per bushel. FarmDoc indicates a final price of $7.50 (I was a nickel too high).

In the same post, I thought soybean prices would average $15.30 and FarmDoc estimates this number at $15.39 ( I am off by 9 cents, but about the same percentage). My net miss for both crops was 4 cents.

The original spring price for corn was $5.68. Therefore, the final difference is $1.82 which about a 32% increase over the spring price.

The original soybean spring price was $12.55 and the final number represents a $2.84 increase or about 23%. I believe these are largest price increases ever, but the percentage increase is third and sixth highest ever for corn and soybeans, respectively.

The FarmDoc post has additional information on the history of these price differences. They are also are predicting average GRIP payments for Illinois districts and it appears that extreme drought recorded in Southern Illinois may result in GRIP payments exceeding $800 per acre.

2012 is shaping up as a year where crop insurance more than pays for itself (just ask your banker).

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