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June 2013 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.

CRP in an S Corporation

Jun 30, 2013

We had a reader ask the following question in response to our posts on CRP payments being subject to SE tax:

"What about CRP income that is earned by an S corp which only rents out farmland and also collects CRP income.  Will that CRP income be subject to SE tax while the land rent is not."

Rental income including CRP income received by an S corporation is not subject to SE tax.  Therefore, based on the question brought up by the reader, CRP payments would normally not be subject to SE tax. 

However, based on the Morehouse case, the IRS could argue that CRP payments represent a trade or business and thus, the services provided by the S corporation would require some type of appropriate compensation to the owners of the S corporation for providing services related to the CRP contracts.  In most cases, this amount of compensation would be substantially less than the CRP payments received as income and thus, the S corporation would still result in less tax than CRP payments being directly received by an individual as a landlord/investor. 

Second, if the S corporation was previously taxed as a C corporation and has retained earnings that were not paid out in the form of dividends, the collection of rent and/or CRP payments by the S corporation as its sole source of income will most likely subject the S corporation to a net passive income tax of 35% and if this occurs for three consecutive years, then the S corporation election will terminate.  Many farmers are not aware of this tax and will convert their active farm C corporation to an S corporation and then start to cash rent their farm at some point in the future, and without proper planning, this may result in an adverse tax consequences.

Therefore, the collection of CRP payments by an S corporation will usually not result in any self-employment tax, however, it may result in additional payroll taxes and/or passive income taxes at the S corporation level based on the circumstances of each case.  If you have a situation similar to this, make sure to discuss it with your tax advisor.

Remember, Corn is Not Just Grown in the Corn Belt

Jun 28, 2013

With today's release of the USDA acreage report, it is becoming more apparent that the production of corn is rapidly expanding outside of the corn belt.  North Dakota (3.9 million acres) for 2013 has almost planted as much acreage to corn as Ohio (3.95 million acres).

My father was born in South Dakota and was raised in North Dakota and I visited this state many times about 20 years ago.  At that time, I do not remember seeing one acre of corn.  We now have almost 4 million acres being planted to corn.

I believe that we will continue to see this expansion of corn into areas that never grew corn 20 years ago.  Also, you may see the traditional corn belt start to contract if weather conditions continue to change.

The acreage report appears to be bearish, but remember, the crop still needs to be pollinated and we know how hot weather can affect that.

Your CRP Income May Be Subject to SE Tax

Jun 19, 2013

In the Morehouse Tax Court case just issued yesterday, the court ruled that the receipt of CRP payments by a non-farmer are subject to self-employment taxes.  The case involved a taxpayer located in Minnesota who inherited property in South Dakota and continued to invest in additional farm land in that state.  At all times, the taxpayer never "farmed" the property, but instead either rented the land out or participated in CRP.  Over the years, the taxpayer placed additional land into CRP.

The court ruled that the payments were subject to self-employment tax since the taxpayer was in the business of farming primarily due to his participation in the following activities:

  • Satisfied seeding and weed control obligations;
  • Visited properties to ensure that the properties maintained their status as CRP properties;
  • Filed annual certificates;
  • Participated in emergency haying programs;
  • Requested cost-sharing payments; and
  • Made decisions regarding the profitability of keeping the properties enrolled in CRP.

Additionally, the court indicated that taxpayer was engaged in an "environmental friendly farming operation".  It seems to me the taxpayer was simply trying to make more money from enrolling the land in CRP than he could get from cash renting the property. 

The Court also ruled that the taxpayer was not a farmer, but "was engaged in the business of participating in the CRP and that he enrolled, maintained, and managed multiple properties subject to CRP contracts with the primary intent of making a profit."  It seems under this logic that the court could easily extend this definition to any rental activity that has some type of contract with a governmental agency such as low-income housing, etc.  This may become a slippery slope by the court.

The Court also overruled its own Wuebker decision in arriving at its current ruling in this case.  Courts are like people, they can change their mind.

Under the ruling of this case, it appears that almost any farmland enrolled in CRP will be subject to SE tax (at least in the Eighth Circuit) unless the case gets appealed and overruled which may take a couple of years to resolve.  We will keep you posted with any update on the case, but for now, if you have land enrolled in CRP, make sure to discuss this case with your tax advisor.

Are You Ready for Your $1 Excise Tax Filing Requirement!

Jun 18, 2013

Many farmers have taken advantage of a self-insured medical reimbursement plans or other similar plans.  In many cases, a farmer is able to deduct medical expenses that they might otherwise not deduct due to the 10% of AGI limitations or they do not itemize their deductions.

As part of the Affordable Health Care Act (ObamaCare), there is now a new excise tax effective as of 2012.  It is based upon the number of participants enrolled or covered by the plan and the tax is $1 a person if your plan year ends between October 1, 2012 and September 30, 2013 and rises 100% to a $2 per person tax for plan years ending by September 30, 2014 with an undetermined per person fee thereafter.

If a farmer has one of these plans that covers him, his spouse and four children, then the fee is $6, however, there are two methods of how to calculate the numbers covered and you may end up with a slightly different number under each method.  The filing deadline for this tax is July 31 and is based upon your year-end ending in the previous calendar year.  For example, a plan that had a calendar year-end for 2012 is required to file by July 31, 2013.

There is no de minimis exception to this filing and a penalty may apply for not making the required filing.

CliftonLarsonAllen LLP has provided additional information regarding this filing and you may access that information here.

Also, here is a link to the federal form 720 needed for filing.

ACRE Produces Higher Payouts Than New Farm Bill Proposals

Jun 11, 2013

Gary Schnitkey of the University of Illinois just released an excellent analysis of the projected crop payments under the old ACRE program or the proposed Senate ARC or House RLC or House PLC programs.  As most know, under the old Farm Bill, a farmer could elect to participate in the ACRE program in return for giving up 20% of their direct payments.  With the new Farm Bill (either Senate or House), the ACRE program goes away.  We had many wheat farmers in our area get almost a $100 per acre payment about three years ago from this program.

Under the new Farm Bill proposals, the farmer can elect either a revenue option (Senate ARC or House RLC) or a price option (House PLC) that will kick in if prices get low enough.  Gary ran some numbers for an Illinois sample farmer with an average yield of 182 bushels per acre.  Gary assumed a long-term trend price of $4.50, $4.00 and $3.50 for each year from 2013 to 2016 and then crunched the numbers to determine respective payment amounts.

At the $4.50 level, the only program that made any payments was ACRE.  Over the 4 year period, $117 of total per acre payments would be collected by the farmer over the four years.  None of the other programs made any payments.

At the $4.00 level, ACRE would pay out $289, ARC $110, RLC $50 and PLC zero.

At the $3.50 level, ACRE would pay out $498, ARC $291, RLC $248 and PLC $100.

As you can see for corn farmers, the old ACRE program is much better than any of the new programs offered.  For other farmers, such as peanut and rice farmers, the difference may be much smaller or even tilt toward the new programs, but for corn, bean and wheat farmers, it appears the new programs will pay-out much lower than the old ACRE program and in many cases, there will be no pay-out, even with lower prices.

Prevent Planting Qualifies as "Crop Insurance"

Jun 10, 2013

We got the following question from one of our readers:

"Are payments for prevented planting deferrable into the following year for income tax?"

Most farmers are aware that crop insurance proceeds can be defer to the following year if you meet the following basic qualifications:

  • You use the cash method of accounting;
  • You receive proceeds for damage to crops in the current year (if you receive the proceeds in the year following the crop damage, you cannot defer it); and
  • You business practice is to normally sell more than 50% of your crop in the following year.

 

You need to meet all three of these requirements with certain nuances related to the last one.  Additionly, the crop insurance proceeds needs to be for damage related to some type of weather event (drought, flood, hail, etc.).  "Prevent Plant" insurance on the face of it might not meet this requirement since in order to have a crop, you must plant it.  However, there is a provision in the Code that indicates proceeds related to prevented plantings qualifies as crop insurance for purposes of the deferral.

Therefore, as long as you meet the normal crop insurance requirements you can defer "Prevent Plant" proceeds.
 

How Do We Treat the Grain Gifted?

Jun 09, 2013

Following up on our post regarding gifts of commodities to children and grandchildren, we had a reader ask the following question:

"In your example of Eric gifting to his grandson, does the grandson have to report this gift as income in either case (gifting in the current crop year or the following year)?"

In general, the receipt of the gift by the child or grandchild is not reported as income until they sell the grain. The child will receive a basis of zero (assuming a gift of a prior year crop) or a basis equal to the amount of cost allocated to the grain gifted. In our Eric example, he allocated $4,000 of cost to the 1,000 bushels of corn, so his grandson would have this as his cost basis.

If his grandson holds the grain for at least a year from the time of harvest, this will qualify for long-term capital gains treatment, otherwise, it is short-term. In most cases, the "Kiddie" tax will apply and the (grand)child will have to use the tax bracket of their parents. This almost always applies for kids that are in college or younger and being supported by their parents.

Also, if the fair market value of the grain gifted is greater than $14,000, you will be required to file a gift tax return. You will not owe any gift tax, but a return is required (unless you have gifted more than $5.25 million during your lifetime, then gift tax will be owed).

Example #1 - Eric's grandson is gifted 1,000 bushels of corn (from the previous year). The value at the time of the gift is $7,000 and the his cost basis is zero (since this is the previous year's crop). The grandchild sells it a month later for $8,000 and will report a short-term capital gain of $8,000. His tax rate will most likely be based on his parent's marginal tax bracket. If the grandson had held the crop until at least a year had passed from the time of harvest, it would be taxed as long-term capital gains.

Example # 2 - Same facts as number 1, except this is a gift of the current crop. In this case, $4,000 of basis is allocated and the grandson will have a short-term capital gain of $4,000 instead of $8,000.

Social Security Wage Base is Going Up (and Up and Up)

Jun 07, 2013

In the annual report by the Social Security Administration Chief Actuary is an estimate of the top Wage Base for 2014 through 2022.  For 2013, the Wage Base is $113,700.  The 6.2% FICA tax applies on all earnings up to this amount.  Once you reach the threshold amount, the remaining earnings are subject to the Medicare tax of 2.9% or 3.8% for high income earners. 

The projected wage base for 2014 is expected to rise about 1.6% to $115,500.  Based on their assumptions, the wage base will start to increase at a more dramatic rate starting in 2015 and by 2022, the wage base will be $165,600.  That is almost a 50% increase from the current 2013 amount.

Also, as Congress debates changes to Social Security, it would not surprise us that the Wage Base may be expanded even more to shore it up.

We will keep you posted.

Commodity Gift Update

Jun 04, 2013

We got a couple of comments/questions regarding our previous post on commodity gifts.

First,

"For a cash basis farm taxpayer, I was under the impression that care must be taken to assure that crop is gifted after the year in which the crop was grown.  Otherwise, costs to create the crop need to be backed out of farm expenses and treated as basis for the contribution.  I could be wrong on that point so could you address that issue?"

The reader's question and comment is correct for the gifts of commodities to non-charities.  In that case, a farmer wants to make sure that they are gifting prior year crops instead of current year crops.

Example

Eric gives 1,000 bushels of corn to his grandson worth $7,000.  The gift is made right after harvest and is of the current year crop.  When he prepares his tax return for the current year, he will be required to reduce his expenses by the percentage based upon the number of bushels gifted divided by total bushels grown.  For example, if his total costs were $400,000 and he harvested 100,000 bushels of corn, he would need to back out $4,000 ($400,000 times 1% (1,000 / 100,000)) of expenses when filing his return since this was the "cost" of the bushels donated to his grandson.  However, if he elected to wait until after year-end to make his gift, then he would not be required to back out any of the expenses. 

Charitable gifts of commodities do not have this rule.  You are allowed to fully deduct your expenses on schedule F, etc.  A simple way of looking at it is that if you were required to reduce your expenses on Schedule F, you would then be allowed to deduct the costs of the commodity as a donation on your schedule A.  The  IRS has been beat up a lot lately, but this is a favoable decision by that IRS  since the other way can be a pain to calculate and you would then lose the benefit of a reduction in self-employment income, etc.

Therefore, when making commodity gifts to non-charities, make sure to gift the commodity after the year it is harvested.  This can be tougher with the contribution of livestock.

Another reader asks if the gifts of commodities to charities works for partnerships and corporations.  The quick answer is yes.   Since there is no deduction involved, the amount given will not show up on schedule K-1 as a charity donation, however, the primary benefit is the reduction in income subject to self-employment tax for partnerships and the possible reduction in AGI for higher income farmers that might be subject to the 3.8% net investment income tax.

A nice feature of these types of gifts for C corporations is that you no longer have to worry about the 10% of gross income limitations.  If you make a cash contribution in a C corporation, the deduction for the current year is limited to 10% of your overall net income before the gift.  However, you can have an unlimited commodity gift since there is technically no deduction to be limited.  Also, if the corporation owner does not itemize their deductions, this is way of getting that deduction to flow through the corporation since the amount of grain donated will reduce the taxable income of the corporation.

 If you have a choice between a commodity gift or cash gift to a charity, do the commodity gift every time.  It will save you taxes.

The Advantage of Commodity Contributions

Jun 02, 2013

We had a reader ask the following question:

"Please comment on the tax ramifications of gifting farm commodities to a charitable foundation."

Many farmers have charitable intent, but in many cases their standard deduction ends up greater than their itemized deductions including their charitable donations. In these situations, the farmer can get an extra advantage by contributing grain or other farm commodities directly to the charity. With this direct gift, the farmer does not report any of the grain given as income and this eliminates self-employment tax on the amount of the gift and may reduce the income tax.

Example

Farmer Bean normally write a check to his church each year for $10,000. He has no other itemized deductions and gets no federal tax benefit from the donation. For this year, he elects to give the church 1,500 bushels of corn. This reduces his farm income by $10,000 (reducing his income and self-employment tax) and is still entitled to deduct his standard deduction. Assuming he is in a 15% tax bracket, the gift of grain saves him about $3,000 in tax versus making a cash gift.

For farmers in higher tax brackets, an additional benefit of making commodity charity gifts is that it reduces the amount of adjusted gross income that may be subject to the new 3.8% net investment income tax or phase-out of itemized deductions and personal exemptions.

Care must be taken to make sure the gift is properly documented. There must be a physical transfer of the commodity to the charity and they must be in control of the disposition of the commodity including any fees and expenses.

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