Apr 21, 2014
Home| Tools| Blogs| Discussions| Sign UpLogin


September 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.

How Zero Equals $380 Now Equals $5,800

Sep 26, 2013

In our last post , we discussed how having net gambling winnings of exactly zero could increase your 2013 income tax liability by $380. We had a reader pose the following points:

"Throw in some Social Security and a little more rent income and see what it does to your tax bill. Is it possible the gambling income could make your social security taxable where it was not before?"

To answer this readers question, I worked up some number assuming that a retired farm couple had $20,000 of rent income and $35,000 of social security income and no other sources of income. The farm couple also does not itemize their deductions. For 2013, with these facts, the couple would owe just a couple hundred dollars of federal income tax.

We then assumed the farm couple goes to the local casino and has net gross winnings of $250,000 and net gambling losses of $250,000. After inputting this information, the farm couple now has 85% of their social security income become taxable (there was a small amount before) which leads to an actual federal income tax liability of about $5,000 and we then have to add the net investment income tax of $760 ($20,000 rent income at 3.8%) for a total tax bill of about $5,800. The farm couple went from owing about $300 to $5,800 even though there net cash flow remained the same.

If the farm couple had even more net gambling winnings, part of their personal exemptions would begin to phase-out (gambling losses are not reduced by the same phase-out rules, other itemized deductions are).

As you can see, breaking even at the local casino can cost a farm couple of a lot of income taxes without having the extra cash flow to pay for it. These rules are getting more complex all of the time and I am thankful I have a computer to perform most of the calculations.

How Zero Equals $380

Sep 24, 2013

Gambling income and losses have a unique structure in the Tax Code. Unlike most other types of income where you net expenses against income in reporting a net amount on page 1 of your form 1040, gambling winnings must be reported gross on page 1 and then you are allowed to deduct your gambling losses as an itemized deduction on Schedule A which flows to page 2 of form 1040.

I would hazard a guess that most farmers who gamble on a regular basis probably do not report this income and deduction correctly. You are required to report your gross income from each session of gambling. A session is essentially defined as being engaged in one type of gambling for an extended period of time. You accumulate all of the net winnings from this session. All of these net winnings are reported on page 1. You then are allowed to report all of your net losses on schedule A.

Let's calculate how a farmer who regularly gambles and ends up the year with zero net gambling winnings can cost himself an extra $380 of income tax. We will take an extreme example. Suppose the farmer has rent income of exactly $10,000. He also goes to the local casino each day and on some days he has very good payouts and other days the casino ends up ahead. He keeps track of all of his net winnings and losses for the year and the total amount of winnings is exactly $250,000 and net losses are exactly $250,000 (he breaks even).

However, when preparing the tax return for him and his wife, we are required to report $260,000 of gross income less the $250,000 of gambling losses less some other itemized deductions and personal exemptions which brings his taxable income down to zero. However, he now has $10,000 of rent income subject to the 3.8% net investment income tax. He now owes $380 and that is how zero equals $380.

Gambling can both be hazardous to you at the casino and at tax time. If you enjoy gambling, please make sure to discuss this with your tax advisor to make sure you don't owe any extra taxes.

Estimated 2014 Inflation Adjusted Tax Items

Sep 18, 2013

Many of the provisions in the Tax Code are adjusted each year based upon the inflation for the fiscal year ended August 31. This inflation adjustment number has been issued and the new estimated numbers for 2014 are as follows (the IRS will issue final numbers a little later on, however, they should agree or the differences will be very minor):

  • MFJ standard deduction increases $200 to $12,400
  • Single standard deduction increases $100 to $6,200
  • Phase-out of itemized deductions and personal exemptions begins at $305,050 up from $300,000 for MFJ. Single taxpayers will increase to $254,200 up from $250,000
  • Top 39.6% bracket begins at $457,600 for MFJ and $406,750 for singles
  • Trusts and Estates will see the top 39.6% bracket begin at $12,150
  • Section 179 reverts back to $25,000 (if Congress does not change the law)
  • There is no bonus depreciation (again if Congress does not change the law)
  • The maximum lifetime estate and gift exemption rises from $5,250,000 to $5,340,000
  • The annual gift tax exclusion will remain at $14,000 (this only changes in $1,000 increments)
  • The special use valuation maximum reduction amount increases from $1,070,000 to $1,090,000 for 2014

 

There are many other provisions that will change, but I wanted to highlight the provisions most applicable to farmers.

We will keep you updated if the final numbers are materially different.

Monday is Final Due Date for Business Returns

Sep 15, 2013

Monday, September 16 is the final extension due date for almost all 2012 calendar business tax returns (corporations, partnerships and trusts). If you are unable to file your pass-through business return tomorrow on a timely basis, the penalty will usually be $195 per schedule k1 not file per month late.

If you are late with your filing and get a penalty letter from the IRS, do not automatically pay the penalty shown in the letter. If the late filing is for a partnership income tax return and each partner is an individual who files the income or loss timely on their personal return and there are 10 or fewer partners, then you are usually granted an automatic abatement of the penalty, but you will be required to send a letter to the IRS.

This automatic abatement does not apply to an S corporation, however, the IRS offers a first time abatement program that usually gets you out of the penalty, but again, you have to write a letter to the IRS and they do not advertise this option in any prominent area on their web-site.

If you are late with your C corporation and you owe tax, you will face a possible 5% late filing penalty per month late for at least the first five months, therefore, it pays to get this filed timely. If you do not owe tax, there is usually not a penalty, but you will get a letter from the IRS at some point.

It Only Takes Some Mold to Create a Problem

Sep 11, 2013

Chobani Yogurt Twin Falls, Idaho plant is the largest yogurt facility in the world. It produces about 1 million cases of yogurt per week and processes about 2-2.5 million pounds of milk per day.

I took a trip to Southern Idaho last winter and drove by the plant. It was almost ready to open and I can tell you it is a very large building.

Recently, it was discovered that some of the yogurt coming out of this plant contained mold that made some people sick. Here is the message from the founder of Chobani discussing the pro-active steps they have taken to recall this product. This company was started only in 2005 and in less than 10 years they have probably become the largest US producer of Greek Yogurt. They promote a very natural real yogurt product and perhaps using these steps may have caused the issue with the mold.

I have no complaints with the company or the steps they have taken, but when we deal with food products, it only takes a small amount of mold to cause a very large problem with a company or industry. This is just another example of one in the news lately.

Farm Income 4th On List of Reasons to Purchase Farmland

Sep 08, 2013

The Kansas City Federal Reserve puts out a quarterly survey on credit conditions in their region and the latest survey for the second quarter had some interesting trends. Due to lower wheat prices and the continuing high feed costs, their farmers actually had lower-income for the quarter. However, farmland prices continued their upward trend, up about 25% for irrigated cropland year-over-year and about 18% for non-irrigated cropland. Even rangeland prices were up about 14%.

However, for me, the interesting nugget out of these farmland price increases is the reasons why listed in order:

  • The wealth effect - farmers have had several years of high income which has increased their wealth substantially, leading to a desire to purchase more farmland and more importantly, having the wealth to purchase more farmland,
  • The current low-interest rate environment - With rates at decade lows, it is much easier to purchase farmland at higher values and still have it cash flow. If rates go back to more normal levels, this effect will reverse,
  • Lack of alternative investments - With CD rates at 1% or less, farmers are more likely to purchase farmland that will return more than that rate and still have some upside potential,
  • Finally - farm income expectations - The income generated by the farmland is the 4th reason for purchasing farmland. Over time, this reason should revert back to #1 and in that case, the first three reasons may lead to lower prices, not higher.

 

The quarterly survey is always interesting to read and I highly recommend taking a look at it. It is only five pages long and whether you live in that region or not, you will find something interesting in it each time.

Notice to Employees of Coverage Options Due October 1st

Sep 05, 2013

Employers both large and small are required to provide a notice to employers regarding new health insurance marketplace coverage options by October 1st, 2013. On an ongoing basis, new employees will also need to be provided this notice within 14 days of their start date.

The purpose of the notification is to inform employees about the new health insurance exchanges and subsidies that will be available to individuals effective January 1, 2014 and to provide information about the employer’s current offerings to employees.

The open enrollment period for the state and federal health insurance exchanges begins on October 1, 2013. The new exchanges will offer a place for individuals and small business to compare and select coverage options via an online marketplace.

Although some portions of the Patient Protection and Affordable Care Act (PPACA) were delayed until 2015, this notice requirement remains in effect. Many small employers may assume that they are not required to provide notice to employees, but this requirement applies to employers who are required to comply with the Fair Labor Standards Act, regardless of the number of employees they hire. Employers should provide this notice to both full-time and part-time employees.

Employers can find more information about the notice and model notices which may be completed and sent to employees on the Department of Labor Website: http://www.dol.gov/ebsa/healthreform/index.html.

Special Thanks to Kiely Strohmaier of our Moses Lake, Washington office for working up this post.

Are Land Value Increases Flattening Out?

Sep 04, 2013

The Federal Reserve Bank of Chicago produces a quarterly newsletter on farmland values for their district which comprises, Illinois, Iowa, Indiana, Michigan and Wisconsin. Their latest report seems to indicate a flattening of the rapid farmland price increases we have seen over the last few years. although prices were up 17% on an annual basis, the net change for the second quarter versus the first quarter was zero.

There does seem to be some seasonality to the second quarter since a couple of previous years have reported no change for the second quarter most likely due to farmers planting their crops and some uncertainty as to the prices they will receive.

Indiana saw the highest increases at 21% and 5% for the year and quarter, respectively. Michigan showed an 7% decrease for the quarter, but it appears to be more volatile than other states.

A majority of the bankers surveyed expect farmland prices to be flat for the remainder of the year. We shall see if this trend continues, but with large uncertainty to this years crop and the possible expectations for increases in long-term interest rates, it would not surprise us to see at least a flattening or even a drop in prices over the next few quarters.

We will keep you posted.

Health Care Exchanges are Coming (whether you are ready or not)

Sep 02, 2013

My friend Dick Wittman farms in Northern Idaho and also does part-time consulting for farmers and their families. I just came across a blog post that he published last week in the Idaho Business Review that I thought gives a very fair view of what the health care exchanges mean to his farm and family.

We may not agree with all of the Obama care provisions, but it is currently the law of the land and in many cases, the new state health care exchanges may help our farmers and their families. I would highly recommend reading his blog post.

Log In or Sign Up to comment

COMMENTS

Receive the latest news, information and commentary customized for you. Sign up to receive Top Producer's eNewsletter today!

 
 
 
 
The Home Page of Agriculture
© 2014 Farm Journal, Inc. All Rights Reserved|Web site design and development by AmericanEagle.com|Site Map|Privacy Policy|Terms & Conditions