Sep 2, 2014
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February 2014 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.

Tax Reform - Part ?????!!!!!

Feb 26, 2014

Dave Camp, the chairman of the House Ways and Means Committee issued another tax reform proposal today. Since this is a mid-term election year, it has little chance of passing this year, but it is important to note possible changes that Congress is pondering. The major ones affecting farmers are as follows:

  • For individuals, create three tax brackets - 105, 25% and 35%. The 35% bracket would not apply to qualified domestic manufacturing income (QDMI) which would be taxed at a maximum 25% rate. In exchange the current 9% domestic production activities deduction would be eliminated. Almost all farming income would qualify for QDMI which means farmers whether a schedule F or in a pass-through entity would have a maximum 25% tax rate on their farm income (good for farmers).
  • Capital gains and qualified dividends would be taxed at normal rates, however, there would be a 40% deduction, therefore, only 60% of capital gains and qualified dividends would be taxed (fairly neutral compared to current law).
  • The maximum corporate tax rate would be reduced to 25% over five years (good for farmers who farm as C corporations).
  • Accelerated depreciation would be eliminated. All assets would be depreciated over their useful life on a straight-line basis. For example, trees and vines would be over 20 years instead of the current 10. Most if almost all farm real estate including possibly single purpose ag structures would be over 40 years and not the current 10 or 20 years. Some adjustments for inflation may allow for some accelerated deductions.
  • Section 179 would be made permanent at the $250,000 level with the phase-out beginning at $800,000. These two amounts would be indexed to inflation (these provisions mostly bad for farmers)
  • Homeowners would have to live in the home for five out of eight years and you could only do the exclusion once every five years.
  • Mortgage interest could only be deducted on indebtedness up to $500,000 down from the current $1 million. This would be phased-in over four years.
  • Charitable donations would be subject to a 2% of AGI limitation. Contributions of appreciated property would be based on adjusted basis, not fair market value, except for certain exceptions, primarily publicly traded stock.
  • Possible substantial restrictions on the exclusion for corporate provided housing. This would be limited to $50,000 and the exclusion would apply to only one residence (this could substantially restrict the use of corporate provided housing by farm C corporations).
  • For taxpayers who materially participate in an S corporation or partnership, would automatically treat 70% of their earnings from the business (whether taken in the form of salary or distributions) as automatically being subject to self-employment tax. The remaining 30% would not be subject to SE tax. Passive investors would still not be subject to SE tax (this provision most likely bad for material participating farmers).
  • Roth IRAs would be allowed no matter the income level, however, regular IRA contributions would no longer be allowed. Also, no longer allowed to form new SEPs or SIMPLE 401(k)s.
  • Repeal of the Alternative Minimum Tax (AMT).
  • The special deduction for soil and water conservation expenditures would be repealed (could affect some farmers).
  • Intangibles would be amortized over 20 years instead of 15 years.
  • Repeal of percentage depletion.
  • Gain from the sale of timber held for more than one year would no longer be treated as a capital gain.
  • As with the Senate proposals, the House would repeal like-kind exchanges (not good for farmers who trade in equipment or sell real estate).
  • A gain for farmers is that the current rules regarding the cash method of accounting would be retained. Therefore, all farms operating as S corporations, sole proprietors or partnerships would be able to retain the cash method of accounting.
  • Farmers selling property on an installment sale exceeding $150,000 would be subject to the current interest charge rule that applies currently for sales in excess of $5 million.
  • Farm income averaging would be repealed (not good for farmers).

There are hundreds of other provisions in the proposal. Most of the current credits, etc. are eliminated in exchange for the reduction in individual and corporate rates. On the whole, parts of the proposal would help farmers and parts would hurt. There is no chance of the proposal as is passing, however, many of these proposals are similar to the Senate or President Obama's tax reform initiatives and there is a good chance that tax reform will occur over the next few years, but who knows what the final bill will be.

We will keep you posted.

Here is a link to the Section-by-Section Summary of the Tax Reform Act of 2014 Discussion Draft.

Some Quick Thoughts on the 2012 Ag Census

Feb 25, 2014

The USDA released a preliminary 2012 Ag Census report last week. This report provides summarized information on the number and types of farms by state. More detailed information will be released later on in the year. Some of my quick thoughts on this preliminary release are (comparisons will be to the 2007 Ag Census):

  • Total US farms 2.109 million down from 2.205 million.
  • Total farm land of 915 million acres down from 922 million.
  • Interesting that farms over 1,000 acres only increased by 434 from 173,049 to 173,083.
  • Total farm sales increased from $297 billion to $395 billion, or a 33% increase.
  • Crop income was actually higher than livestock income - $212 billion compared to $182 billion. In almost all other census the opposite occurred.
  • Farms with gross sales greater than a $1 million increased from 57,292 to 81,634, almost a 43% increase.
  • Average age increased from 57.1 to 58.3.
  • Top five Ag States are (1) California $42.6 billion, (2) Iowa $30.8 billion, (3) Texas $25.4 billion, (4) Nebraska $23.1 billion and (5) Minnesota $21.3 billion.

The final report will have lots of interesting data with more detail than the preliminary report and we will update you when it is released.

Is There An Error in the Dairy Margin Protection Program

Feb 24, 2014

The new farm bill provides dairy farmers with a margin protection program that will pay them if the average milk price for a two month period does not exceed the average feed price. The average feed price is comprised of corn, soybean meal and alfalfa. Dairy farmers who enrolled in the program do not have to pay any premiums if their coverage is at the $4 level. Between $4 and $8, they are required to pay an annual premium per cwt based upon the level of coverage selected.

In reading the premiums per cwt in the farm bill, I believe that a major error in pricing has occurred. The cost to insure 100 lbs of milk for a full year rises from $.04 for $5 of coverage up to $1.36 for $8 of coverage. However, the premium for $6.50 of coverage is $.29 per cwt while the premium for $7.00 (only 50 cents more) is $.83 per cwt or an increase of $.54 per cwt. Therefore, if you want to get 50 cents of possible insurance coverage for the year, you are required to pay 54 cents. This does not sound correct to me, especially since the increase in premium from $7 t0 $7.50 is only $.23 per cwt.

I am guessing that there is typo in the farm bill on this premium, but I am not sure if USDA has the authority to overturn it without consent from Congress. If it remains at this level, it appears the bargain is the $6.50 level, not $7.

We will keep you posted if they change it.

Make Sure to Review Your Base Acres

Feb 23, 2014

One of the original proposals in the farm bill discussion was to make payments based on actual production, not base acres. Well, this did not happen, so for 2014-2018 crop years, your actual ARC or PLC payments will be made based upon your base acres. For county elected ARC or PLC provisions, this payment will be based upon 85% of your base acres. For individual ARC coverage, these payments will be made based upon 65% of base acres. As you can see from this 23.5% reduction in base acres, there will probably not be many times when you will elect individual ARC over county ARC.

Also, remember that you have to make an one-time election to either elect PLC or ARC for the 2014-2018 crop years. If you do not make an election, you will be locked into PLC beginning in 2015 and you will not receive a payment for 2014. Also, if you elect ARC, all producers in the farm including cash landlords will be required to sign off on ARC. This will result in actual yields being shared with landlords. This may sway a farmer toward PLC coverage.

You will be granted a one-time option to reallocate your base acres from the "old" base to a "new" base that will be calculated by taking each crop's share of the farm's total acres planted to covered crops over the 2009-2012 crop years. For example, let's assume a farmer had a total of 2,000 base acres comprised of 650 wheat acres, 700 corn acres and 650 soybean acres. During the 2009-2012 crop years, the farmer actually averaged 1,600 corn acres and 400 soybean acres due to the rise in corn prices and related agronomy changes. Based on this one-time reallocation option, the farmer could update their base acres to reflect 1,600 corn and 400 soybeans acres.

This decision would be based upon the farmer's expectations regarding crop prices for each of the crops grown by the farmer and by placing the "old" base acres into a spreadsheet and then calculating the same expected payments based upon the "new" base acres.

The farm bill allocated about $3 million to extension universities to help develop ARC/PLC calculators. We will most likely start seeing some of these over the next month or so. Most likely the sign-up period will not occur until at least April and will go into at least mid-summer.

We will keep you posted.

ARC & PLC Are Not Crop Insurance

Feb 17, 2014

We had a reader ask the following question:

"Paul, I have been reading your blogs about federal crop ins. Is PLC and ARC the whole program or do we still have the traditional options that we have had the last few years? If the traditional plan is still in place will we have to pick between the whole farm option and enterprise units? Most of my farming friends here in Northern Illinois are wondering the same thing."

I have gotten similar questions from other readers. The new ARC and PLC programs contained in the new Farm Bill are "programs" to replace the old DCP and ACRE payments. They are not crop insurance. Title I of the Farm Bill deals with the program payments and ARC and PLC are contained in Part II of Title I. Other commodity provisions such as the Dairy Margin Protection Program, Marketing loans, Sugar provisions, etc. are also contained in Title I. Since these are farm programs, there are payment limitations on them. A producer can not receive more than $125,000 ($250,000 if married) in program payments in any crop year. If your three-year average adjusted gross income (AGI) exceeds $900,000, then you will have to pay back any program payments received.

Title XI contains all of the provisions relating to crop insurance. This includes the new Supplemental Coverage Option (SCO) which is only available with PLC. Your current crop insurance options essentially remain the same as in the prior farm bill (with certain tweaks on coverage options and new products). Crop insurance proceeds have no limitation on the amount a farmer can receive. There is also no AGI limitation.

With regards to the option on choosing between whole farm and enterprise units, I am not an expert on crop insurance and all of the rules. In reading the bill, there is an option to have different coverage levels for irrigated and non-irrigated crops, but I did not see anything else. You should discuss this with your crop insurance agent.

ARC Could Lock in More Revenue Than Crop Insurance

Feb 16, 2014

We have written several posts on Agricultural Risk Coverage over the last couple of weeks, however, the Olympic average calculations called for in ARC may yield higher income levels than crop insurance for the 2014 and 2015 crop years. ARC is calculated by taking the average revenue for either county or individual coverage. This Olympic average is based upon the average revenue for each year over the last five years. After calculating the revenue for each year, you then throw out the high and low year and take the average of the remaining three years.

For example, I looked at Buchanan County, Iowa and have calculated my estimated Olympic benchmark revenue for 2014. The average US corn price for each crop year is $3.55 (2009), $5.18 (2010), $6.22 (2011), $6.89 (2012). The 2013 average is not known yet since that crop year will end August 31, 2014. For purposes of this calculation, I assumed $4.20 for the 2013 crop average. The average yields for Buchanan County is 171 (2009), 167.50 (2010), 187 (2011), 140.40 (2012) and 2013 will be released shortly, but I assumed 178 (actual yields may be a tiny bit different based on final FSA calculations). We now arrive at average revenues for each year which is as follows:

  • 2013 - $748
  • 2012 - $967
  • 2011 - $1,163 (highest)
  • 2010 - $868
  • 2009 - $607 (lowest)

2009 is the lowest and 2011 is the highest and these are thrown out. We then average the remaining three and come up with $861 of benchmark revenue. Our maximum payment is 10% of this number or $86 and we do not start to collect until revenues are lower than 86% of this number or $740.

Now, under crop insurance, you would take the greater of the spring or harvest price and then essentially multiply your trend APH to arrive at your "benchmark" revenues. Let's assume for this year, that the county APH is simply the average of the last 5 years or 169 bpa. If we take our current ARC benchmark revenue of $861 and divide by 169 bpa we arrive at a price of $5.09 which would be the crop insurance equivalent spring or harvest price. This means that right now ARC is essentially offering about the equivalent of $5.10 corn pricing for the 2014 corn crop.

Now for the 2015 corn crop, the numbers are actually probably a little higher than 2014 unless corn prices and yields fall dramatically. In my example, I am assuming that the 2014 crop yield for the county is 185 bpa and the average US corn price will be $4.10. This results in average revenue of $777. Since we have a trailing 5 year Olympic average, we now throw the 2009 crop year completely and then 2013 is our low year and 2011 is our high. After doing the calculations, we end up with benchmark revenue of $749 about $9 higher than our 2014 crop year example.

The Price Loss Coverage guarantee is currently $3.70 for the 2014-2018 crop years. ARC appears to be offering coverage levels closer to $5.10 per bushel than $3.70 for 2014 and 2015. Who knows what 2016-18 would be, but prices would need to be substantially lower than now for PLC to beat ARC over the five-year farm bill cycle. This is one example for corn. Each crop will have different numbers for county yields, prices and PLC reference prices, but so far, my analysis indicates ARC is probably better for corn, beans and wheat than PLC.

John Deere Expects Increase (Hopes For) in Section 179 and Bonus

Feb 14, 2014

John Deere released their first quarter fiscal 2014 years yesterday and profits were up slightly from the year before. As part of the conference call, they highlighted that US farm receipts are expected to remain high, however, based on their graph in slide # 6, they do show US farm receipts over $400 billion in both 2012 and 2013, with an expected drop to about $375 billion this year. Direct governmental payments as a percentage of gross farm revenues are expected to be extremely low compared to historical levels.

Livestock margins are expected to stabilize near historically high levels (slide # 8). Slide #9 shows that the Commonwealth of Independent States (Russia, Kazakhstan and Belarus) had a late fall planting putting the 2014 winter wheat crop at risk and credit availability is being impacted by continuing restrictions, increased collateral requirements and reduction in interest rates subsidies. China continues to be supportive of agriculture. India had a very favorable 2013 monsoon season which should result in good 2014 crops.

Brazil's crop mix expects to be 54% grains, 17% sugarcane and 29% other crops (slide #10). Their expectations for 2014 Ag equipment sales is US/Canada down 5-10%, EU down 5%, South America down 5-10%, CIS countries down slightly and Asia Ag up slightly (slide #13).

Expectations for average corn and bean prices up slightly, wheat down 20 cents a bushel and cotton the same (slide #35).

Their breakdown of total farm revenues is (slide 38):

  • Crops $192 billion
  • Livestock $174 billion
  • Government payments $11 billion
  • Total $377 billion

Finally, they expect net farm income to drop from the $130+ billion range to about $110 billion.

In an article in the Wall Street Journal, they reported that John Deere expects Section 179 to be in the $250,000 range for 2014 and 50% bonus depreciation to be reinstated. However, as we have already mentioned several times, they do not expect the final law to be in place until late in the year which will be too late for most farmers to both order and place in service new equipment for 2014.

IRS Data by Zip Code and County

Feb 12, 2014

The IRS just released certain summarized income and expense information based upon taxpayers in a county or zip code for tax year 2011. This information includes the number of returns with AGI between certain dollar amounts such as 0-$25,000, over $200,000, etc. It also provides information on the components of income such as wages, interest, dividends. For interest to farmers, it provides the actual number of farm returns for each zip code, however, it does not directly indicate the amount of farm income. That number is contained in the business income information.

For example, I grew up in Dixie, Washington and moved to Walla Walla, Washington when I was in high school. Some interest information for that zip code (99362) is as follows:

  • Total tax returns - 10,810
  • Total Adjusted Gross Income - $527 million
  • Total wages - $322 million
  • Taxable interest and dividends - $7 million
  • Total number of business returns - 1,488
  • Total business income $21 million
  • Number of farm returns 66

Now I know that there are more than 66 farmers who live in Walla Walla, however, many of these farmers probably report their income from a partnership or corporation, therefore, they would not be included in this number.

If you are interested in seeing how your county checks out with your return, you can click here and go directly to the IRS website for this information. Years before 2011 are also included.

When Farmers Barter

Feb 11, 2014

 

We had a reader ask the following question:

"If you barter a vehicle for grain do you just put that grain with your other grain sales as there was no 1099 b form?"

Many farmers barter goods and services during the year and in many cases, the barter transaction is not reflected accurately on the tax return. In the case of the reader, they would report the fmv value of the grain given in exchange for the vehicle as additional grain sales and it would be added in with their cash sales. This same value would then be reflected as part of their fixed asset purchases. In this case, they could then take Section 179, 50% bonus depreciation (if a new vehicle) or depreciate over the applicable life.

Here are some other examples of bartering and how they should be treated:

  • Two farmers perform various services for each other. One farmer does the spring planting. The other farmer does spraying. At the end of the year, they add up the costs associated with the planting which they estimate at $35,000 and the cost of spraying at $30,000. They decide to net the difference the farmer who did the spraying writes a check to the other farmer for $5,000 and deducts this amount on his tax return. The farmer who received the check reports $5,000 as custom work on his schedule F. Technically, each farmer should report the gross amount as custom work income on each of their return and then report the work done by the other as custom hire or machine work on the expense section. In almost all cases, the bottom line effect would be the same for each, therefore, just reporting the net payment made is very common and should not change the bottom line.
  • Now let's assume one of the farmers grows beef and instead of selling the beef to his farmer friend, the farmer performs services on his farm worth the beef provided. In this case, since the beef will be consumed by the farmer for his personal consumption, he should report the work performed as income, but will not have a deduction to offset. The farmer that provided the beef will have an equal amount of income and expense to report, therefore, there should be no bottom line effect.
  • Now let's assume a farmer does some construction work for his farmer neighbor who is building a house that he will rent out to others. In this case, the farmer performs construction services of $15,000 and the neighbor does spring planting worth the same amount. Here the farmer who did the work could report it on Schedule C (most likely on Schedule F) and have an offsetting deduction for the planting costs. The farmer building the house would now increase his construction costs by $15,000, however, these can only be depreciated over 27.5 years and he will still need to report the income on his Schedule F.

As you can see, there are many forms of bartering that farmers perform and I am sure that I have not listed all of the various methods. Some of these barter transactions are properly reported, however, my educated guess is that much higher percentage is not.

Some ACA Relief for Employers with 50 to 99 Employees

Feb 11, 2014

The Department of Treasury issued Regulations today (Monday, February 10) announcing that employers with more than 50 employees but less than 100 would not have to offer health insurance or pay a "responsibility" penalty until 2016 (one year later than the postponed 2015 requirement). Additionally, it appears that seasonal employees that are not expected to work more than six months in a year will not be considered full-time employees for purposes of the mandate.

Although the responsibility for providing insurance or paying a penalty has been postponed for a full year, it appears that these employers will be required to report worker information to the IRS beginning in 2015. A fact sheet summarizing many of the changes can be reviewed here. As we read the new Regulations, we will update you with changes that may affect farmers, but it appears the new Regulations are at least one small step to the better.

Margin Protection for Dairy Producers

Feb 10, 2014

Dairy farmers are now starting to enjoy healthy margins after several years of either breakeven or loss margins. The new farm bill provides margin protection for dairy farmers. This margin protection is calculated based on the difference between the "all-milk price" and average feed cost. Average feed cost is calculated as the sum of the price for:

  • 1.0728 bushels of corn, plus
  • .00735 of a ton of soybean meal, plus
  • .0137 of a ton of alfalfa hay

Therefore, if corn is trading for $4.50 per bushel, soybean meal is trading at $400 per ton and alfalfa hay is trading at $220 per ton, the components would be as follows:

  • Corn $4.83
  • Soybean meal $2.94
  • Alfalfa $3.01

Adding these three components together, we get an average feed price of $10.78. The margin that a dairy farmer can lock in is between $4 and $8 per cwt. In our example, if the all-milk price is greater than $18.78, there would be no payment to the dairy farmer. If the price is between $14.78 and $18.78, there may be a margin payment depending on the coverage level elected.

The farmer may make an annual election to obtain margin protection in increments of 50 cents. If they elect $4 margin protection, there is no premium owed. Between $4.50 and $8 of margin protection, a sliding scale premium will be owed on an annual basis as follows:

Producer Premiums

 

Less Than

More Than

 
 

4 Millions Lbs

4 Millions Lbs

 

Coverage

Premium

Premium

Percentage

Level

Per Cwt.

Per Cwt.

Difference

       

$ 4.00

None

None

 

$ 4.50

$ 0.010

$ 0.020

100%

$ 5.00

$ 0.025

$ 0.040

60%

$ 5.50

$ 0.040

$ 0.100

150%

$ 6.00

$ 0.055

$ 0.155

182%

$ 6.50

$ 0.090

$ 0.290

222%

$ 7.00

$ 0.217

$ 0.830

282%

$ 7.50

$ 0.300

$ 1.060

253%

$ 8.00

$ 0.475

$ 1.360

186%

The farmer can elect coverage between 25% and 90% of production with the premium being adjusted accordingly. The program is scheduled to start September 1, 2014 and a program payment will be made based upon the average margin during a two month period. The periods are Jan/Feb, Mar/Apr, May/Jun, Jul/Aug, Sep/Oct, and Nov/Dec. If the average margin for any of these two months falls below the coverage level elected by the farmer, then a payment will be made based upon his level of coverage and production history.

This is a brief summary of the new dairy margin program which will replace all of the current dairy programs. For large producers, it may not make sense to elect $8 coverage on an annual basis when the farm is locking in $4 of protection at a $1.36 cost. However, at the $6 level, the cost is now $.155 per year for an extra $2 of coverage. A farmer will need to run their numbers and see which coverage makes the most sense. Unlike ARC or PLC where the farmer is locked in for all five years (2014-2018), the dairy margin program allows farmers to change their mind each year.

We will keep you posted.

Estimating Inherited Land Values

Feb 09, 2014

We received the following question from a reader:

"Hello, I am trying to determine how to establish a base value (for capital gains purposes) on some farmland I inherited from my parents.My mother (last surviving parent) died in 2005. We had the land appraised in 2009 but did not actually sell until 2013. I am not sure how to figure out the 2005 value (at the time of her death). Any suggestions would be appreciated."

This situation arises frequently where property is inherited and no estate tax return was either filed or required to be filed. Generally, an appraisal should be done for any real estate that has value at the time of death, but because of the cost, many times it is not done. In the case of this reader, there is a method that can be used in many states to arrive at a value that should be relatively close to the fair market value of the land at the time of death.

Many states (such as Iowa) publish an annual report listing the value of farmland by county and by the quality of the soil. Usually, an index will be published for these values each year. For example, in the case of the reader, the published index for the value of comparable farmland in 2005 (the date of death for the mom) could be 100. When the land was appraised in 2009, the index may have risen to 135. If the appraised value of the land was $7,000 in 2009, you would divide this value by 1.35 to arrive at the 2005 fair market value of $5,185 or so per acre.

Now, if the reader is audited by the IRS, there may be a battle regarding how they arrived at the fair market value used in valuing the land since no appraisal was done in 2005. However, based on the methodology used, most agents will usually agree with the final valuation since it is reasonably determined and based on published indexes.

One final thought on the reader's question is that my assumption is that the mother owned 100% of the land when she passed away. If, however, the father had transferred farmland at his death to the reader, then that portion would need to be valued based upon the year of the father's death, not 2005.

Which is Better - ARC or PLC Plus SCO

Feb 06, 2014

Crop farmers will have two program options to consider under the new Farm Bill. Option # 1 is Agricultural Risk Coverage (ARC) which covers the risk of the farmer not receiving targeted revenue between the 76% and 86% band. If "actual" revenues calculated by the USDA fall within this band, then the farmer will collect a payment. If revenues are greater than 86%, then no payment is made. If revenues are less than 76%, then the maximum 10% of benchmark revenue will be paid. However, there is an overall $125,000 per farmer ($250,000 for married farmers) limit. If the calculated payment is greater than $125,000/$250,000, it will be limited to this amount.

Option # 2 is Price Loss Coverage (PLC) in conjunction with a crop insurance Supplemental Coverage Option (SCO). PLC will make a payment if the calculated US average price for a crop falls below certain targets. For example, the corn target price is $3.70. If the price falls below this level, then a payment will be made. SCO provides additional county level insurance coverage that cannot exceed the difference between 86% and the coverage level in the individual policy. Since this is a form of crop insurance, there are no overall payment limits on the amount that can be received, however, unlike ARC, you must pay an additional premium for this coverage (although the USDA will cover 65% of the premiums cost). Only the payments received under PLC, if any, will be subject to the $125,000/$250,000 limit.

SCO is not available until the 2015 crop and if a farmer does not make an one-time timely election in 2014 between PLC and ARC, they are automatically enrolled in PLC and they WILL NOT receive any payment for the 2014 crop year. Also, if the farmer elects ARC coverage, then SCO is not available to the farmer for the 2014-2018 crop years.

For both county level ARC and PLC coverage, the payments are made based on 85% of your base acres for those crops enrolled. You an elect on a crop by crop basis between ARC and PLC for county coverage, however, if you want ARC coverage on your farm, you will need to enroll all crops into this program and any payments will be based upon 65% of base acres, not the higher 85%.

Until we see a premium schedule regarding the SCO option, it is probably a little tough right now to decide which coverage is best. Perhaps, larger operations may opt toward PLC with SCO to take advantage of no limits on crop insurance payments. Smaller farmers growing corn, wheat, and soybeans and related type crops would probably lean toward ARC at the county level.

Until we get guidance from the USDA, things are in a state of flux, but we will try to keep you posted.

One Possible Section 179 Strategy

Feb 05, 2014

We had a reader ask the following question:

"Should I wait to buy section 179 property until the date 179 property is raised from $25,000 to whatever?"

As we have said in a previous post, who knows when the Section 179 deduction will be raised from $25,000 to "whatever". In fact, Congress may end up leaving it at the current amount (highly unlikely). However, we are fairly certain that we will not know the final number until late in the year.

One strategy that is available to farmers is to use deferred payment contracts for amounts equal to what you believe the actual Section 179 deduction will ultimately be. For example, if you think that Section 179 will be $250,000, you will sell an extra $250,000 (on two or more contracts) on a deferred payment contract calling for payment in January, 2015. When preparing the income tax return, if Section 179 ends up at $250,000, you will elect to report the $250,000 income in 2014, thus soaking up the $250,000 Section 179 deduction. If you think it might be $500,000, you may want to sell $500,000 of grain on a deferred payment contract.

Deferred payment contracts call for the actual sale of the grain, however, payment is deferred usually to the following year. You do want to make sure that the company you are selling the grain to will be able to pay you. It is much better to pay tax on payment received now, than have a bad debt deduction for deferred payments never received.

This is just one strategy that is only available to a farmer and you may want to consider using it in 2014.

FSA Does Not Understand Tax Return Income

Feb 03, 2014

We received some correspondence from a CPA whose is battling with the FSA on the definition of AGI for S corporations, LLCs, LLPs, LPs and other similar entities. The FSA manual on page 6-12 lists the line items from federal income tax returns for computing AGI for purposes of payment limitations. For corporations filing using Form 1120 (C corporation) the guide computes AGI using line 30 on Form 1120. Line 30 comprises all taxable income and expenses of the corporation including all non-farm income, sales of raised breeding livestock held more than two years and Section 179 deductions.

For S corporations, the FSA instructions indicate that the agent should pick up line 21 income off of the first page of Form 1120S. Line 21 income does not reflect all of the income and expenses of a Farm S corporation. Whereas Section 179 is allowed as a deduction in arriving at line 30 C corporation income or loss, an S corporation reports Section 179 expense on page 3, Schedule K, Line 11. Also, if the farmer sells raised breeding stock that generates a Section 1231 gain, this is also reported on page 3, Schedule K, Line 9. Therefore, if a FSA agent simply follows their instructions, they can grossly overstate OR understate the actual AGI of the S corporation. These same issues apply to LLCs, LLPs and LPs.

As an example, let's assume we have a farm that files either as a C corporation or an S corporation. Its gross net income before Section 179 deduction is $900,000 and after Section 179, its net farm income is $400,000. It has no other items of separately stated income or expense items. The C corporation will report $400,000 of net farm income on line 30 of Form 1120. However, the S corporation will report net farm income of $900,000 on line 21. The Section 179 deduction of $500,000 is completely ignored. All farmers and tax preparers would conclude that the net farm income of either corporation is exactly the same, however, the FSA will now penalize the S corporation by completely disallowing any direct payments paid since average AGI exceeds $750,000 (assume the previous two years had the same set of facts).

We are trying to pass this information onto the relevant personnel at the FSA, however, these things can take time to change. If there are any FSA readers getting this blog, we would appreciate your help in getting this resolved. The FSA manual is over 400 pages long and this is what the local FSA personnel are required to use. Even if we know it is wrong, it is not wrong to the local office until the manual is updated.

10% of Benchmark Revenue not Benchmark Guarantee

Feb 03, 2014

A problem with trying to read a 900 page plus farm bill on a small laptop screen is that it is very easy to misread some of the fine print. A reader gave us a comment regarding ARC that the maximum payout is 10% of benchmark revenue, not benchmark guarantee. In this case, the actual amount allowed would be about 10% higher than my examples.

Also, the yield for each county is based upon yield by planted acres. It appears that the USDA does not directly report this number, but it can be arrived at taking total county production and then dividing it by total planted acres for each county. In my example, I simply used the numbers provided by the USDA for yield by county which is provided by the USDA. This would result in the numbers shown in the example changing by a small amount.

We will keep you updated on the farm bill and if you find anything that does not look right, please send us a comment asap.

Supplement Coverage Option (SCO) will be available to a farmer who elects Price Loss Coverage (PLC)

Feb 03, 2014

Supplement Coverage Option (SCO) will be available to a farmer who elects Price Loss Coverage (PLC) instead of Agricultural Risk Coverage (ARC). ARC provides similar coverage, however, there is no premium to be paid by the farmer, but there is a limit on the amount of payment that a farmer can receive. With SCO, the farmer can elect to pay a premium (65% subsidized by the government) to cover the amount of insurance that he elects up to 86%.

For example, assume a farmer normally elects 75% revenue coverage. With SCO, he can pay an additional premium to insure up to 86% or an extra 11% of coverage at the county level. The farmer would collect under regular crop insurance based upon his individual coverage with the SCO paying only if the county average was less than 86% of expected revenues. His SCO payment would be based on the difference between actual county revenues and 86% of expected revenues capped by the coverage elected by the farmer. Premiums for this coverage will be released by the Federal Crop Insurance Corporation (FCIC) in time for coverage beginning in 2015 (there is no SCO option for the 2014 crop year).

A farmer will need to run the numbers, however, without knowing the premium until the 2015 crop year and the requirement that you cannot elect SCO if you elect ARC, a farmer will need to run the numbers to see if PLC plus possible SCO coverage for only four years of the Farm Bill is worth it or not. Remember, the farmer must make a one-time election to opt into ARC. If they do not make the election, they are automatically enrolled in PLC (plus SCO availability).

The FCIC will begin to develop a crop margin coverage option targeting rice growers in 2015 as the initial option for coverage. There will also be separate enterprise units for irrigated and non-irrigated crops beginning in the 2015 crop year.

Beginning farmers and ranchers are eligible for increased premium subsidies by 10%. Beginning in 2015, farmers who have both irrigate and non-irrigated crops can elect different coverage levels. This would allow them to elect a higher coverage amount on the more variable crop (usually non-irrigated).

A more detailed analysis of crop insurance options and other farm bill provisions is available here.

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