Sep 30, 2014
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April 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.

Updated Average Marketing Prices 2013/14

Apr 30, 2014

The USDA releases updated prices on almost all major (and many minor) commodity crops at the end of each month. The latest report was released today. Since ARC will be based upon the average price received by farmers for their crop for the marketing year, we can take these monthly reports and obtain an average price for each crop by marketing year. For example, the corn and soybean marketing year ends on August 31 of each year. Taking the monthly price received by farmers for September 2013 until April 2014, for corn, we arrive at an estimated average price of $4.60 to date. The April estimated price is $4.73 and will be updated to the final number next month, however, it should not vary by much more than a penny or so.

For soybeans, the average price is $13.23 and for wheat, the average to-date price is $6.85. On Monday of this week, I posted my ARC and PLC analysis. The average prices I used for that analysis was (1) corn $4.65, (2) soybeans $13.25 and (3) wheat $6.50. As you can see, I am within 5 cents on corn, 2 cents on soybeans, but off by 35 cents on wheat. The wheat marketing year will end on May 31, 2014, so there is only one more month to report, therefore, the final wheat number should be between $6.85 and $6.90. Prices have rallied, but it would take an average price over $7.50 for May to get the overall average above $6.90.

Also, the final average marketing price is based upon a weighted monthly price, therefore, there could be a slight difference between simply taking an average of the 12 month prices versus the final price. For example, taking the twelve month prices for the 2012 corn corp year resulted in a monthly average of $6.8825 and the final number used was $6.89. As you can see, not too much of a difference.

If you sign up for ARC, it will be fairly easy for you to plug in these monthly prices into a spreadsheet and therefore, estimate how much of an ARC payment may be due based strictly on price. The final payment will incorporate county yields (in most cases), so if yields are higher than normal, your payment would be less and vice versus.

Remember, this does not start until the 2014 crop year begins and any payment to be received will not be paid until after October 1, 2015.  I will keep you posted on final average marketing prices.

Partial Taxpayer Victory on Horse Farm Case

Apr 29, 2014
In the Merrill C. Roberts cased just released by the Tax Court today, the taxpayer ended up with a partial victory in another horse farm case. Mr. Roberts, started a restaurant in 1969, had it burn down in several months after opening, and then used the insurance proceeds to open a bar in 1972. The bar was near an airport and started attracting "airport controllers" who asked Mr. Roberts "to arrange for exotic dancers to perform at the celebrations". Although profitable, Mr. Roberts elected to sell the business for "moral reasons" in 1973. About a year later, the buyers stopped paying and he took the business back and continued to operate it as a bar and nightclub. Over several years, he expanded his business by opening several more nightclubs. In 1987, Mr. Roberts bought 50 acres near his original nightclub and ten years later bought another 45 acres directly adjacent to it. The former owner had used the land to board horses and there was an operational stable on the property. He thought he might get some income off of the property, but the original intent was to subdivide the land and sell the plots. In the mid-1990s Mr. Roberts eased out of the nightclub business by selling it to his three children. In about 1998 or 1999, Mr. Roberts was invited on a tour of Hoosier Park, the first racing track to open in Indiana. He soon became hooked on the horse racing business and proceeded to purchase two horses for a $1,000 each and actually made about $18,000 in his first year of racing. He increased his stable to 10 horses in 2001 and bought a breeding stallion. In 2005, he decided to build his own stable on the land he owned, however, the City of Indianapolis put up many road blocks even though the land was zoned agricultural. He then elected to sell the property for $2.2 million which closed in June, 2006. He rolled over the gain on the 50 acres into new property more suited for training horses. The IRS elected to audit the 2005-2008 tax returns and assessed additional taxes of $169,785, $617,119, $297,150 and $297,640 for 2005-08 respectively. Additional penalties under Section 6662(a) (accuracy penalty) of about $220,000 were also assessed and for 2007, the IRS elected to assess a failure to file penalty of $16,894. In our review of the Mathis case earlier this year, we laid out many of the key factors that the court looks at in determining whether a business is a hobby (and thus not deducible) or not. Quoting the Court "On the basis of the record and considering the nine factors discussed above, the Court finds the petitioner did not engage in horse-related activities for profit during the 2005 and 2006 tax years. However, petitioner demonstrated a profit objective beginning in tax year 2007 when he significantly changed his operation, opened a new facility on real estate specifically purchased for horse-related activities, and transitioned out of the recreational aspect of horse racing. Accordingly, petitioner demonstrated the requisite profit objective under section 183 to deduct business expenses for tax years 2007 and 2008 but not for tax year 2005 or 2006." The key reason for this decision was that Mr. Roberts testified that his original intent for the land was for appreciation from selling it as lots, not a horse operation. In a full victory for the taxpayer, the Court waived the accuracy penalties for 2005 and 2006 (2007 and 2008 no longer applied since there was no tax liability to assess the penalty against), however, he did file his 2007 return late, so that penalty was upheld. Although not a full victory for Mr. Roberts, he did reduce his overall potential tax and penalties by over $800,000 (which should be sufficient to cover the legal fees and allow him to buy a couple more horses).

Trusts, Capital Gains and the Net Investment Income Tax

Apr 29, 2014

As has been previously discussed in several posts, the highest tax rate for 2013 was raised from 35% to 39.5% and the highest capital gains tax was also raised from 15% to 20%. Obamacare also implemented a new complicated 3.8% surtax on net investment income in excess of certain thresholds. The thresholds are as follows based on a modified adjusted gross income:

  • Married filing joint: $250,000
  • Single: $200,000
  • Estates and Trusts: $12,150

As you can see, the threshold for estates and trusts is much lower. Income that is passed out to the beneficiaries of the trust reduces trust income and although it is taxed to the individual, in almost all cases this tax is lower than if taxed at the trust level. However, capital gains are typically excluded from distributable net income and typically taxed to the trust. Therefore, in a simple example, if a trust has $112,150 of capital gain income that cannot be distributed, the trust would pay around $25,000 in tax due to the 3.8% Medicare surtax and condensed tax brackets for trusts.

By contrast, if this income could have been distributed to an individual married taxpayer, this same income would have only generated around $3,000 of tax assuming no other income or dependents. Obviously that is a simple example, however, it is one I came across this last tax season. Given how many trusts hold farm land or brokerage investments, this situation can arise very often.

Capital gains do not always have to be taxed to the trust, however, and in certain situations can be distributed to beneficiaries. A great deal of attention must be focused on the governing instrument and the law of each jurisdiction; each state may differ in this regard.

As you can see, there are many unique aspects of trust and estate income taxation that in many cases can increase the income taxes paid by trusts and estates. Further, executors and trustees must adhere to fiduciary standards and owe duties of care and loyalty to all beneficiaries of the estate or trust and must be knowledgeable about the circumstances of individual beneficiaries as well as the overall structure of the entity. A decision to distribute capital gains income in one year to lower trust taxes may not be the best decision for all beneficiaries in future years. Therefore, careful consideration should be always be given when deciding if capital gain income should be kept within the trust or if it can be distributed to the beneficiaries.   

House Ways & Means Committee Votes to Make $500,000 Section 179 Permanent!

Apr 29, 2014

The House Ways and Means Committee approved today six tax extenders including making Section 179 permanent at the $500,000 level. There are an additional 50 or so extenders that this committee will review and vote on. It is good news that the committee voted on Section 179 at this level, however, this is just at the committee level and once it gets out of the committee, it must go to the full house for a vote.

It is highly unlikely that a full vote will occur before the mid-term election, but farmers should take some comfort from the fact that both the House and the Senate committees voted for Section 179 to be at the $500,000.

We will keep you posted, however, do not place much hope for a resolution before November.

ARC Versus PLC - 2014-2018

Apr 28, 2014

I have gotten several questions regarding which program is better - ARC or PLC. There is no one right answer to this question since there are so many unknown variables. However, I decided to run out the numbers for corn, soybeans and wheat assuming certain crop marketing prices for each year. For corn, I elected to run the numbers assuming an average crop price for each year (2014-2018) of (1) $3.00, (2) $3.75, (3) $4.50 and (4) $5.25. For soybeans, I elected to use (1) $7.50, (2) $9.00, (3) $10.50 and (4) $12.00. For wheat, I used (1) $4.75, (2) $5.50, (3) $6.25 and (4) $7.00.

From the University of Illinois Farmdoc database, the actual average marketing crop prices for each of these crops by crop year are:

Crop 2009 2010 2011 2012 2013

Corn $3.55 $5.18 $6.22 $6.89 $4.65

Soybeans $9.59 $11.30 $12.50 $14.40 $13.25

Wheat $4.87 $5.37 $7.24 $7.77 $6.50

2013 crop year prices are my estimates. These crop years do not end for corn and soybeans until August 31, 2014.

In my analysis, I assumed that the average crop price for 2014-2018 would remain exactly the same for each year. I also assumed that the yield would remain static during each year. PLC makes a payment based on price only, whereas, ARC makes a payment on both price and yield. All calculations shown are based upon a per bushel basis.

Corn Analysis - PLC only pays when corn prices drop below $3.70. Therefore, at the $3.00 price level, a full payment of 70 cents per bushel would occur during all five crop years for a cumulative payment of $3.50. For ARC, payments would occur at the $3.00, $3.75 and $4.50 level. At the $5.25 level, no payments would be made. At $3.00, the cumulative payments would be $1.59, at $3.75 cumulative payments would equal $1.52 and at $4.50, cumulative payments would equal 20 cents. At either $3.00 or $3.75, 54 cents of payments are made in 2014 and 2015. The reason for this is that the Olympic averages throws out the 2009 low year for 2014 and uses the same three years (2010,2011 and 2013) for the 2015 crop year.

Soybean Analysis - Since the PLC reference price is $8.40, payments only occur when bean prices average $7.50 per bushel. In this case, the cumulative payments equal $4.50. For ARC, cumulative payments equal $4.19 for $7.50, $3.44 for $9.00 and $.24 for $10.50. No payments occur at the $12 level. At both the $7.50 and $9.00 price level, full payments of $1.24 per bushel occur during 2014 and 2015. In 2016, $1.11 is paid at the $7.50 level and $.96 at the $9 level. In all cases, these payments would exceed any PLC payments.

Wheat Analysis - The PLC wheat reference price is $5.50. Therefore, only the $4.75 price payment yields a PLC payment and the cumulative amount is $3.75. For ARC, the $4.75 level yields cumulative payments of $1.83, while the $5.50 level drops cumulative payments all the way down to $.04. The $6.25 and $7.00 price levels yields no payments at all.

Corn Conclusions - If you believe that corn prices will remain below $3.70 for all five years of the farm bill, then PLC will yield more than ARC. However, under this scenario, ARC will yield almost as much for the first three years and you should receive a payment for the 2014 and 2015 crop year even if prices average $4.50 during those crop years. It appears that there is still a slight advantage to ARC over PLC based on recent price trends.

Soybean Conclusions - Bean prices would have to average less than $8.40 for all five years for PLC to make any material payments. At the $7.50 price level, PLC does make a cumulative payment of $4.50, however, ARC at this price level almost pays the same amount ($4.19) with additional payments all the way up to the $10.50 level. It appears that ARC has a large advantage over PLC for soybeans (unless bean prices decrease dramatically over the next five years).

Wheat Conclusions - It appears that material payments for wheat will only occur if wheat averages less than $5.50 for either PLC or ARC. If wheat averages $4.75 for all years, PLC would payout $3.75 for PLC, whereas ARC yields only $1.83 and at the $5.50 level and above, ARC would yield little or no payments under either program. It appears that PLC has an advantage over ARC since wheat prices would have to be at the $5.50 reference price for any ARC payments to kick in. Also, PLC allows the farmer to take advantage of the Supplemental Coverage Option (SCO) while ARC does not allow for this option.

Care must be taken in reaching any conclusion from this limited analysis especially since we do not know the final 2013 crop marketing year average prices. However, based on current price trends, we would not think the final numbers will be off by that large of amount and at least this analysis provides some clarity on how PLC and ARC might pay-out assuming certain price levels.

Are You Still Running Windows XP?!

Apr 25, 2014

Windows XP has been around for over a decade now and I am fairly certain that many farmers are still using this as their desktop operating system. Microsoft only officially supported this software until April 8, 2014. After that date, they will stop updating the software for any new viruses, malware or other items that may affect proper use of the software.

If you are still using this as your primary operating system, I would highly suggest upgrading to a new operating system. Here is a very good summary of the issues surrounding the expiration of Microsoft's support. I think you may find it helpful. As a side note, the IRS still uses Microsoft XP on many of their computers.

Social Security Drops Efforts To Collect Old Debts From Children of Debtors. Maybe.

Apr 23, 2014

As a follow up to a recent post, the Social Security Administration recently announced its suspending its efforts to collect old debts that stretch beyond 10 years. Acting commissioner Carolyn W. Colvin had this to say in an official statement:

I have directed an immediate halt to further referrals under the Treasury Offset Program to recover debts owed to the agency that are 10 years old and older pending a thorough review of our responsibility and discretion under the current law to refer debt to the Treasury Department.

If any Social Security or Supplemental Security Income beneficiary believes they have been incorrectly assessed with an overpayment under this program, I encourage them to request an explanation or seek options to resolve the overpayment.”

Since the program gained traction in the news recently, both the age of the debts Social Security was trying to collect and the fact that it was putting the burden on people who were children when the debts were supposedly incurred by their parents and guardians created a bit of a controversy. Especially that Social Security officials themselves admitted that they had no records of the alleged debts.

In an email, Social Security spokesman Mark Hinkle said, "We want to assure the public that we do not seek restitution through tax refund offset in cases when the debt in question was established prior to the debtor turning 18 years of age." He added, "Also, we do not use tax refund offset to collect the debt of a person's relative. We only use it to collect the overpaid benefits the person received for himself or herself."

The 2013 Tax Season Bites the Dust

Apr 15, 2014

I am waiting for my oldest son's age to finally surpass the number of tax seasons I have completed. He is 27 (and working at a CPA firm in Costa Mesa, CA) and his little brother, age 25 works at Price Waterhouse Coopers in downtown LA (there is a chance he gets to spend 3 months in Calcutta, India since he is in International Tax). It will require me to retire for about 7 years for his age to catch up to my tax seasons.

This year was actually much easier on myself and I think most of my compatriots since we did not have Congress passing a tax bill on the last day of the year to mess up the IRS computers (although the computers have other issues to deal with). Next year may go back to being a bit of a mess since I think we will get a new tax law at the end of the year and this will delay 2014 filings, but that is at least 9 months in the future.

Since the 2013 tax season is now done, it is time to look forward to getting additional farm tax and accounting education. I had previously mentioned a couple of times about the AICPA Farm Conference in Austin this May. I am fairly certain it is officially sold out, but for those CPA's, Attorney's, Banker's, Farmer's and others that are interested in getting two days of good farm business and estate tax advice in a nice resort location, Roger McEowen of Iowa State Center for Agricultural Law and Taxation has two summer conferences planned. The first is in West Baden Springs, Indiana (the home of Larry Bird, technically French Lick, but very close) the first Thursday and Friday in June. The second is scheduled for the last Thursday and Friday in West Yellowstone, Wyoming.

Each course has a full day of farm business taxation update and a full day of estate taxation and planning. I will be teaching with Roger (and one or two others) at each conference. I taught at the two events last year and I think anyone interested in getting more farm tax knowledge; it would be worth attending and the resort areas are nice too.

If you are interested, here is a link to the CALT website.

Social Security, Treasury Targets Taxpayers for Their Parent's Decades-Old Debts

Apr 14, 2014

According to a recent Washington Post article, the Treasury Department has been seizing tax refunds or demanding payment from hundreds of thousands of Americans on some very old debts due to a single sentence in the 2008 farm bill that removed the 10-year statute of limitations on debt owed to the government. Since 2011, the Treasury has collected $424 million on these old accounts.

Social Security has been especially aggressive, targeting 400,000 taxpayers that it says collectively owe back $714 million in ancient overpayments. In many cases, the people who actually received the money are dead, so the agency goes after any children who may have indirectly benefited from the money, starting with the eldest, until the debt is paid. Per the article, some of the debts go back over 50 years and the responsible agencies have not been very helpful in substantiating the amounts owed or willing to take credit for reopening the cases. A Social Security spokeswoman says the agency didn’t seek the change; ask Treasury. Treasury says it wasn’t us; try Congress. Congressional staffers say the request probably came from the bureaucracy.

The only explanation the government provides for suddenly going after decades-old debts comes from Social Security spokeswoman Dorothy Clark: “We have an obligation to current and future Social Security beneficiaries to attempt to recoup money that people received when it was not due.”

See the full article here.

Trusts Can Get You in Trouble

Apr 10, 2014

In a Tax Court filing from last week (Estate of Elwood H. Olsen, TC Memo 2014-58), we find how much tax can be owed if taxpayers do not administer trusts correctly. In the case, Mr. Olsen passed away in 2008 at the age of 92. In 1994, Mr. Olsen and his wife Grace each formed revocable living trusts (a very common estate planning tool). Each of these trusts had essentially identical terms and upon death, the trusts would be split into (1) a so-called marital trust that in turn would be divided into two separate and distinct trusts known as Marital Trust A and Marital Trust B and (2) a Family Trust.

On December 8, 1998, Mrs. Olsen passed. The final estate settlement allocated (1) $1 million to Marital Trust A, ; (2) $504,695 to Marital Trust B; and (3) $600,000 to the Family Trust. At that time, the maximum lifetime exclusion was $600,000 so that is why the family trust was allocated that amount. Also, the executor made a "QTIP" election on the two marital trusts. This election allowed the estate to reduce the estate value so that no tax would be due on Mrs. Olsen's death. However, upon Mr. Olsen's death, the trust assets would then be included in his estate.

As can sometimes happens with these facts and circumstances, Mr. Olsen did not create three separate trusts after the settlement of the estate. Rather, he simply kept all of the assets in one trust and throughout his life, made substantial charitable gifts and other transfers.

Upon his death, his personal representative elected not to include any of the trust assets in his estate return. The IRS audited the estate and assessed additional tax based upon their calculation of the value of Marital Trust A and B that should have been included. The IRS determined this value at $1,071,224 resulting in a deficiency of $482,051.

The Tax Court finally ruled that only $607,927.51of the Marital Trusts would be included, however, this still increased the tax by about $250,000 plus the estate probably spent another $100,000 or more on legal fees.

As advisors, we find too many other cases like this where clients have trusts and do not totally understand the mechanics involved in properly administering the terms and provisions of the trust. Since Mr. Olsen made several substantial charitable gifts during his life; the proper set up of the trusts and using the Marital Trusts to funds these gifts would most likely have reduced his estate and not caused an audit and court proceedings. This is a case where using a qualified trustee to handle the trusts along with Mr. Olsen would have been prudent.

Senate Finance Committee Proposes Two-Year Extension of Section 179 and Bonus Depreciation

Apr 03, 2014

Senator Ron Wyden (D - Oregon), chairman of the Senate Finance Committee has submitted a bill to extend many of the provisions that automatically expired at December 31, 2013. Of special interest to farmers is that Section 179 would be retained at the $500,000 level for 2014 and 2015 AND 50% bonus depreciation would be extended through December 31, 2015.

However, since this is an election year, there is little chance that this bill will make it to the Senate for passage and even if it makes it that far, it will most likely stall in the House. Most pundits agree that this bill will come up for a vote after the Mid-Term elections and before year-end, similar to what happened two years ago.

There seems to be bi-partisan support for passing this bill, but again, with an election year, nothing will happen until late in the year and certain items may get eliminated in the final bill.

We will keep you posted.

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