Aug 20, 2014
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June 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.

IRS Releases Final Regulations on ACA Small-Business Tax Credit

Jun 30, 2014

The IRS released on June 20 their final regulations on the small-business tax credit for paying health insurance premiums for the business employees. This credit has been available since 2010 and was at a 35% maximum level until 2013. In 2014 and 2015 the credit increases to 50% for health insurance premium payments offered through a Small Business Health Options Program (SHOP). If your farm is participating in this program and you pay for your employees premiums, you may be eligible for the credit. Remember, that a credit offsets your income tax dollar-for-dollar.

To get the maximum 50% credit, you must employ less than 11 employees and your average wage is less than $25,000. If your numbers are greater than these in one or each category, then your credit will be reduced. Once you exceed 25 full-time employees the credit is reduced to zero. The IRS has guidance on what you need to know about the credit located here. After 2015, the credit no longer applies.

I have had some businesses qualify for the credit in the past, however, the requirement to participate in the SHOP program may eliminate them from obtaining the credit this year. If you think this may apply to your farm, please make sure to check the IRS website or check with your tax advisor. The credit can materially reduce your tax.

Transition Period for LGM-Dairy to DMM is Announced by FSA

Jun 26, 2014

The 2014 farm bill now provides for a new Dairy Margin Management (DMM) program. Dairy farmers have been able to take advantage of Livestock Gross Margin-Dairy (LGM-Dairy) under current crop insurance provisions. However, the 2014 bill provides that a dairy farmer cannot take advantage of both programs to prevent "double-dipping". In addition, the LGM-Dairy insurance program can extend into 2015 after the DMM is scheduled to start in September, 2014. This presented concerns regarding dairy farmers wanting to sign-up for DMM but being prevented since they were already enrolled in LGM-Dairy.

To address these concerns, the FSA just released Notice LD-637 providing a transition period for these farmers. Essentially, the transition allows the dairy farmer to sign up for DMM, but not start the program until their contract under LGM-Dairy expires. Since the DMM payments cover a two-month period at a time, there is a chance a dairy farmer would have no coverage for a full month.

For example, if a dairy farmer has a LGM-Diary contract through February 28, 2015, their DMM coverage would start March 1, 1015. However, if their LGM-Diary contract expired March 31, 2015, their DMM coverage would not start until May 1, 2015.

Is Low Section 179 Causing Low Equipment Sales?

Jun 24, 2014

Most of the equipment manufacturers have released their equipment sales for the last quarter and most of them reported lower sales for the first quarter of this year versus 2013. We have seen some commentators attribute this to the current lower Section 179 tax deductions for this year and no bonus depreciation.

However, when you review the numbers for these companies, it appears that the major component of the drop in ag equipment sales relates to foreign sales where Section 179 and bonus depreciation would be irrelevant. We believe that lower crop prices are probably more determinative of equipment sales than income tax policy. However, tax policy will play into the timing of the decision, but overall profitability of the farmer is far more important.

We know that livestock producers are enjoying a very profitable year, however, they do not normally purchase as much equipment as row crop producers unless they are growing their own feed. Farm equipment sales were very robust in 2012 when Section 179 was scheduled to be much lower. It will be interesting to see if sales pick up later in the year if Section 179 is raised to $500,000 and 50% bonus depreciation are both reinstated retroactive to January 1, 2014.

We shall see.

ARC-IC versus ARC-CO

Jun 23, 2014

The FSA issued some regulations on the calculations of PLC and ARC late last month. This notice provides a good overview of how the FSA will determine the payment calculations under PLC and ARC. ARC is broken down into ARC at the County Level (ARC-CO) and ARC at the farm level (ARC-IC). We had provided an analysis last week as to the difficult choice between ARC-CO and ARC-IC when the farm's yields are slightly higher than the county averages. We received some feedback on the fact that ARC-IC payments will be based upon 65% of base acres, however, benchmark revenue and related payment calculations will be based upon actual farm revenue weighted by the amount of revenue each crop will provide.

For example, if a farmer is growing corn and soybeans and the per acre revenue for corn is $800 and the per acre revenue for soybeans is $400 and it is planted in a 50/50 rotation, then the benchmark revenue is $600 ($800 times 50% plus $400 times 50%). This $600 times 86% is the revenue guarantee of $516. If the actual revenue generated by corn and soybeans in the same % allocation is less than this number, then a payment will be made.

This can lead to additional complexities to the election between ARC-CO and ARC-IC since soybeans will most likely not have a payment under ARC-CO while corn is most likely going to have a payment. Therefore, by mixing soybeans into the ARC-IC calculations, the breakeven point for ARC-IC versus ARC-CO may be decreased.

I am currently traveling to West Yellowstone to speak at the two-day conference on Thursday and Friday on farm income and estate tax planning. It is not too late to sign up for this class. If interested, please follow this link.

When I get back, I will update my detailed examples on ARC-CO versus ARC-IC.

Dairy Margin Management Options

Jun 18, 2014

The new farm bill brought in an additional dairy margin management program that will be effective September 1, 2014 (perhaps later if FSA is not ready). Dairy farmers currently have Livestock Gross Margin (LGM) Insurance under the crop insurance program. It would be nice if dairy farmers could take advantage of both programs, however, the farm bill requires farmers to pick one or the other. FarmDoc Daily provided a good analysis of the benefits and pitfalls to each program in a post a couple of days ago. Here is the post.

One of the key things to note about the two programs is that the new Dairy Margin Program (DMP) is available to all dairy farmers, while LGM insurance is only available each month until the underwriters reach capacity. This may mean that you may lean toward the DMP. However, we are not yet certain if the DMP can be updated on an annual basis or if you will be locked into your choice for the life of the farm bill.

Also, as more producers take advantage of DMP which may result in increased dairy production. If this happens, the current high margins may erode substantially which will may the DMP pay more and decrease any payments under LGM.

As you can see, similar to the choices between ARC and PLC, farmers have a lot of number crunching to do and the choice that they make can permanently affect them negatively for almost five years. I would hope that the next farm bill provides more flexibility on these decisions (I am not willing to bet any money on that).

When to do Individual ARC May Be Tough to Decide

Jun 16, 2014

I originally thought that most farmers would want to pick county ARC since it makes a payment on 85% of base acres versus picking individual farm ARC since it only makes a payment based on 65% of base acres. However, in running some scenarios through the ARC analysis, it may be tougher to choose than I thought.

For example, I ran some numbers assuming a county Olympic average of 172 bushels per acre. The key assumption for 2014 crop was that the Olympic corn price would be $5.35 and the actual price received for corn would be $3.80, $4.05 and $4.30. I then compared these county ARC payments to a farmer who elected individual ARC with an 185 APH. The total payments (rounded) received are as follows:

Price County Individual

$3.80 $53,000 $45,000

$4.05 $26,000 $35,000

$4.30    Zero   $14,000

I originally thought the key driver for picking individual ARC would be the amount of yield difference, however, it appears the key driver is the increased price revenue guarantee from the higher yields times the Olympic price. With higher yields a farmer electing individual ARC will get a payment sooner since their benchmark revenue is greater than the county benchmark. However, as the price starts to drop for corn, the gap between the two ARC calculations narrows and once they each get closer to the 10% of benchmark revenue ARC limit, county coverage will usually result in greater payments since the two limit amounts are about equal, however, county ARC pays on 85% of base acres versus 65% for individual ARC.

In our example, the crossover point is at a price of about $3.88. Individual ARC had reached its 10% benchmark revenue limit at about $3.95. It took from $3.95 to $3.88 for the extra base acres at the county level to catch up and county ARC continues to outpace individual ARC until about $3.78 when county ARC hits its 10% benchmark limit. It is at this price when county ARC reaches it maximum payment of $55,000 and individual ARC remains at its maximum $45,000. Therefore, in this example, the maximum that county ARC can exceed individual ARC is only $10,000 while the individual ARC payment may exceed county ARC by more than this amount when prices were higher.

Any farmer who has APH substantially higher than county yields will almost always elect individual ARC. However, when the gap between county yields and farm yields are in the 10-20% range, it may be much tougher to pick the right election. 

PLC/ARC Updates

Jun 12, 2014

One of the questions we are getting is "When would individual ARC make more sense than county ARC?". As most of our readers know, ARC and PLC makes payments based upon base acres. In the case of county ARC, the payment is based upon 85% of base acres. In the case of individual farm ARC, the payment is based upon 65% of base acres. This difference equates about a 30% advantage to county, therefore, the assumption is that most farmers would pick county ARC.

However, we have come up with at least one example where individual ARC will most likely pay much higher than county ARC and that is in regards to farmers who have high individual yields primarily due to irrigation versus a county that has very low county yields. For example, lets suppose we have a farmer in Kansas who grows irrigated corn. His APH for this corn is 245 bushels per acre. The county average for all corn is only 115 bushels per acre. He is one of only a handful of farmers who irrigate in his county. Let's assume that there is a 75 cent per bushel payment for corn during the 2014 and 2015 crop year (the price is not dependent on county or farm). Going through the number crunching yields about a $125 payment per acre for individual farm and about a $60 payment for county (both payments are limited to 10% of benchmark revenue). Let's assume he has 1,000 base acres. The total county payment is 1,000 times $60 times 85% or $51,000. The total payment for individual ARC is 1,000 times $125 times 65% or $81,250. In this case, the farmer would elect individual farm coverage since his payment for each year would be about $30,000 higher.

The farm bill does not split irrigated from non-irrigated crops in arriving at county ARC numbers. Therefore, any farmer whose APH is at least 50% higher than the average county yield may tend toward electing individual farm coverage. However, if the farm's APH does not change much due to irrigation and the county ends up with a much lower yield, then the gain from using individual farm ARC may be much lower.

Now for farmers who have high yields and a county with low yields, PLC may make even more sense. For example, let's assume we have a county with average wheat yields of 35 bushels per acre. There are a few farmers in the county who grow irrigated wheat that averages 145 bushels per acre. PLC makes a payment based upon payment yield times 85% of base acres. Let's assume that the PLC payment for the year is $1 per bushel and the ARC payment is the same. The ARC payment for county coverage is 1,000 acres times $1 times 35 bushels per acre times 85% or $29,750. For individual ARC the payment would be 1,000 times 145 times $1 times 65% or $94,250. The PLC payment would be 1,000 times 145 times $1 times 85% or $123,250. In this case, the PLC payment would be about $100,000 higher than county averages and at least $30,000 higher than individual ARC. Actually the difference would most likely be much higher since ARC would be limited to 10% of benchmark revenue and in this case that would probably limit the payment to about 70 cents instead of the $1 assumed. This would result in PLC being closer to a $60,000 higher payment than individual ARC.

As with all ARC/PLC calculations, you must run the numbers. Let us know if you have any questions on whether ARC or PLC is better for your farm and we will help you run the numbers.

Corn Acres Trends

Jun 11, 2014

In reviewing the 2012 AG census data for corn acres, it is very interesting some of the trends that jump out at us. In 1997, the US grew corn on about 71 million acres. By 2002 the acres had dropped to 68 million acres, but beginning thereafter with ethanol, acres jumped to 86 million in 2007 and for 2012, corn acres were at 87.4 million (we know that 2013 and 2014 number may be a little higher).

The top 10 states in corn production were (in million acres):

  • Iowa - 13.7
  • Illinois - 12.3
  • Nebraska - 9.1
  • Minnesota - 8.3
  • Indiana - 6.0
  • South Dakota - 5.3
  • Kansas - 3.9
  • Ohio - 3.6
  • North Dakota - 3.5
  • Wisconsin - 3.3
  • Missouri - 3.3 (tie)

There are 15 states with more than 1 million acres allocated to growing corn and 49 states grow it. The only state that does not grow any corn is Alaska while the state with the lowest number of acres is also our smallest state - Rhode Island.

Now for the trends. North Dakota is number 9 on the list of largest acres, however, in 1997, North Dakota grew corn on only 592 thousand acres. It grew to 991 thousand in 2002, 2.4 million in 2007 and finally 3.5 million for 2012. This represents an increase of 485% in 15 years. Other states with more than a 1 million acre increase during this same period are (1) South Dakota (2.0 million acres), (2) Minnesota (1.9 million acres), (3) Iowa (1.8 million acres), (4) Illinois (1.5 million acres) and (5) Kansas (1.5 million acres).

The outer fringes of the old corn belt (ND, SD, MN and KS) increased corn acres by about 8.4 million acres over 15 years. At an average production of even 125 bushels per acre this represents over 1 billion additional corn bushels.

It will be interesting to see what the trend in corn acres will be in the 2017 AG census. Until then, we will keep you posted.

Walla Walla Spring Time

Jun 11, 2014

My mother was born in Hay, Washington in the early 1920s. She was the only girl in her senior class and the two other boys were related to her. During college, her family moved to Walla Walla, Washington to farm which is where I grew up (actually Dixie which is about 10 miles away). Walla Walla is on the edge of the Blue Mountains and has some of the best wheat ground in the world (some years yields exceed 150 bushels per acre on dry land). Part of the topography is fairly steep ground. On our home place, we had some slopes in excess of 40 degrees and those could be fun to harvest in the summer time.

My cousin took this photo and posted on facebook and I thought I would share it with our readers.

Walla Walla Spring TimeIn this photo you can see the foothills of the Blue Mountains in the background and I would guess that the hill in the upper right corner of the photo easily exceeds 30 degrees for most parts of the field. We always get asked why we farm on such steep ground and I have two responses (1) when you can get 130 bushels per acre and (2) when you can look at a scene like this every day when farming "why not".

Where are the Large Farms?

Jun 10, 2014

As we have previously mentioned, the 2012 US AG Census was just released and there are many interesting facts contained in the census. One area that I will highlight today is the trends regarding large farms. These farms contain more than 2,000 acres. As can be expected Texas has the most large farms with 10,810. It is the only state with more than 10,000 large farms. The top 10 states are as follows:

  • Texas - 10,810
  • Montana - 6,481
  • North Dakota - 6,437
  • Kansas - 6,211
  • South Dakota - 5,637
  • Nebraska - 5,286
  • Colorado - 3,602
  • Oklahoma - 3,518
  • New Mexico - 3,003
  • Illinois - 2,469

The total number of large farms increased from 80,393 in 2007 to 82,207 in 2012. Over the last 15 years, the total increase has been about 7,800 farms or a little more than 10%. This data reflects the number of large farms, not the total amount of acreage controlled by these farms.

Another area that I will cover is the amount of total cropland in the US. The trend has been down over the last 15 years from 445 million acres in 1997 to 390 million in 2012. The top 10 states are (in million acres):

  • Texas - 29.1
  • Kansas - 28.5
  • North Dakota 27.1
  • Iowa 26.3
  • Illinois 23.8
  • Nebraska 21.6
  • Minnesota 21.6
  • South Dakota 19.1
  • Montana 17.0
  • Missouri 15.3

The smallest state is Rhode Island with 22,593 acres which is about 35 square miles of cropland. Interestingly enough, Alaska is by far our largest state (sorry Texas), but is the second smallest with 84,114 acres. Although Texas has the largest acres of cropland, it also lost the most in the last five years dropping over 4.5 million acres out of production.

Know Your Deferred Tax Liability!

Jun 09, 2014

Over the last couple of months I have seen some farm operations that based upon the fair market value financial statements provided appear to have net worth, however, when you factor in the amount of deferred taxes that would be owed if all of the inventories, equipment and receivables were liquidated, the farming operation would go from positive net worth to negative net worth. Some of the extreme examples are a farming business with $25 million of assets, $6 million of net worth, however almost of the farming assets have zero or little income tax basis. If these assets were liquidated and taxes paid at 40% (or higher, almost all of this income is ordinary income), the farm operation would owe about $10 million in taxes and the positive net worth would become negative net worth of $4 million.

Now I know that many farmers say the payment of the deferred taxes will occur several years in the future. However, this assumes the farming operation is showing a profit and as you can see in my example, this operation has a large amount of leverage ($19 million of total debt versus $6 million of net worth). As many farmers have expanded rapidly in the last few years, we are starting to see more situations like our example.

The key is to know your deferred tax liability and have a manageable plan that deals with the liability each year. Although there is that genetic chip implanted in farmers at birth to never pay taxes, in many situations paying some each year is much better than getting with a large liability at once.

If you don't know how to calculate this liability, a qualified CPA should be able to help you with this analysis and it should not take too long. Get started now!

FBAR Filing Deadline is Near

Jun 05, 2014

The Foreign Bank and Financial Accounts Report (FBAR) form, formerly TD 90-22.1 now known as FinCEN Form 114 must be electronically filed by June 30th. As it is not required that this form be filed at the time of filing an individual tax return, this form can be easily overlooked.

This form must be filed by anyone having a financial interest in or signature authority over at least one financial account located outside of the U.S., where the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year. This is an informational form only and does not have a tax due, however, the penalty for a person who is required to file an FBAR who fails to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.

For those individuals who fail to file the FBAR form by June 30th , there are several options to help alleviate some of the high penalties and fines. One option is the Offshore Voluntary Disclosure Program, where some taxpayers may be eligible for penalties as low as 5 percent of the account balance, although most will pay a 27.5 percent penalty. As you can see, the 27.5 percent may not alleviate much, so I would recommend discussing with your tax advisor if you meet the criteria for filing this form.

Corn Belt and Cash Rents Cropland Values Level Off

Jun 04, 2014

The Chicago Federal Reserve releases a quarterly update on cropland values and cash rents for their district which comprises the three main "I" states in the corn belt (Iowa, Illinois and Indiana) and although good Iowa farm land was up 1% for the quarter, good farmland in Illinois and Indiana dropped 4% in the latest report.

Another sign of possible slipping land values is that cash rents were down 2% for the quarter. The value of farmland is directly tied to cash rents and there is a very good chart in the report showing the index for both cash rents and values beginning in 1981 with an index value of 100 for each.

Farmland values bottomed out in 1987 with a reading slight lower than 50, while cash rents bottomed out right at 50. Over the next 10 years very little change occurred in either cash rents or land values. Beginning in about 2000, farmland values begin to accelerate while cash rents remain fairly steady until about 2007 when they begin their rapid accelerated growth.

Farmland values topped out last year at about 150 (on an index basis), whereas cash rents only got up to about 110. The 40 point difference between land values and cash rents is most likely related to our period of extremely low-interest rates beginning with the financial crisis of 2008.

These reports always have some good nuggets of information and would highly suggest farmers bookmarking their websites.

Portability Revisited

Jun 03, 2014

With the "permanent" changes in the estate tax laws from about 2 years ago, we now have a permanent provision called portability. This allows for the unused portion of someone's estate to be "ported" over to the surviving spouse to be used on their final estate tax return.

Example: John Bean passes away worth $1 million in 2014. The lifetime exclusion amount is $5.34 million. The unused $4.34 million is "ported" over to Jane Bean who can be worth $9.68 million (if she died in 2014) and not owe any estate taxes.

In order to elect portability, the executor must file an estate tax return even if no estate tax is due. This can result in some administrative costs, and in many cases, it is worth making the portability election (especially if the estate is under $5.34 million).

The assumption is that portability is better than placing assets into a "credit shelter" trust for the benefit of the surviving spouse. In many cases, this assumption is incorrect. The amount ported over to the surviving spouse does not increase with inflation. Therefore, the longer that the surviving spouses lives past the first spouse, the greater the income and estate tax savings from using a credit shelter trust.

Example: John & Jane Bean are worth $10.680 million when John passes away in 2014. The executor can either set up a $5.34 million credit shelter trust for Jane or elect portability and pass a full exemption onto Jane. We will assume that Jane passes away 10 years later, the estate tax is at 40% and the capital gains tax is at 23.8% with no state income or estate taxes. We will assume a 2% inflation rate and a 5% rate of return on the assets. After 10 years, if all of assets are liquidated and capital gains taxes are paid, by using a credit shelter trust, the final estate will have an extra $542,700 of value versus electing portability. This is primarily due to the rate of return on assets values being higher (5%) than the rate of inflation (2%).

If farmers combined estate is currently over $10 million which in many states is less than 1,000 acres of good farmland, then it is very important to interact with advisors that understand the benefits of using a credit shelter trust versus simply assuming portability is the best option.

If anybody is interested in a more detailed analysis of these options please send an email to me at paul.neiffer@claconnect.com.

Kansas Land Values-Analysis of Four Year Trends

Jun 01, 2014

Kansas State University has a great resource for farmers and others interested in farming, not just in that state. On Friday, Dr. Mykel Taylor presented a webinar on the trends in Kansas Farm Values over the last four years. The Kansas Agricultural Statistics Service (KAS) reports annual farmland prices, but only on a statewide basis. As most farmers know, the value of farmland varies greatly through out any state and in many states, farmland values vary greatly within many counties. I know the county I grew up in (Walla Walla County, State of Washington) has great variability in prices. In the northern section of the county where there is light rainfall, the price of farmland may be less than $1,000 per acre. As you get closer to the mountains with greater rainfall, the price of good crop land probably gets close to $5,000 or more. As you get to the west side of the country where there is good irrigated ground, the value may be more than $10,000 and for those certain acres that are good for vineyards, the value may be higher than $20,000.

In Kansas, the KAS estimated the value of non-irrigated farm land rose from about $1,000 per acre in 2010 to about $2,000 per acre in 2013. This is about a 100% increase over four years. For irrigated ground, the price rose from $1,500 to $3,000 during the same time period. KSU took Kansas Property Valuation Department data and estimated their own set of values. During the same period, they estimated that non-irrigated ground rose from about $1,500 to slight more than $2,500 and irrigated ground increased from $2,500 to almost $5,000.

As you can see, there is a fairly large gap between the two, however, the trend is the same, UP. The Northeast section of the state has the highest averages with Brown county having the highest average for non-irrigated ground at $6,003 and an overall average of $4,895. Only a few counties in Kansas have material amounts of irrigated ground and most of it is in the western/central part of the state. The highest average was in Harvey county at $7,656.

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