The Farm CPA: Tax Relief Act Helps Farmers

March 4, 2011 10:49 AM

In baseball, if the home team is playing defense in the top of the 9th with a one run lead, two outs and the bases are loaded, the manager will normally go out to the mound and bring in his top
relief pitcher to get the last out.

Congress and the President on Dec. 17, 2010, provided the same type of drama with the passage of The Tax Relief Act of 2010. There have been many tax acts during the past 25 years or so,
and this act probably has more provisions that are pro-farmer than almost any other act that I can remember.

Savings for Farmers. Everybody’s front-burner issue was the extension of the Bush tax cuts. Under the new law, the current favorable tax rates on income, capital gains and dividends will be extended for at least two years. This means that the top rate on income will remain at 35% and the top rate on capital gains and dividends will remain at 15%.

In my opinion, the most important provision is the extension of the top dividend rate being kept at 15%. If a farmer has a C corporation with a large amount of retained earnings that need to be distributed, then 2010, 2011 and 2012 are the prime years to get this accomplished (in some cases, this can be distributed at zero tax for federal purposes).

For 2011 only, Congress initiated a new payroll tax savings for employees, including self-employed farmers. Instead of the FICA tax being 6.2% on wages and net farm income, the employee’s part of the tax will fall to 4.2% or a maximum possible savings of $2,136 for those with wages and net farm income more than the FICA wage base of $106,800.

The extension of the Bush tax cuts would not have meant much to farmers without extending the Alternative Minimum Tax (AMT) patch for 2010 and 2011. Under this patch, only about 4 million taxpayers will be subject to AMT instead of 26 million. This should save those affected up to about $10,000 in AMT for these two years.

Also, earlier in the year Congress extended the 50% bonus depreciation for all of 2010. The new bill increases bonus depreciation for new assets placed in service between Sept. 8, 2010, and Jan. 1, 2012, to 100%. This means that almost all new farm equipment, buildings and structures will qualify for immediate write-off if placed in service between these dates. In 2012, the bill returns to 50% bonus depreciation for those assets.

Estate Tax Changes. This bill would not be complete without addressing the estate tax mess that Congress created earlier in the decade. Under the old law, there was no estate tax for 2010 but a limited step-up in basis for inherited assets. For 2011, the top rate would have been 55% and estate taxes would have been owed on estates as low as $1 million.

The new law decreases the top estate tax rate to 35% for 2011 and 2012. The lifetime exclusion increases from $1 million to $5 million per taxpayer. In addition, the old step-up in basis rules to fair market value could be used for inherited assets.

For 2010, the new law allows an estate to use either the old law in effect with no estate tax and limited basis adjustments, or the new 2011 law. The due date for any estate happening in 2010 has been automatically extended to nine months after President Barack Obama signed the law to allow the estate-holders time to decide which election they want.

Moreover, spouses can now tack on the unused lifetime exemption from their deceased spouse who filed an estate tax return. For example, if a farmer died with an estate of $2 million, the unused $3 million can be added to the surviving spouse’s $5 million lifetime exemption to make $8 million exempt from estate tax.

Finally, the gift and generation skipping tax lifetime exemptions have been coordinated with the estate exemption, which means for 2011 and 2012, farmers can gift up to $5 million without owing gift taxes.

All in all, the Tax Relief Act was the best Christmas gift Congress has given farmers in a long time.

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Spell Check

3/10/2011 09:44 AM

  In what cases would a dividend distribution from a C corp. be taxed at zero?


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