Agricultural and Natural Resource Issues Chapter 11 pp National Income Tax Workbook

Transcription

1 Agricultural and Natural Resource Issues Chapter 11 pp National Income Tax Workbook

2 Tax Legislation NIB 1. Cash Accounting 2. SE Tax on Rental Income 3. DPAD Eliminated? 4. Step-up in basis

3 Ag Economy Update NIB 1. Farm Economy is still tight. 2. Commodity Program payments lower in 2017 and will be lower in Tax legislation? 4. Farm Bill legislation? 5. Interest Rates ^

4 11/30/2017 Corn Price Last 20 Years Source: macrotrends

5 11/30/2017 Barry Ward, OSU Extension

6 11/30/2017 Barry Ward, OSU Extension

7 CORN SELECTED BUDGET STATS Item Input Yield in bushels/acre Receipts Corn Price $3.70 /bushel $ $ ARC/PLC $0.00 $0.00 Variable Costs Seed Cost $280 /bag $ $ Nitrogen (NH 3 ) $425 /ton $53.77 $65.47 P (MAP) $455 /ton $26.89 $32.26 K 2 0 (Potash) $315 /ton $11.77 $14.13 Chemicals $60.42 $60.42 Fuel/Diesel $2.20 /gallon $12.66 $12.66 Breakeven Cost / Bu $2.17 $1.97 Fixed Costs Labor and Management $75.73 $81.87 Machinery Cost $ $ Land Rent $ $ Breakeven Cost / Bu $4.67 $4.35 Returns Return to Total Costs -$ $ Return to Variable Costs $ $ /30/2017 Return to Land Barry Ward, OSU Extension $26.24 $109.48

8 11/30/2017 Barry Ward, OSU Extension

9 Illinois FBFM 2015

10 Concentration of ag loans in Corn Belt but low ag delinquency rates Commercial agricultural banking performance by state in 2017 Q2 Source: FDIC

11 Source: USDA, NASS. Million acres Increase in land operated by large farms Area operated by economic sales class in Ohio $1,000 to $9,999 $10,000 to $99,999 $100,000 to $249,999 $250,000 to $499,999 $500,000 or more

12 Ohio House Bill 49 p. 431 Ohio Biennial Budget Bill Included language to make certain changes to the Current Ag Use Valuation (CAUV) program The Tax Commissioner is required to assume that the holding period for agricultural land is twenty-five years for computing buildup of equity or appreciation with respect to that land. This effectively raises the calculated capitalization rate in the formula which effectively lowers the calculated CAUV value Land enrolled in CRP will be valued at the lowest soil productivity level (recoupment is possible if land is taken out of CRP)

13 Ohio House Bill 49 p. 431 Counties undergoing reappraisal or triennial update in 2017 will see their CAUV values decline by an average of ~31% (taxes due in 2018) This does not necessarily mean that property taxes on these parcels will decline by this amount

14 Agricultural and Natural Resource Issues p Agricultural Income & Expenses 2. Net Operating Losses 3. Buying & Selling Farmland 4. Rental Property 5. Demolition of Structures 6. Disposition of Converted Wetlands

15 Agricultural Income & Expenses

16 Why is the definition of who is a farmer so important? p. 394 Exclusion of income from discharge of indebtedness Limit on deducting charitable contribution of a conservation easement Carryback of net operating losses Soil and water conservation expenditures Expenditures for fertilizer, lime, and other materials to enrich, condition, or neutralize soil Domestic production activity deduction Uniform capitalization of reproductive expenses

17 Why is the definition of who is a farmer so important? p. 394 Recordkeeping for business use of vehicles Method of accounting for corporations engaged in farming Cash method of accounting and inventory method Crop insurance or disaster payments Weather-related sales of livestock Deduction of prepaid expenses Application of the at-risk rules

18 Why is the definition of who is a farmer so important? p. 394 Material participation for purposes of the passive loss rules Livestock destroyed by disease Disposition of converted wetlands or highly erodible croplands Imputed interest rules Farm income averaging Self-employment tax on rent

19 Why is the definition of who is a farmer so important? p. 394 Special use valuation of real estate for estate tax purposes FICA taxes on commodity wages FUTA taxes Excise tax on gasoline and diesel fuel used on farms Relief from estimated tax penalties

20 Agricultural Income & Expenses p. 392 Farmers: Individuals, partnerships, corps that cultivate, operate, or manage farm for gain or profit, as owners or tenants Farm: Agricultural, stock, dairy, poultry, fruit, truck farms, plantations, ranches, and all land used for farming

21 Agricultural Income & Expenses Cultivate, Operate, Manage p. 392 Owner/tenant must: Participate to a significant degree in the farming process Bear a substantial risk of loss in the process

22 Custom Planting Not a Farmer p. 392 John Planter: 11.1 Is engaged in a farming related activity Bears no risk of loss Should use Schedule C If custom work was incidental he would report income on Schedule F

23 Contract Swine Barn p. 392 Sue Sweeney: 11.2 Owns building & provides care Paid on a per head basis Gets paid a bonus if meets production goals She materially participates & shares risk

24 Agricultural Income & Expenses For Gain or Profit Is there an actual and honest profit objective p. 393 Taxpayers engaged in hobby farming are not engaged in the activity for purposes of earning a profit and thus are not farmers for income tax purposes.

25 Weekend/Evening Warrior p. 393 Austin Mitchell: 11.3 CPA/attorney inherited farm April-Sept: Up to 40 hours/week on farm Farm fixed up, planted 1,000 trees No budget or plan, no separate acct., no agric. courses/advice $10,000 loss each year..not a farmer

26 Farming is on IRS Radar!

27 Schedule F Compliance Audits pp targeted audits to be conducted for 2015 tax year (note: Hobby Farmers using Schedule F) 4/1/2017 to 4/1/2018 Looking at tax returns with high W-2 income and Schedule F expenses. Horse related activities, ranch operations, and new or experimental endeavors are especially susceptible 6 Items of interest

28 Schedule F Compliance Audits Internal IRS Memo February 27, 2017 pp Whether deductions are truly ordinary and necessary business expenses deductible under I.R.C Whether farmers are properly distinguishing between custom hire expenses and amounts paid for equipment rental and employee wages 3. Whether gasoline, fuel, and oil expenses are proper business expenses 4. Whether mortgage interest is properly attributable to mortgage interest on real property used in the taxpayer s farming business. 5. Whether repairs and maintenance expenses are for the maintenance of farm buildings, machinery, and equipment that do not add to the property s value or appreciably prolong its life 6. Whether expenses for supplies, including amounts paid for prepaid supplies, are properly documented, and fall within proper prepaid limits are properly documented and fall within proper prepaid limits

29 Farm Income Schedule F p Farm Product Sales Cooperative Distributions Ag Program Payments- ARC/PLC Conservation Reserve Program Payments Commodity Credit Corporation Loans Crop Insurance/Disaster Payments Custom Hire Other Income Disposition of Farm Assets

30 Farm Expenses Schedule F pp Car & truck Conservation Depreciation & cost recovery Fertilizer & lime Interest payments Rent or lease payments Supplies, repairs & maintenance Seeds & plants Taxes Prepaid expenses

31 Net Operating Losses

32 Net Operating Losses - Farming NOL: Covered in great depth in 2016 NOL: Generally 2 year carryback & 20 forward. Can elect to waive carryback Farming business: Back 5, Forward 20 N/A: Contract harvesting, buying/selling plants/animals grown/raised by others NOL: 3 years for casualty & theft or declared disaster for small business (but not ag). See Example page 411 p

33 Net Operating Losses Farming Losses 5 Year C/B p. 411 Beaches Ex Figure 11.7 NOL ($80,000) Crop Farm (Sandy) : ($70,000) due to flood Trucking (Rocky): ($30,000) due to flood 5-yr c/b: ($70,000) 3-yr c/b: ($10,000) Could waive 5-yr c/b and revert to 2 yrs. Ex Forgo the 5 year carryback 3-yr: ($10,000) 2-yr: ($70,000) Could elect to forego entire carryback

34 Buying & Selling Farmland

35 Buying/Selling Farmland p. 416 Help your farmers by working with them to keep track of basis in farmland (purchase, gift or inheritance). How well do you think your farm clients are tracking basis? Cost basis sale, gift, inheritance Basis allocation

36 Buying/Selling Farmland p. 416 Special Use Valuation Section 2032A For farm estates of decedents dying in 2017: Aggregate decrease in amount cannot exceed $1,120,000 Qualified heirs may be liable for estate tax if within 10 years after death of the decedent, the heir transfers property or property is no longer used as a farm

37 Buying/Selling Farmland Land with CRP Contract p. 418 Purchaser can become successor-ininterest if USDA approves If no succession, seller remains responsible under contract May be obligated to pay back $$ May have to pay liquidated damages Seller adds early term. costs to basis

38 Rental Property

39 Fixed Cash Lease p. 418 The cash tenant pays the landlord a fixed amount, usually part in advance, for the use of farm real estate and receives all of the resulting production. The tenant pays all costs of production and thus assumes all production risks (drought, insect, hail, etc.) and all price risks.

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41 Indexed Cash Lease NIB A lease that is indexed to a pre-determined parameter Lease amount changes each year based on the parameter change Possible parameters: NASS Ohio Average Cash Rental Rate % Change, AEDE Survey Rental Rate % Change

42 Tax Implications - Landlord pp Reported on Schedule E No SE tax as no material participation Not a trade/business so: No Section 179 expense No soil & water conservation expense No farm income averaging No qualification for estimated taxes

43 Tax Implications - Landlord pp Schedule E Can deduct ordinary and necessary expense (taxes, interest, repairs, insurance, mgmt fees). Cash rent of farmland net income nonpassive (loss is passive) See Example 11.19

44 Other Tax Notes- Cash Lease p. 420 Net Investment Income Tax For higher income earners - cash rental may be subject to 3.8% NIIT Cash Rent Tenant Line 24b Prepaid: Deduct if benefit not > earlier of mos > TP first realizes benefit/rights 2. End of tax year following year of payment

45 Flexible Cash Leases

46 Flexible Cash Lease Pp A flexible-cash lease will allow landowners to share some of these risks without becoming subject to selfemployment taxes. And, like a fixed-cash lease, the tenant doesn't have to keep track of the landowner's share of expenses. Nor does the landowner have to make grain marketing decisions or other management decisions.

47 Rental Property - Flex Lease pp Two basic forms: 1. Cash lease with a bonus Base rent Additional rent paid if revenue exceeds benchmark revenue 2. Percent of gross income lease Base rent Additional rent if agreed upon % of gross revenue exceeds the base Paid in cash, not crop share Same tax consequences as cash rent lease

48 Crop Share Lease Landlord rents land in exchange for share of crop. Need information on how landowner participates in the farming activity. The share of the crop is determined by each party s contributions to the business.

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50 Crop Share Lease - Landlord pp Materially participates: SE Tax Sch F No material participation: No SE F4835 Material participation if (1 or more): 1. a)pay 50% direct costs, b) provide 50% tools, c) advise/consults, or d) inspects (needs do at least 3 of these) 2. Regular decision making affecting success 3. Works 100 hours over 5 weeks or more 4. Materially/significantly involved/production

51 Crop Share Lease - Landlord pp Unlike cash rent landlords, crop share landlords may be eligible for tax provisions that typically apply to only farmers, even if the landlord does not materially participate. Section 179 Soil & Water Expenses Farm Income Averaging Estimated Tax Payments Passive Loss Rules

52 Rental Property - Leasing Personal Property - Machinery p. 423 Self-Employment Tax (on Sch C) if 1. Not leased with real property and 2. Rental activity is a trade or business Primary purpose is income or profit Tax payer continuously/regularly involved Ex Randy Rogers retires and rents entire equipment line on a 5 year leasing arrangement

53 Rental Property - Leasing Personal Property - Machinery p. 423 If sporadic, not Trade or Business, can be reported as other income on line 21 on 1040 (expenses included on line 36)

54 Demolition of Structures

55 Demolition of Structures I.R.C. 280B pp No deduction allowed for cost of demolishing buildings no deductible loss Costs and losses added to land basis If purchases, uses & depreciates, then demolishes, remaining basis into land

56 Demolition of Structures p. 426 Polly Ester (Example 11.26) Purchased land & tears down buildings. Has to allocate $5,000 to basis. Does this happen? Chip Monk: (Example 11.27) Purchased land and uses tool shed. Depreciates shed for a few years. When demolishes, puts adjusted basis and demo cost to basis

57 Questions?