Agricultural & Natural Resources Tax Issues Chris Bruynis David Marrison Barry Ward Associate Professor Associate Professor Assistant Professor bruynis.1@osu.edu marrison.2@osu.edu ward.8@osu.edu 740-702-3200 440-576-9008 614-688-3959 Agricultural & Natural Resource Issues Chapter 10 pp. 321-368 2016 National Income Tax Workbook 1
2016 Farmers Tax Guide http://www.irs.gov/pub/irs-pdf/p225.pdf Agricultural & Natural Resource Issues p. 321 1. Tangible Property Regulations De Minimus Safe Harbor 2. Contribution of Food Inventory 3. Bonus Depreciation on Vines and Trees 4. Cost Recovery for Hoop Structures 5. Conservation Reserve Program Payments 2
Agricultural & Natural Resource Issues p. 321 7. Easements 8. Valuation of Unharvested Crops 9. CCC Loan with Commodity Sale on Form 1099-PATR 10.4-H Club and FFA Projects 11. Multiple Entities Issue 2: Contributions of Food Inventory p. 324 3
Issue 2: Contributions of Food Inventory p. 324 PATH Act reinstates enhanced deduction for contributions of food inventory & made permanent Inventory basis for contribution Actual cost If inventory not required, elect basis = 25% FMV Issue 2: Contributions of Food Inventory p. 324 Example 10.3 Cash Basis Net farm income was $7,150 Broccoli would have sold for $280 at farm market Basis: $70 ($280 x 25%) $7,150 = $1,073 4
Issue 2: Contributions of Food Inventory p. 324 Example 10.3 Cash Basis 1. Deduction is lesser of: Basis + ½ Profit o $70 + (½ $210) = $175 or Two times the basis o 2 $70 = $140 2. Limited to 15% of Net Income o $7,150 *15% = $1,073 Issue 2: Contributions of Food Inventory p. 325 Donee must also use the property for the care of the ill, needy, or infants Donation to nonprofit for fund-raising dinner would not qualify odeduction would be broccoli FMV reduced by ordinary income if sold odeduction of -0-5
Issue 2: Contributions of Food Inventory p. 325 Must obtain and retain a receipt Must keep reliable records of: 1. Organization name and address 2. Date and location of donation 3. Description of property 4. FMV and how it was determined 5. Cost or other basis of property 6. Terms and conditions of gift Issue 3: Bonus Depreciation-Vines &Trees p. 325 Options for depreciating assets MACRS Bonus Depreciation UNICAP election Section 179 6
Issue 3: Bonus Depreciation-Vines &Trees p. 325 MACRS Rules Generally, farmers can choose: 1. GDS recovery period a. 150% DB method b. SL method 2. ADS (SL over longer recovery period) Issue 3: Bonus Depreciation-Vines &Trees p. 325 Bonus Depreciation Rules 50% deducted in first year 40% for 2018 30% for 2019 0% for 2020 and later 7
Issue 3: Bonus Depreciation-Vines &Trees p. 325 Bonus Depreciation Requirements: Recovery period < 20 year Original use commenced with TP Placed in service before1/1/2020 ADS must not be required method Issue 3: Bonus Depreciation-Vines &Trees p. 326 UNICAP Rules Capitalize costs of preproductive period if preproductive period > 2 years Most farmers can elect out o Elect out by not applying on 1 st return UNICAP would be required o Farmer & related must use ADS on property used predominantly in farming 8
Issue 3: Vines &Trees p. 326 Preparatory Costs Costs incurred so that the plant s growing process may begin Must be capitalized regardless of UNICAP rules Issue 3: Vines &Trees p. 326 Preproductive Period Costs Costs of cultivating, maintaining, or developing the plant during the period after plants are planted and before they are placed in service Includes management, irrigation, spraying, fertilizing, tax depreciation, frost protection, & repairs on buildings and equipment 9
Issue 3: Bonus Depreciation-Vines &Trees pp. 325-326 PATH Act adds a new option Election to deduct 50% of adjusted basis in year plants are planted or grafted Must be tree or vine that bears fruits or nuts or Any other fruit or nut plant with preproductive period > 2 years Issue 3: Bonus Depreciation-Vines &Trees p. 327 PATH Act adds a new option Basis of plant must be reduced by bonus depreciation Cannot claim bonus depreciation for plant in year it is placed in service but may claim Section 179 &/or MACRS 10
Issue 3: Bonus Depreciation-Vines &Trees p. 327 Differences New and General Rules New election applies to any tree or vine that bears fruits or nuts regardless of its pre-productive period UNICAP applies only to plants that have a nationwide weighted average preproduction period of > 2 years Issue 3: Bonus Depreciation-Vines &Trees p. 327 UNICAP Rules End of 2-year preproductive period Under New: the time at which such plant begins bearing fruits or nuts Under UNICAP: the period before the 1st marketable crop or yield from such plant 11
Issue 3: Bonus Depreciation-Vines &Trees p. 327 New vs General Bonus Depreciation Property does not have to qualify for the general bonus depreciation to be eligible for the special elective bonus depreciation for plants that bear fruit or nuts. Issue 3: Bonus Depreciation-Vines &Trees p. 327 New vs General Bonus Depreciation Property does not have to meet the following requirements: 1. Recovery period < 20 years 2. Original use commences with TP Property that must be depreciated under the ADS is eligible property. 12
Issue 3: Bonus Depreciation-Vines &Trees p. 327 Benefits of the New Legislation 1. Farmer that elected out of UNICAP can claim bonus depreciation 2. Bonus depreciation can be deducted in an earlier year Issue 3: Bonus Depreciation-Vines &Trees pp. 327-328 Example 10.4 Elect out of UNICAP ADS for depreciable assets Figure 10.1 Example 10.4 Elective Bonus Dep 2016: Bonus $23,500, $7,000 maint. 2017: $12,000 maintenance, 179 2018: 179, ADS dep., Deduct $12K 13
Issue 3: Bonus Depreciation-Vines &Trees p. 330 Planning Pointer Farmers can increase the adjusted basis of plants that are eligible for the elective bonus depreciation by choosing a more rapid cost recovery method for assets that are placed in service in the year the plants are planted and used to plant the plants. Issue 4: Cost Recovery - Hoop Structures Figure 10.5: Farm recovery periods Hoop structures likely to be treated as farm buildings (20-year property) Building per Regulations: o Appearance test structure enclosing a space w/walls and usually a roof o Functional test same purpose as in reg. examples pp. 330-332 14
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Issue 4: Cost Recovery - Hoop Structures p. 332 Hoop not a single-purposes structure Does not meet the specifically designed, constructed, and used ocan be used for many purposes 17
Issue 4: Cost Recovery - Hoop Structures Example 10.6: 3 identical hoop structures 1. To store grain: argue grain bin (7 yr)? 2. To house dairy goats: argue singlepurposes (10 yr)? 3. To store farm equipment: 20 year general purposes farm building pp. 332-333 Issue 4: Cost Recovery - Hoop Structures p. 333 MACRS if placed in service after 1986 unless an exception (list p. 333) Use GDS unless ADS required/elected. On a farm, ADS would be required for: 1. Listed property used 50% in T or B 2. With election out of UNICAP (other required ADS usage p. 333) 18
Issue 4: Cost Recovery - Hoop Structures Example 10.7 Required use of ADS Apple orchard, preproductive pd. > 2 yrs Elected out of UNICAP New machine shed placed in service in 2016 Must use ADS 25 year recovery pd. pp. 333-334 Issue 4: Cost Recovery - Hoop Structures Section 179 Expense Deduction Must be 1245 property which includes: 1. Real property (not a building) a. an integral part of production or b. bulk storage facility or 2. Single purpose livestock and horticultural structures Hoop structure, as a building, not eligible pp. 334-335 19
Issue 4: Cost Recovery - Hoop Structures p. 336 Bonus Depreciation 50% AFYD Specific type of property including o Tangible property depreciated under MACRS with recovery period 20 years Original use begins with taxpayer Not an excepted property (list p. 336) Hoop structure, Example 10.6, qualifies Issue 4: Cost Recovery - Hoop Structures p. 337 Order of cost recovery: 1. Section 179 2. Bonus depreciation 3. MACRS depreciation As hoop structure unlikely to qualify for section 179 - bonus depreciation, then MACRS. 20
Issue 5: Conservation Reserve Program (CRP) Payment p. 338 The Conservation Reserve Program (CRP) is a land conservation program administered by the Farm Service Agency (FSA). (Reagan-1985) In exchange for a yearly rental payment, farmers enrolled in the program agree to remove environmentally sensitive land from agricultural production and plant species that will improve environmental health and quality. Contracts for land enrolled in CRP are 10-15 years in length. The long-term goal of the program is to re-establish valuable land cover to help improve water quality, prevent soil erosion, and reduce loss of wildlife habitat 21
Issue 5: Conservation Reserve Program (CRP) Payment p. 338 Notice 2006-108: Participation in a CRP contract is a trade or business Farmer is subject to SE tax Non-farmer is subject to SE tax Proposed revenue ruling has not been issued Issue 5: CRP Payments p. 340 2008 Farm Bill: Excludes CRP payments from the definition of net earnings from selfemployment if owner is receiving: Old age or survivor s benefits Disability benefits 22
Issue 5: CRP Payments p. 341 Morehouse v Commissioner Tax Court followed IRS reasoning and held CRP payments subject to SE tax 8 th Circuit reversed and held that CRP payments are rent onot subject to SE tax because taxpayer did not materially participate Issue 5: CRP Payments p. 342 CRP, NIIT & Additional Medicare Tax NIIT applies to income reported as rent CRP on Sched E Additional Medicare tax applies to selfemployment income CRP on Sched F Neither if TP collecting social security as CRP not in SE income & not rents 23
Issue 7: Valuation of Unharvested Crops pp. 350-351 FMV of unharvested crop needed for 1. Transfer by sale, gift, or inheritance 2. To make IRC 754 adjustment 3. To make IRC 336(e) election 4. To calculate potential built-in gains Issue 7: Valuation of Unharvested Crops p. 351 Sale of Unharvested Crop with Land Unharvested crop is 1231 asset if: 1. On land held for > 1 year 2. Sold at same time and to same buyer as sale of land 268 denies deduction of cost of raising the crop (including prior year) 24
Issue 7: Valuation of Unharvested Crops p. 351 Valuation of Annual Crops 1. Appraisal by a qualified appraiser 2. Discount FMV of crops at harvest Issue 7: Valuation of Unharvested Crops p. 351 Appraisal of Growing Crop Example 10.21 Crop Cost Growth FMV Wheat $200 60% $320 Soybeans $335 15% $385 Corn $560 15% $644 25
Issue 7: Valuation of Unharvested Crops pp. 351-352 Discounting Harvested Crops Example 10.22 FMV of harvested wheat $100,000 Weather risk - 12,000 Fire risk - 2,000 Discounted value $ 86,000 Issue 7: Valuation of Unharvested Crops p. 352 Non-Materially Participating Landlord If decedent did not materially participate, share rent is IRD no date of death FMV basis) Must determine FMV on date of death to allocate rent before and after death 26
Issue 7: Valuation of Unharvested Crops p. 352 Timber Valuation 1. Sales comparison 2. Cost 3. Income capitalization Tax Issues for 4-H/FFA Members Question: Do 4-H/FFA pay taxes on profits from their projects sold at fair and/or for the projects sold privately? Answer: Yes, all income is subject to income tax. 27
Reporting Income from 4-H/FFA Projects Line 21 of Form 1040 Attach form with gross income & the expenses May not be subject to self employment tax if the project is primarily for educational purposes & not for profit. Schedule F Income or loss reported for Self-Employment If member has other farming activities in addition to the project than it most likely goes here. 28
Form 1099 for 4-H/ FFA Members? Question: If a 4-H or FFA member receives a cash award based on the placement of his or her livestock, crops or other products displayed at the fair, does the fair board need to issue them a 1099? Answer: Yes, if the award (or aggregate) is $600 or more 29
Form 1099 for 4-H/ FFA Members? Question: Does the fair need to issue a 1099 to the 4-H Member if they animal the sell in the Market Livestock Auction sells for $600 or more? Answer: No, the 1099 requirement does not extend to payments for farm commodities. [Treas. Reg. 1.6041-3(c)] Issue 9: 4-H Clubs & FFA Projects p. 362 Buyers at a Fair Auction Often purchase at > FMV, sell at loss Done for promotional purposes odeduct as ordinary and necessary business advertising expense Example 10.32 If donates: lesser of FMV or basis 30
Issue 9: 4H Clubs & FFA Projects p. 355 4H or FFA Member: T or B or not? Not T or B (& not SE income) if for educational purposes, not for profit, follow organization rules/restrictions oreport on line 21 (show expenses in line 21 or attach statement) Issue 9: 4-H Clubs & FFA Projects p. 355 4-H or FFA Member: Tor B or not? T or B (& SE income) Sch F if: o Regular & recurring activity o Not primarily for educational purpose ointends to make a profit and/or o Other farming activities conducted 31
Issue 9: 4-H Clubs & FFA Projects pp. 355-356 Example 10.25 No profit intent o Comparing steer/heifer growth rates o Sold steer and heifer @ fair: $3,300 o Prize of $500 o Expenses of $2,900 o $900 net on line 21 Figure 10.13 o If loss, no deduction Issue 9: 4-H Clubs & FFA Projects pp. 355-356 Example 10.26 Profit intent o Comparing steer/heifer growth rates o Used offspring of parents herd o Commodity wages for work on farm o Filing Schedule F for other activities o Sale $3,300, Prize $500, Exp. $2,600 o Likely to be treated as T or B 32
Issue 9: 4-H Clubs & FFA Projects pp. 356-357 Gift of Inputs: Noncash gift c/o basis Example 10.27 o Parents: cow-calf operation/feedyard o Juan purchased steer from neighbor o Used grain/supplements from 2015 o Basis -0- (parents expensed in 2015) o If paid parents, parents have income Issue 9: 4-H Clubs & FFA Projects pp. 357-358 Line 21 income not included in earned income for dependent s standard deduction comp. in 1040 instructions o Earned income not defined FFA or 4-H income result of personal labor & management argue as earned? Example 10.28 (example 10.25) o Earned: $1,250 Not earned: $1,050 33
Issue 9: 4-H Clubs & FFA Projects p. 358 Kiddie Tax Earned income if T or B treatment 911(d)(2): Personal service & capital material income producing factors, reas. allow. for comp not > 30% of net Line 21 not earned income Sch F 30% as earned income Issue 9: 4-H Clubs & FFA Projects pp. 359-360 Example 10.29 Age 16 Netted $6,000 from 4-H swine project Primarily educational line 21 $3,500 interest income Parents claimed him Standard deduction of $1,050 Form 8615 Figure 10.14 34
Issue 9: 4-H Clubs & FFA Projects p. 360 Example 10.29 Age 16 If not primarily educational $6,000 subject to SE Tax Show efforts worth $1,800 earned income for kiddie tax Figure 10.15 - Taxable income comp Figure 10.16 Form 8615 entries Questions? 35
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