By: Jeffrey K. Lewis, Attorney and Research Specialist, Agricultural & Resource Law
As we settle into 2022 and regroup after a busy holiday season, one of things an agricultural employer should be thinking about is taxes, more specifically, have they met their obligations when it comes to federal and state employment taxes. In this two-part series, we discuss the federal and state taxes that an employer is required to withhold from employees’ wages and the tax obligations that an agricultural employer is solely responsible for. This series covers the taxes and obligations an employer has because of the wages paid to employees. This series does not cover the business income or personal income tax reporting obligations of agricultural employers.
The first part of this series focuses on federal taxes and an employer’s obligations when it comes to social security, Medicare, federal income, and federal unemployment taxes. We also discuss when to pay the taxes and how to pay them. The information contained within this series is not meant to be legal and/or tax advice. Agricultural employers should seek out the counsel and guidance of an attorney or other tax professional to help them ensure they are compliant with their obligations under federal tax law.
Social Security and Medicare Taxes. Generally speaking, an employer must withhold social security and Medicare taxes from the wages it pays its employees. However, there are special rules for agricultural employers. The $150 Test or the $2,500 Test will help determine if an agricultural employees’ wages are subject to social security and Medicare taxes along with federal income tax withholding requirements.
All cash wages that an employer pays to an employee during the year for farmwork is subject to social security, Medicare, and federal income tax withholding requirements if either of the following tests are met:
Source: Peggy Kirk Hall, Associate Professor, Agricultural & Resource Law
You can count on tax law to generate interest in the agricultural community and that’s certainly the case with several tax bills recently introduced in Congress. Within the last month, members of Congress proposed a flurry of tax proposals that could impact agriculture if enacted. Of course, passing tax legislation is always difficult and subject to partisanship, and we expect that to be the case with these bills.
Here’s a look at the tax proposals receiving the most attention.
Death Tax Repeal Act of 2021. Sen. Thune (R-SD) and Rep. Smith (R-MO) are the primary sponsors of S. 617 and H.R. 1712, companion bills introduced March 9 that propose to repeal the federal estate tax, which the sponsors claim to be “the most unfair tax on the books.” The Act would also repeal the generation-skipping tax and make modifications to the computation of the federal gift tax, beginning at 18% under $10,000 and incrementally increasing by an additional 2%. Cosponsors of the Senate proposal includes 30 other Republicans, and the House bill has 137 cosponsors including one Democrat. The bills were referred to committee but have yet to see any further action.
For the 99.5 Percent Act. Introduced March 25 by Senators Sanders (D-VT), Gillibrand (D-NY), VanHollen (D-MD), Reed (D-RI) and Whitehouse (D-RI) to “tax the fortunes of the top 0.5% and reduce wealth inequality,” this bill would reduce the federal estate tax exemption from its current level of $11.7 million per individual. Under the proposal, estates in excess of $3.5 million per individual and $7 million per couple would pay the estate tax, which would begin at 45% for estates between $3.5 and $10 million. The tax would increase incrementally, reaching 65% for estates over 1 billion. The proposal would also reduce the lifetime gift tax exemption from its current level of $11.7 million to $1 million but would not reduce the annual $15,000 per person per year gift tax exemption for cash gifts. It would limit the exemption for gifts to trust at $20,000 per year. Protections for farmland include allowing farmland value to be lowered by up to $3 million for estate tax purposes and increasing the maximum exclusion for conservation easements to $2 million. The bill would also prohibit reduced valuation for assets held in a pass-through entity, affecting the 35% valuation discount that is typical for farmland LLCs.
Sensible Tax and Equity Promotion (STEP) Act. A group of Democrats in the Senate introduced the STEP Act on March 29 in an effort to “close the stepped-up basis loophole by taxing unrealized capital gains when heirs inherit huge fortunes on which the original owner never paid income taxes.” The proposal would tax the transfer of property that has a net gain either during lifetime or at death. During lifetime, a completed transfer to a non-grantor trust or individual other than spouse would be subject to tax but the first $100,000 of cumulative gain would be exempt. At death, the first $1 million of appreciated assets would pass without taxation. Transfers to charity, spouses, charitable trusts, qualified disability trusts would be exempt, as would gains on residences up to $250,000 per individual or $500,000 for married couples. Taxes on illiquid property such as farms and some farm assets could be paid in installments over a 15-year period, and any taxes paid under the Act would be deductible from the federal estate tax. The bill would also require gains on non-grantor irrevocable trusts to be reported every 21 years.
Corporate Tax Dodging Prevention Act. Another bill by Sen. Sanders (D-VT) would go after the corporate tax rate. The bill would restore the top corporate tax rate to 35%, its level prior to the reduction to 21% by the Tax Cuts and Jobs Act of 2017. It also includes a number of provisions to reduce the ability of corporations to avoid paying federal taxes by moving income and profits offshore.
We are likely to see several more tax proposals in Congress in the coming year and time will tell whether any of them will have traction. Some may merely be bargaining chips among the many legislative agendas in Washington. One thing is certain–tax bills will continue to generate interest in the agricultural world, so we’ll keep readers updated on these and future proposals.
Source: Ohio Farm Bureau
Taxes are becoming more of a hot topic in Washington D.C. and some of the plans being proposed would have a disastrous impact on rural Ohio and rural America as a whole. Proposed legislation in Congress would tax capital gains at death and eliminate stepped-up basis as a way to raise revenue for government spending, causing Farm Bureau to issue an Action Alert to our members. Ty Higgins has more with OFBF’s public policy vice president, Jack Irvin.
Source: Peggy Hall, OSU Extension
Wondering what’s happening with CFAP, the Paycheck Protection Program, and Executive Orders? So is the Farm Office team, and we’re ready to provide you with updates. Join us this month for Farm Office Live on Wednesday, February 10 from 7–8:30 p.m. and again on Friday, February 12 from 10–11:30 a.m., when we’ll cover economic and legal issues affecting Ohio agriculture, including:
Status of the Coranivirus Food Assistance Program (CFAP)
Update on the Paycheck Protection Program (PPP).
Tax credits information
Executive Orders that may impact agriculture
Legal update on small refinery exemptions
Farm Business Analysis program results
2019 is upon us and you may be meeting soon with your lender to discuss financial needs for the year. We all know agriculture is suffering from poor economic conditions – and the outlook for many sectors of the industry doesn’t look real promising. A variety of factors are forcing lenders to be more critical of loan applications. Let’s review a few things you can do to assist your lender as they review your loan application.
A year-end Balance Sheet is very helpful and provides a snapshot of the assets, liabilities, and net worth of your farm. Get in the habit of completing one each year for your lender to keep on file and for your own reference so you can monitor changes over time. You can get a blank balance sheet from your lender or access one here: https://farmoffice.osu.edu/farm-management-tools/farm-management-resources.
Cost of Production:
Know your cost of production. What does it cost you to produce 100 pounds of milk? What is your per acre or per ton cost to grow and harvest crops? If you need assistance with determining these, please see: https://farmoffice.osu.edu/ for copies of Ohio State University Extension production budgets and https://farmprofitability.osu.edu/business-summariesfor copies of the Ohio Farm Business Summaries.
Why are you requesting money from your lender? What is your goal(s)? What are you hoping to accomplish with the money you are requesting? Will you use the money as an operating loan to plant your crops? Are you planning an expansion? Are you wanting to consolidate existing debt? Regardless of the reason, your lender is going to need to know how you plan to repay the loan. A budget and cash flow projections will help everyone understand how the money will be used and how it will be repaid. Research has proven that you are more likely to accomplish your goals if they are written. Be sure your goals are Specific, Measurable, Attainable, Rewarding, and Timed (SMART). See this Ohio State University Extension fact sheet for information about writing SMART goals: https://ohioline.osu.edu/factsheet/node/767.
Your lender may request copies of your tax returns. Make sure you categorize income and expenses the same way each year. This allows the lender to compare apples-to-apples when evaluating your historic income and expenses. Also, if you pre-pay expenses or defer income, make sure your lender is aware of this so they can make accrual adjustments.
Communication with your lender is critical. Your lender is interested in understanding your farm, knowing how you are progressing, and what your plans are for the short and long-term. Invite your lender to visit the farm for a tour, a ride in the tractor, or to assist with milking!
Every lender would love to see each client have a written business plan. A business plan is made up of five parts: Executive Summary, Description, Operations, Marketing Plan, and Financial Plan. The University of Minnesota Extension has a template available at the following site: https://agplan.umn.edu/.
Summary: The items discussed in this article are ones you can control. Focus on these areas and make adjustments accordingly to make improvements. Contact the Knox County Extension Office for assistance.
The new tax law known as the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017 and will affect income tax returns for all of us for 2018 (to be filed in the next few months). The headline pieces of the new tax law include new tax brackets, higher standard deductions, elimination of personal exemptions and a new corporate flat tax rate of 21%. This will amount to lower total federal income tax for the large majority of taxpayers and C-corporations. Parts of the new tax law will make tax preparation simpler while parts will add complexity to the process.
With the new lower tax rate for corporations (specifically C-corporations) of 21% (a flat 21% rate) this replaces the old graduated tax brackets for C-corporations that started at 15% and topped out at 35%. The new lower tax rate for C-corporations may have created a decidedly uneven playing field if the new tax law hadn’t included a new deduction for all other businesses. This new Qualified Business Income Deduction (QBID) (sometimes referred to as the Pass-Through Deduction) is a 20% deduction of a businesses’ Qualified Business Income (QBI). Without this, businesses across the U.S. would have been strongly considering a change to a C-Corp structure for income tax purposes. With this QBID, the playing field between the different tax entities is mostly re-leveled. There may be inequalities that show up with the new tax law as it relates to business entity selection but it may take some time for these inequalities to reveal themselves.
Revised Recovery Period for Farm Machinery & Equipment
Under the TCJA, new farm equipment and machinery placed in service after December 31, 2017, is classified as 5-year MACRS property. Previously, machinery and equipment was classified as 7-year MACRS property. These assets must be used in a farming business. Equipment used in contract harvesting of a crop by another tax payer is not included in the business of farming.
Used equipment is still classified as 7-year MACRS property. The Alternative Depreciation System (ADS) for all farm machinery and equipment, new and used, is 10 years. Grain bins and fences are still 7-year MACRS property with a 10-year ADS life.
Farm Equipment Purchase Example:
Bill Brown purchased a new combine on September 28, 2017. In May 2018, he purchased a new tractor and used tillage tool. In August 2018, Bill constructed a new fence and in September he constructed a new grain bin. These assets are MACRS recovery classes:
New combine (2017) 7-year
New tractor (2018) 5-year
Used tillage tool 7-year
Fence (2018) 7-year
Grain bin (2018) 7-year
New Rules for Depreciation Methods
Assets placed in service after December 31, 2017, have depreciation rates increased to 200% Declining Balance (DB) for those farm assets in the 3, 5, 7, and 10-year MACRS recovery classes. Assets in the 15 and 20-year MACRS recovery classes are still limited to a maximum of 150% DB. Residential rental property and nonresidential real property continue to be limited to Straight Line (SL) depreciation.
Farm Equipment Depreciation Example:
Bill Brown paid $430,000 in 2017 for the new combine. He elected out of bonus depreciation and did not elect any Section 179 expense deduction. The half-year convention applies. Bill depreciates the combine over a 7-year MACRS recovery class using the 150% DB method. His depreciation is:
[($430,000/7) x 0.5 x 150%] = $46,071
What is the difference if Bill waited until 2018 to make the combine purchase?
[($430,000/5) x 200%) = $86,000
$86,000 – $46,071 = $39,929 more than if purchased in 2017
The increase in the rate of depreciation, combined with the shorter MACRS recovery class for new farm equipment and machinery, may generate more depreciation than needed. Taxpayers may choose to use the Straight Line (SL) method of depreciation and may also elect to use the 150% method. Both elections are made on a class-by-class basis each year. To further reduce the amount of depreciation, you may elect to use the ADS, which calculates depreciation using the SL method and lengthens the recovery period.
For additional information about this topic, contact your tax advisor or visit: https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act.
The holiday season stands out as one of the most generous times of year as people give gifts to the people they love. What better way to get into the holiday spirit than to talk about the tax implications of your gifts? There are three shopping weekends left until December 25th, so here are three highlights about the federal gift tax that you should know:
1. The federal gift tax is assessed on the person who gives the gift, not the person who receives the gift.
An individual who gives a gift of cash or assets with a fair market value greater than $15,000 to any one person in a given year will have to report the gift(s) using IRS Form 709 when filing taxes for that year. These forms cannot be filed jointly, so if a married couple gives a gift that is worth more than $30,000 to any one person, both of them must file IRS Form 709 and report half of the value of the gift.
Form 709 requires a few pieces of information about the gift and who receives the gift. It asks for things like a description of the gift, the recipient’s name and address, when it was given, and its value. While documentation or receipts do not have to be submitted with Form 709, filers should keep records for themselves about the gift in case the IRS has questions.
The gift tax rates for 2018 range from 18 to 40 percent. The rates depend upon how much in excess of the $15,000 exclusion the gift is valued. For instance, a gift valued at $20,000 would have no taxes on the first $15,000, but the $5,000 over the $15,000 threshold would be subject to an 18 percent tax. The 40 percent rate applies to gifts valued at $1,015,000, or $1,000,000 over the $15,000 exclusion.
Fortunately for the recipient, the gift does not count as income to the recipient because the gift falls under the gift tax rules instead of the income tax rules. Continue reading