Agricultural Tax Issues Program

If you are a tax professional with an interest in farm income taxes and looking for a more in-depth program on agricultural tax issues, this may be the program you are looking for. On Friday, December 17, 2004 Ohio tax professionals will have an opportunity to hear Dr. Phil Harris, professor of Agricultural Economics, University of Wisconsin deliver a taped lecture accompanied by a slide presentation and supplemented with a 300+ page reference manual. During this four hour program, there will also be two 30 minute live conference calls to provide participants with a chance interact with Dr. Harris on specific questions. This highly-rated program will be offered at nine sites across the state on the 17 th . Check out

http://aede.osu.edu/programs/TaxSchool/agissues.html for more information.

Non-StarLink Farmer Litigation: Where is my Settlement Payment? How much is it? What do I do when it arrives? How is it taxed?

Over 72,000 farmer-claimants will soon be receiving their respective shares of a Net Settlement Fund approximating $75 million. This article discusses the status of this payout, how the Prepaid VisaT Direct Cards may be used, the responsibility of a farmer-claimant to account to any share landlord or others, and the tax implications of the payout.

This report can be viewed in the Law and Taxation section at
http://www.farmdoc.uiuc.edu/legal/articles/ALTBs/ALTB_04-12/ALTB_04-12.pdf

Source: Farmdoc Project Office, Department of Agricultural and Consumer Economics, College of Agricultural, Consumer and Environmental Sciences, University of Illinois at Urbana-Champaign

How Thankful Are You For Your Farm Employees?

November is traditionally the time that Ohioans gear up for the holiday season. In particular, Thanksgiving has been important to farm families as the fall harvest has been completed. This provides farm families a time to reflect on the past growing season, plan for the next year’s cropping year, and pause to examine the farm business from top to bottom.

Hired and family labor are at the heart of most farm operations. Farm managers are encouraged to take time at the end of 2004 to determine the satisfaction level of their farm employees. Do they believe that they are being compensated fairly? Do they feel like they are part of the farm operation team or are they simply grunt labor? Are there strategies that can be implemented to make employees feel more appreciated and productive at the farm?

Most farm employees receive monetary compensation through wages or salary, vacation and overtime pay, and bonuses. Farm operators should remember that workers’ compensation, unemployment insurance and social security taxes are required by federal law. Farm managers may also provide employees with other fringe benefits such as sick or holiday leave, insurance, retirement programs, housing, farm commodities, meals, clothing, education reimbursement, personal use of farm assets, and use of a vehicle. Each farm employee has differing needs and desires. Therefore it is critical that farm managers take time to develop a benefit package that meets the specific needs of an employee. Other perks such as tickets to a ballgame or concert, a dinner certificate to a restaurant, a surprise paid day off and verbal thank-yous all can help indicate to the employee that their hard work is appreciated. What creative ways can you adopt to say thanks to your employees?

Mike Hogan, AG & NR Extension Educator in Carroll County, Ohio has written a factsheet, HRM-2-97 Compensating Farm Employees, that serves as a valuable resource for farm managers looking to improve their compensation program for their employees. This fact sheet can be received through any County Extension office or at http://ohioline.osu.edu/hrm-fact/oo2.html Additionally, farm operators can also visit with their local County Extension Educator for additional help in designing an employee compensation program that will work for the farm business and employees.

Because part of an employees compensation for agricultural workers may be fringe benefits, it is important that employers let employees know the full compensation package. It is recommended that the employee be given at least once of year a detailed summary of all compensation, cash and noncash, to each employee. The University of Nebraska has a table included in their publication, “Compensation Packages for Farm Employees” that will assist farm operators in this task. This table can be found at http://ianrpubs.unl.edu/farmmgt/g1067.htm

Income Averaging Improved from Recent Legislation

I.R.C. §1301, Act §314 Effective for tax years beginning after 2003

Background

An individual taxpayer engaged in a farming business may elect to compute his or her current year regular tax liability by averaging, over the prior three year period, all or a portion of his or her taxable income from the trade or business of farming. Because farmer income averaging reduces the regular tax liability, the AMT may be increased. Thus, the benefits of farmer income averaging may be reduced or eliminated for farmers subject to the AMT.

New Law

The Jobs Act of 2004 provides that, in computing AMT, a farmer’s regular tax liability is determined without regard to farmer income averaging. Thus, a farmer receives the full benefit of income averaging because averaging reduces the regular tax while the AMT (if any) remains unchanged.

Example:  Effect of Income Averaging on AMT

Clay and Lilly Fields had $120,000 of net income from farming in 2004 and no other income. They had $50,000 of AMT adjustments. Without income averaging, their 2004 regular tax liability would be $17,736. Their tentative minimum tax is $24,763, which results in a $7,027 ($24,763 – $17,736) AMT liability. If the Fields elect to use income averaging, they can reduce their regular tax liability by $5,195. Before the change to I.R.C. §1301 by the Jobs Act of 2004, their AMT would have gone up by the same amount so their total tax liability for 2004 would not have changed. After the Jobs Act of 2004 change, their AMT liability remains the same and the Field’s total tax for 2004 is reduced by the $5,195 reduction of regular taxes. Reference:  Land Grant University Tax Education Foundation, Inc.

Tax Managment Dilemmas & Considerations for 2004

In the October 2004 issue of the Ag Manager, discussion of the tax management process started by emphasizing the need for up-to-date farm records prior to the end of the year. With up-to-date records as of the end of September or October, the manager can then make estimates of income and expenses for the remainder of the year and make comparisons of the projected 2004 net farm income to the net income of previous years. The over-all goal of income tax management is not to minimize tax liability, but to avoid large swings in net income from one year to the next, e.g., being in the 35% tax bracket one year, showing a net operating loss the second year and then bouncing back into the 15% bracket the third year. Large swings in taxable income means more income tax will be paid over time due to the progressive tax rates, but less total tax will be paid if net income is leveled out over time.

When the estimate of the 2004 net farm income has been compared with the net income of previous years, one of three tax management strategies can be decided upon. One strategy is to increase net income by reducing planned expenses and/or generating more income, a second strategy is to decrease net income by increasing planned expenses and/or reducing income while a third strategy is to do nothing and continue as planned for the remainder of the year.

To increase taxable income consider increasing grain and livestock sales, but make sure any increased sales are in line with any marketing plans. Collect any money that might be owed. To reduce expenses delay purchases of inputs until after January 1, postpone capital purchases that are not absolutely necessary and use slower depreciation methods for assets placed in service during 2004.

If 2004 has been a good year and net income is projected to be up significantly, consider postponing grain and livestock sales, but again make sure these are sound marketing decisions. Use qualified deferred payment contracts so grain can be delivered and the payment postponed until after January 1. Pre-pay expenses for 2005, but make sure prepayments are for specific products, quantities and prices so the payments are not considered to be deposits. Pay interest on outstanding loans up-to-date by the end of the year. Additional capital purchases may be advisable, but don’t buy depreciable assets just because more depreciation is needed. Use accelerated depreciation methods and/or the section 179 expensing election for assets placed in service during 2004.

Regardless of the tax management strategy chosen, the manager should estimate the income and self-employment tax that will be due March 1 (or April 15) and begin making plans on where the money will come from to pay that liability. There are not many surprises worse than having the tax return completed two days before the deadline and not knowing where the money will come from to pay the taxes.

For 2004 the standard deduction is $9,700 for taxpayers that are married filing jointly (MFJ) and $4,850 for single filers. The 2004 personal exemption is $3,100 for each exemption. A younger couple with two children will have to have taxable income of $22,100 before income tax is due, an older couple with no children will have to have $15,900 before any income tax is due while the single filer would need taxable income of $7,950 before income tax is due. Although no income tax is due for these example taxpayers, if those taxable income amounts are all from farming, their respective SE tax liabilities would be $3,123, $2,247 and $1,123. SE tax is due on all net profits once those profits exceed $400. It is estimated that 70-75% of the over-all tax bill for the average self employed person is for SE tax, the remainder being income tax liability.

For MFJ taxpayers, the first $14,300 of taxable income is taxed at 10%, the next $43,800 is taxed at 15% and the next $59,150 is taxed at 25%. For single taxpayers, the first $7,150 of taxable income is taxed at 10%, the next $21,900 at 15% and the next $41,300 at 25%.

However, year-end tax management is not without its dilemmas. Having cash (or interest free credit) available to use for buying next year’s inputs always make tax management easier, but don’t tie up all available cash purchasing inputs and not have any cash available to pay the tax bill. Interest paid on borrowed money to purchase inputs is deductible while interest on money borrowed to pay income taxes is not deductible. And always make sure the interest paid is less than the taxes saved, otherwise it may not be such a good deal. If there is extra cash available at year’s end another consideration (or dilemma) is to make additional payments on outstanding loans starting with the shortest term and/or highest cost loans first. Although this strategy won’t cut your tax bill since the extra principal payment(s) is not deductible, it will make your operation more financially sound.

The overall goal of tax management is to avoid large swings in net income, not to minimize tax liability. Records and estimates are critical to determining and implementing the appropriate tax management strategy by December 31. Finally, it is important to estimate the tax liability so cash will be available by the due date of the tax return. Seek the help of a tax professional if necessary to complete this process. The goal of this process is to make well-informed tax management decisions

Estate Planning, What's in Your Plan?

A 12 lesson letter study course is available on estate planning. Take a look at the first lesson at http://lorain.osu.edu/ag/Lesson13.pdfwhich which addresses the following topics: Do’s and don’t with life insurance; Retirement funding vs. preserving assets; Treating children equally or equitably; Continuing a business in an efficient/functioning/profitable manner while transferring management; and Planning the disposition of your assets while providing liquidity for and minimizing estate transfer costs. If you would like all 12 lessons, visit http://lorain.osu.edu/ag/pg1.htm for enrollment and other information on the letter study.

Futures & Options Grain Marketing Course

Agriculture Economics 625 is an agricultural futures and options course for farmers, agribusiness persons, and educators.  It will meet each week from January-March at the Allen County Extension office, on the OSU Lima campus.  It will provide the in-depth knowledge and skill to understand and use all available marketing alternatives.  Participants will also develop a personal marketing plan.  For detailed information and a registration flyer contact the Allen county Extension office at 419-231-6086.  To talk to the instructor, call Dr. Dean Baldwin at 740-747-2450.

Energy Grants Available from the Farm Bill

The Farm Security and Rural Investment Act of 2002 (the Farm Bill) created a number of programs for rural America including a grant and loan program to help fund renewable energy and energy efficiency projects in rural America. This program, created in Section 9006 of the Farm Bill, is a 5-year program to help farmers, ranchers and rural small businesses purchase renewable energy systems and make energy efficiency improvements. This site will help you better understand the opportunities found in Farm Bill Section 9006: www.rurdev.usda.gov/rbs/farmbill/ .

Manure Applications to Frozen/Snow Covered Ground

As you may be aware, regulatory officials are considering banning the application of manure to frozen/snow covered ground, defined by the Ohio Department of Agriculture (ODA) as times when it is not possible to incorporate manure into the soil. This is the result of citizen complaints and stricter enforcement by regulatory officials to protect surface and ground water in Ohio. The Natural Resources Conservation Service (NRCS) in Ohio, along with Soil and Water Conservation Districts (SWCD) and Ohio State University Extension personnel have worked to revise the NRCS Conservation Practice Standard 633 in an effort to put in place standards that will allow farmers to continue the practice of manure application in an environmentally and socially acceptable manner.

While still an allowable practice, manure application to frozen/snow covered ground is not recommended. However, if such an application must be made, ALL of the following criteria must be met:

  • Application rate is limited to 10 wet tons/acre for solid manure more than 50% moisture and 5 wet tons of manure less than 50% moisture. For liquid manure the application rate is limited to 5,000 gallons/acre.
  • Applications are to be made to land with at least 90% surface residue cover (e.g. good quality hay or pasture field, all corn grain residue remaining after harvest, all wheat residue cover remaining after harvest).
  • Manure shall not be applied on more than 20 contiguous acres. Contiguous areas for application are to be separated by a break of at least 200 feet. Utilize those areas for manure application that are furthest from streams, ditches, waterways, surface waters, etc. (areas that present the least runoff potential).
  • Increase the setback distance to 200 feet “minimum” from all grassed waterways, surface drainage ditches, surface inlets and water bodies. This distance may need to be further increased due to local conditions (e.g. higher slopes, sensitive or high quality streams on the area.
  • The rate of application may not exceed the rates specified in the USDA/NRCS Practice Standard 633.
  • Additional winter application criteria for fields with significant slopes more than 6% (fields exceeding 6% are to be identified in a Comprehensive Nutrient Management Plan (CNMP) – manure shall be applied in alternating strips 60 to 200 feet wide generally on the contour, or in the case of contour strips on the alternating strips.

The ODA does not allow permitted farms to routinely apply manure during the winter. According to ODA’s rules, if manure is to be applied on frozen or snow covered ground, ALL of the following must be met:

  • The Department’s Livestock Environmental Permitting Program must be notified prior to commencing the manure application
  • The field must have greater than 80% ground cover
  • Application rates are to be reduced
  • Additional setbacks from streams, springs, neighboring residences, water wells, water surface intakes, grassed waterways, drainage ways and wells, and sinkholes must be followed.

What Can You Do?

  • There are several things you can do to manage these new rules, including:
  • Making it a goal to always keep your manure holding structure as empty as possible •  Establishing cover crops on appropriate fields following this year’s harvest
  • Using no-tillage when possible
  • Incorporating manure into the soil whenever possible
  • Contacting your local NRCS/SWCD and Ohio State University Extension offices to discuss potential funding or for more information.