Will a Personal Guaranty Trump LLC Financial Liability Protection?

Erin Porta, OSUE Agricultural and Resource Law Extern  Like much of the business world, many Ohio farmers are choosing to operate as Limited Liability Companies (LLCs) to gain personal liability protection for LLC members and ample estate, tax, management and business … Continue reading

Farm Policy Background: Income of U.S. Farm vs. Nonfarm Population

by: Carl Zulauf, Professor, and Nick Rettig, Undergraduate Student
Ohio State University, July 2013

Overview:
This post is the first in a series that will examine big picture issues that frame U.S. farm safety net policy. Impetus for the series is the recent rejection by the U.S. House of Representatives of the proposed 2013 Farm Bill. While spending on food nutrition programs was a key issue, both the proposed spending and structure of the farm safety net impacted at least some, maybe many, votes. Thus, the decision by the House of Representatives suggests the U.S. is now fully engaged in a major debate about the future of its farm safety net. These types of debates are more about the big policy picture than about specific policy parameters, such as the level of target prices. This post specifically examines the issue of farm income relative to the income for the rest of the U.S.

Historical Perspective:
Average income of U.S. farm households has exceeded average income of all U.S. households every year since 1996, a full decade before the start of the recent farm prosperity (see Figure 1). Moreover, since 1972, income of farm households has exceeded income of all households in 67% of the years. The major exception is 1979 through 1984, a period that overlaps with the farm financial crisis. Note that farm household income is calculated using net farm income. For a more detailed discussion comparing U.S. farm household and all U.S. household income see the U.S. Department of Agriculture (USDA), Economic Research Service (ERS) website:
http://www.ers.usda.gov/topics/farm-economy/farm-household-well-being/farm-household-income.aspx

Average household incomes can be compared back to 1960. In 1960, average farm household income was 65% of average U.S. household income. Thus, over the last half century, farm household income has increased substantially relative to income of U.S. households.

To obtain a longer historical perspective, two data series need to be spliced. Specifically, USDA, ERS published a comparison of per capita (per person) personal income from 1934 through 1983. This data also is presented in Figure 1. It is from the Economic Indicators of the Farm Sector: Income and Balance Sheet Statistics, 1983 (http://search.library.wisc.edu/catalog/ocm07565652). Specifically, Figure 1 contains per person disposal personal income. Disposable income is total personal income minus personal current taxes. In 1934, per person disposable income of farms was 39% of U.S. per person disposable income. By 1983, the ratio was 69%. The ratio of farm household income to all U.S. household income usually exceeds the ratio of per person disposable income because farm households are larger on average than nonfarm households. Again, per capita farm income is calculated using net farm income.

Caution is always in order when conducting a comparison over time and when comparing across different data sets. Nevertheless, the trend is so strong that it is difficult to argue that farm income is not substantially higher relative to nonfarm income now than when farm programs began in 1933. This historical perspective is relevant for the current debate because farm programs were adopted in part as a response to the poverty of the U.S. farm population, which was 25% of U.S. population in 1930. Critics of farm policy commonly mention this historical change in relative economic status.

Role of Nonfarm Income:
The increase in farm income relative to nonfarm income is the result of many factors, but two stand out. One is the increasing size of the farm production unit, which in turn is partially driven by technology. The second is the increasing role of nonfarm income (also referred to as off-farm income). Figure 2 is a companion to Figure 1, specifically presenting the ratio of the income of the farm population (or households) that comes from farm sources. Nonfarm income comes from varied sources. The majority are wages and salaries from off-farm jobs, followed by transfers, such as Social Security, and income from nonfarm businesses. Farm income provided over 60% of per capita income of the U.S. farm population in the 1940s and 1950s. In contrast, farm income has provided less than 15% of all income of farm households in recent years, even including the farm prosperity years since 2005.

Supporters of farm programs are quick to point out that the role of nonfarm income is smaller on larger farms, which produce the majority of U.S. farm output. Figure 3 presents the household income figures for farms with gross sales of $250,000 or more in 2011. These farms accounted for 82% of the value of U.S. farm production in 2011. The data are from the USDA, ERS website, http://www.ers.usda.gov/topics/farm-economy/farm-household-well-being/farm-household-income.aspx. While nonfarm sources accounted for only 25% of the household income of these farms, their total household income averaged $205,215 or 194% more than average U.S. household income for 2011. Thus, it is not clear that focusing on larger U.S. farms necessarily strengthens the argument for a U.S. farm safety net policy.

It is worth noting that, while nonfarm income is a smaller share of household income on larger farms, it is not small on average. Off-farm income of farms with over $250,000 in farm sales in 2011 exceeded $50,000, which is 72% of U.S. average household income in 2011. While not commonly discussed, it appears that an important prerequisite for farming in the 21st Century in the U.S. is to have a second (or more) source of income not from the farm. Nonfarm income not only increases total household income but also is an important risk management strategy.

Farm Size Consideration:
It is commonly pointed out that an increasingly small share of the U.S. population has any tie to farming, including through grandparents and friends. A related issue is the ability of the nonfarm population to relate to the size of a modern farm. Figures 4 and 5 are an attempt to illustrate how this consideration has changed over the last half century. It is the comparison of these two figures, not the individual figures that matter.

Total gross farm sales for the median size farm that raised the 5 largest value farm commodities included in the farm safety net is calculated. The commodities are corn, cotton, soybeans, wheat, and dairy. The calculation uses data from the 2007 and 1964 Census of Agriculture (http://www.agcensus.usda.gov/index.php). The median size farm is the farm for which 50% of the farms raising the commodity had fewer acres of the commodity (fewer milk cows) and the farm for which 50% of the farms raising the commodity had more acres of the commodity (more milk cows). To illustrate, in the 2007 Census, the corn farm with 50% of all farms growing corn having less acres of corn and 50% of all farms growing corn having more acres of corn had gross farm sales from all farm commodities of $132,216. The reason for using total farm sales, not sales from corn only, is that the concern in this article is comparing farm households with the nonfarm household. The median size farm is arrived at using the arithmetic technique of interpolation.

In 2007, total farm sales of the median size farm raising corn, soybeans, wheat, dairy, and cotton was at least 95% higher than average U.S. farm household income (see Figure 4). Obviously this comparison is not valid because gross sales include expenses. However, contrast the picture of 2007 with the picture from the 1964 Census (see Figure 5). In 1964, average U.S. household income was $7,336, which exceeded the gross sales of the median size cotton, dairy, and corn farm. Even gross sales for the median size farm raising soybeans was only 41% greater than average U.S. household income in 1964. Taken together, Figures 4 and 5 illustrate that it is increasing harder for U.S. households to relate to the size of current farms.

Summary Observations:
There is nothing novel in this discussion. Farm household income has increased relative to nonfarm household income. Key reasons for this increase are the increasing role of nonfarm income and the increasing size of farms. Non-farmers have an increasingly hard time relating to the larger size of farms. Each of these considerations influences the willingness of the non-farm population to support the farm safety net. However, these trends are not new. Thus, it appears that, either individually or in combination, they have not been a compelling set of reasons to substantially reduce or eliminate spending on the U.S. farm safety net.

However, their influence may be changing. The U.S. is currently engaged in updating its safety net. The key update is the extension of access to medical care to the general U.S. citizenry. This decision, which culminates a long run trend toward increasing access to medical care, is an expensive government program. There are 3 options for paying for it: increased government revenues, reducing the cost of existing medical services, and reducing spending on other government items. The answer will likely be a combination of all three. The size of the redistribution of spending from other government items to medical care will depend on the growth rate of the U.S. economy and the cost savings achieved in existing medical services.

Given the current state of the relationship between farm and nonfarm household income and the current size of farms, it will be hard for the U.S. farm safety net to avoid continuing cuts. Lower spending on the farm safety net will make it difficult to reach agreement because each farm actor wants to protect their part of the farm safety net. It would be easier to craft a new farm bill if projected baseline spending in the future was higher, but that means farm income would have to decline. Higher government spending on the farm safety net as a result of lower farm income may not be a desirable situation for the U.S. farm sector.

This publication is also available at http://aede.osu.edu/publications.

2013 FARM BILL UPDATE – JULY 2013

by:Carl Zulauf, Professor, Ohio State University, and Gary Schnitkey, Professor, University of Illinois at Urbana-Champaign, July 2013

Overview:
Both the U.S. Senate and U.S. House of Representatives have passed farm bills. As expected, differences exist. Some are notable. This post briefly reviews the current farm bill situation and looks at possible paths forward. It examines the farm bill situation from three perspectives: politics, process, and content.

History:
The 2008 Farm bill expired on September 30, 2012. During 2012, the Senate passed a new farm bill. The House of Representative Agriculture Committee passed a bill, but the House did not debate it. Instead, Congress extended for one year 2008 farm bill provisions that had baseline spending. Thirty-seven programs had no baseline, including agricultural disaster assistance, the Wetland Reserve and Grassland Reserve Programs plus three other conservation programs, eight energy programs, and seven programs related to horticulture and organic agriculture. Thus, these 37 programs are not continued. The direct payment, target price, and ACRE programs had baseline and are continued; however, the budget sequester act led to a 8.5% reduction in direct payments and 5.1% reduction in payments by all other programs administered by the Farm Service Agency.

On June 10, 2013, the U.S. Senate passed the Agriculture Reform, Food and Jobs Act of 2013 by a vote of 66-27. Voting for the Bill were 46 Democrats, 18 Republicans, and 2 Independents. On July 11, 2013, the U.S. House passed the Federal Agriculture Reform and Risk Management Act by a vote of 216 to 208. All 196 Democrats voted against the bill. The House had rejected an earlier version of the bill, 195 to 234. Key differences between the accepted and rejected versions are that the version which passed (1) did not contain a food assistance title and (2) replaced permanent farm bill law for farm support programs with the 2013 House farm support programs.

Politics:
Recent farm bill debates generally have not been particularly partisan. Key differences were usually more along regional than political party lines. The 2013 House farm bill is partisan. While it is easy to point to the debate over the food assistance title as a partisan issue, a deeper partisan issue is at play: federal spending. Generally, more liberal Democrats favor increased spending while conservative Republicans favor lower spending. Exacerbating this division is the slow growth of the U.S. economy, which means slow growth in government revenue. When considering the current farm bill situation, it is important to note that most legislation is now partisan, especially if it involves spending. It is also worth remembering that partisanship marked the debate during the 1950s and 1960s over high, fixed parity support prices vs. market-oriented, lower parity support prices and the associated debate over mandatory supply controls. As a general rule, Democrats favored high, fixed parity support prices while Republicans favored market-oriented, lower parity support prices. This debate did not begin to end until the Food and Agriculture Act of 1965 was enacted, foreshadowing that the market-oriented, lower price support position would emerge.

Process:
While the lack of a food assistance title in the House farm bill has garnered considerable attention, food assistance has been tied to the farm bill more recently than historically (see http://www.fns.usda.gov/snap/rules/Legislation/about.htm). The Food Stamp program was initiated by legislation outside a farm bill, the Food Stamp and farm support programs have been extended for different periods of time by the same farm bill, and major changes in the Food Stamp program have occurred outside the farm bill. Moreover, even if its authorization expires, Congress can continue the Supplemental Nutrition Assistance Program (SNAP – previously called the Food Stamp program), by appropriating money for it. Thus, both history and the current situation suggest it is possible to write a farm bill without a food assistance title, although farm bills since the 1970s have included food assistance. Hence, from the perspective of process, like any difference between House and Senate bills, a Conference Committee will be impaneled to try to bridge the difference.

Key date for passing a farm bill is not September 30, 2013, but December 31, 2013. The farm bill was extended for the 2013 crop year, meaning current crop programs continue until a crop’s 2013 crop year ends. For example, the corn and soybean 2013 crop year ends August 31, 2014. December 31, 2013 is critical because the current U.S. dairy price support program ends on this date. The dairy price support program would then revert to permanent law provisions. Permanent law provisions are primarily in the Agriculture Adjustment Act of 1938 and Agricultural Act of 1949. Under permanent law, the dairy support price is likely to exceed $35 per 100 pounds (cwt.), compared with a $9.90/cwt. support price in the 2008 farm bill and a May 2013 all-milk market price of $19.70/cwt. Congress demonstrated in its 1-year extension of the 2008 farm bill that it will not allow the dairy support price to revert to permanent law. For more details on the 1-year extension of the 2008 farm bill and permanent law, see Congressional Research Service Report, “Expiration and Extension of the 2008 Farm Bill,” by Jim Monke, Megan Stubbs, and Randy Alison Aussenberg, January 15, 2013 (http://nationalaglawcenter.org/assets/crs/R42442.pdf).

Content Differences:
Besides the food assistance title, major differences in the 2013 House and Senate farm bills include:

(1) replacement of permanent legislation — The House Bill replaces the 1938 and 1949 farm legislation with the farm commodity title in the 2013 House farm bill. Thus, the House farm bill proposes that the House farm commodity support programs would exist forever until Congress decided to reconsider them. The Senate continues permanent legislation. Its commodity title is an amendment to the permanent laws and expires at a specified date in the future. For example, commodity programs for field crops expire after the 2018 crop year. Thus, the Senate farm bill requires that commodity programs be reconsidered. Reverting to permanent law has been an impetus for continuing dialogue on the farm safety net. The House version reduces and perhaps negates the need to pass farm safety net legislation in the future, thus likely making it harder to change the farm safety net.

(2) type of multiple-year program — Multiple-year assistance in the Senate bill centers on a revenue program, whose guarantees can drop and increase over time. In contrast, the House bill contains a more traditional fixed target price program. Generally, the House Bill makes larger payments to rice and peanuts than does the Senate Bill.

(3) type of dairy program — the Senate bill contains a supply management program; the House bill does not contain a supply management program.

These differences involve important philosophical questions: how often should Congress debate the farm safety net and how market oriented should farm safety net programs be. In addition, concern exists among southern crop producers that the distribution of payments from crop insurance differs notably for peanuts and rice from the distribution of direct payments and target price deficiency payments.

The broader point is that, even if the food assistance title was not an issue, it is not clear that a Conference Committee can bridge the differences that exist on farm safety net programs.

For a more detailed discussion of some of these issues, see the May 9, 2013 farmdoc post titled, “Payments by U.S. Farm Safety Net Program: Differences by Crop,” by Carl Zulauf and Gary Schnitkey, available here; the May 23, 2013 farmdoc post titled, “Comparison of Approaches to Price Supports for the 2013 Farm Bill,” by Nick Paulson, available here; and the June 7, 2013 farmdoc post titled, “Market Distortion and Farm Program Design: A Case Examination of the Proposed Farm Price Support Programs,” by Carl Zulauf, available here.

Summary Observations:

Many paths forward exist, with these four likely spanning the possible outcomes:

(1) The Conference Committee reaches an agreement that is enacted into law.

(2) The Conference Committee does not reach agreement and the current 2008 farm bill extension is extended for another year. As an aside, a 2-year extension could occur if Congress wants to avoid a farm bill debate in a Congressional election year.

(3) The Conference Committee does not reach agreement and the 2008 farm bill is extended again but in a different version. For example, some observers have discussed reducing direct payments if another extension occurs.

(4) The Conference Committee does not reach agreement and permanent law is repealed, ending farm commodity support programs. This outcome seems unlikely but we do not think its probability is zero. Should this outcome occur, the farm safety net becomes the insurance program, meaning multiple-year losses would not be covered by the farm safety net.

The interplay of politics, process, and content will determine in part which of these paths or if an entirely different path is taken. Senate leadership and President Obama have both indicated they will not accept a farm bill without a food assistance title. A farm bill with a food assistance title would require a very different coalition in the House than the coalition that passed its farm bill. Specifically, the support of a large number of Democrats would be needed. Is such a coalition attainable?

Weather and price/revenue trends matter in a farm bill, if for no other reason, than farm program payments are based on production, price, and revenue. A decline in price/revenue will increase the budget baseline of the ACRE program and the target price programs in the 2008 farm bill. On the one hand, this consideration could enhance the likelihood of another extension since a higher budget baseline for a 2014 farm bill increases the ability to address legislative concerns. On the other hand, farm groups may wish to lock in the higher target prices of the 2013 House farm bill. Groups concerned with Federal spending will not favor this outcome.

The latter paragraph highlights one of the key divisions at play in this farm bill debate: the desire on the part of those concerned with the level of federal spending vs. traditional farm bill supporters. What makes this division even more interesting is that many members of Congress who are most concerned about federal spending are representatives from rural America, an area that traditionally has backed the farm safety net. Thus, which of these divisions win out could well go a long way to deciding how the 2013 farm bill debate is resolved.

The preceding discussion has noted that there is no necessary reason for a farm bill to contain a food assistance title. However, not including a food assistance title in a 2013 Farm bill could potentially alter the dynamics of future farm bill debates. Conventional wisdom is that farm safety net programs are easier to enact when the farm bill includes a food assistance title because more constituencies have a stake in the bill. Thus, an important decision that all farm safety net supporters will need to consider is the strategic, long term consequences of having or not having a food assistance title in a 2013 farm bill.

A parallel discussion exists for inclusion of the revision to the 1938 and 1949 permanent laws. Revision to permanent law means that farm commodity programs will need to be considered in the future. Thus, it acts as a catalyst for the entire farm bill. Many actors that support the farm bill have interest other than commodity programs. In addition, knowing that the farm bill will be reconsidered in the future probably encourages compromise since policy actors know that the possibility exist that their concerns will be revisited in the not-too-distant future. Thus, an important decision that all farm safety net supporters will need to consider is the strategic, long term consequences of having the ability to modify farm safety net programs at a known time in the future and the value that this known revision date has to bringing policy actors with other concerns into the farm bill portfolio.

As mentioned in earlier farmdoc posts, the U.S. is currently engaged in a debate about the safety net provided to Americans, a debate that commenced with the extension of medical care to all Americans. It looks like the farm bill will be the next major confrontation in this broader debate. The outcome is uncertain but may have importance beyond traditional farm bill concerns.

This publication is also available at http://aede.osu.edu/publications.

Farmers and Phosphorus in Ohio’s Maumee Watershed: Perceptions, Practices and Potential

by: Robyn Wilson, Lizzy Burnett, Tara Ritter, Brian E. Roe and Greg Howard

Algal blooms have been a serious issue in Lake Erie since the 1960s. The blooms, which are harmful to wildlife and humans, occur when phosphorus levels are high within the lake. Although total phosphorus levels in Lake Erie decreased and stabilized during the 1980’s and 1990’s due to both farmer best management practices and other policies (e.g., phosphorus banned from detergents), data collected within the last decade have revealed an increase in dissolved reactive phosphorus (DRP). While there is some uncertainty about the current causes of this increase in DRP, experts have confidence that the changes are likely due to agricultural runoff during large rain events, particularly in the Maumee watershed. The Phosphorus Task Force of Ohio recommends that farmers use best nutrient management practices (BMPs) to reduce DRP loading into Lake Erie tributaries.

Agricultural BMPs are meant to improve soil health (e.g., conservation tillage, cover cropping, controlled traffic), increase nutrient management precision (e.g., soil testing, grid sampling, comprehensive nutrient management planning), improve the filtration of surface and subsurface runoff (e.g., filter strips, grass waterways, biofilters), and improve manure management (e.g., following Natural Resources Conservation Service (NRCS) guidelines). Adoption of a variety of these practices can serve to curtail nutrient loss from agro-ecosystems, thereby decreasing the overall impact of agriculture on water quality.

Although BMPs are known to be effective at reducing nutrient loss, their adoption remains voluntary in Ohio and many farmers still choose not to practice them. The purpose of this study was to:

1) Investigate farmer decision-making in order to better understand the prevalence of a variety of BMPs in the Maumee watershed,
2) Identify why farmers choose to adopt certain BMPs, and
3) Identify what motivates individual farmer willingness to adopt additional practices on their farm.

This information may reveal what, if any, methods may be employed to increase BMP implementation, thereby ultimately improving water quality and protecting associated ecosystem services. Previous research has focused largely on sociodemographic predictors of adoption and economic motivations. To evaluate these complex decision-making processes, this survey incorporates a variety of behavioral and social motivators.

The descriptive findings in this report are the result of a survey conducted in early 2012 among row crop farmers living within the Maumee watershed of northwest Ohio (a watershed in the 5 Western Lake Erie drainage basin). This report includes a description of the study area and survey methods, as well as a summary of the survey findings with tables and figures.

Key findings in this report include:

1. A strong majority of farmers in the Maumee Watershed believe that agricultural practices (including both row crop and livestock operations) contribute to water quality issues and that the available best management practices are effective. However, a similar majority also believes that what they are doing on their own farm is currently adequate.

2. Farmers are fairly concerned about nutrient loss, believing it is likely to have a negative impact on water quality and profit. However, the seriousness of the impacts is perceived to be only moderate, especially at a local level (e.g., to the individual farm and farmer).

3. Farmers feel a limited amount of control over nutrient loss on their farms and the impact on water quality. However, most farmers are willing to take at least one new action on their farm to reduce nutrient loss, seeing it as beneficial and valuable, even though they don’t all agree about the necessity or fairness. This suggests that there is perhaps only a minority of farmers who do not feel the need to do more.

4. From a social perspective, approximately half of farmers feel pressure from within the farming community to adopt best management practices (more so for practices like filter strips compared to cover crops). Although they believe other farmers expect them to do so, they do not necessarily feel the need to be like other farmers in their community. When it comes to society in general, a minority believe that non-farming friends and family approve of their practices, and a similar minority feel the need to respond to societal wishes in terms of their farming practices.

5. Farmers are generally more aware of the algal issues in Grand Lake St. Mary’s than they are those in the Western Lake Erie Basin.

6. A minority of farmers participates in conservation programs (with the Conservation Reserve Program being most popular). There is also potential for increased adoption of several BMPs that may help to address the current dissolved reactive phosphorus issues in Lake Erie. Namely, a minority of farmers currently uses grid sampling, follow a comprehensive nutrient management plan, and use cover crops (citing issues associated with the costs and uncertainty). There is also potential to increase the percentage of farmers who avoid fall-winter application, in particular manure application. Finally, the majority use broadcast application in a limited tillage system, pointing to the potential to increase the incorporation or sub-surface application of nutrients.

The full findings of the report are available at:
http://ohioseagrant.osu.edu/maumeebay/docs/farmers-phosphorus-and-water-quality.pdf

Further Notes

Robyn Wilson is Assistant Professor, School of Environment and Natural Resources, Ohio State University

Lizzy Burnett and Tara Ritter are Graduate Research Assistants, School of Environment and Natural Resources, Ohio State University

Brian E. Roe is McCormick Professor, Department of Agricultural, Environmental and Development Economics, Ohio State University

Greg Howard is a post-doctoral researcher, Department of Agricultural, Environmental and Development Economics, Ohio State University

Funding provided by the National Science Foundation’s Coupled Human and Natural Systems Program and the Climate, Water and Carbon Initiative at Ohio State University.

Project website is: http://ohioseagrant.osu.edu/maumeebay/

How the Afforable Care Acts Impacts Small Businesses

by: Larry Gearhardt, OSU Extension Tax Specialist

In March 2010, President Obama signed into law new health care reform. One part of the legislation is known as the Patient Protection and Affordable Care Act. Many of the provisions contained in the law become effective in 2013 and the law will be active beginning in 2014.

While the primary purpose of this reform is to mandate that all U.S. residents obtain health insurance coverage, the law creates a host of tax credits and penalties on taxpayers and employers for failure to do so. In addition, there are several new rules that were created to raise the necessary funds to do so.

LARGE EMPLOYERS DISTINGUISHED
A previous article appearing in the Ohio Ag Manager on June 26, 2013, explained how, beginning in 2014, “applicable large employers” must provide affordable health coverage with minimum essential coverage to employees to avoid a tax penalty. NOTE: On July 3, 2013, the Obama administration announced that the employer responsibility and insurance reporting requirements under the Affordable Care Act have been postponed until January 1, 2015, to give businesses more time to comply with the health care reform law.

An “applicable large employer” is an employer that employed 50 or more full-time and full-time equivalent employees in the preceding year. An employer that did not employ 50 or more full-time and full-time equivalent employees in the preceding tax year is not subject to a penalty for failing to provide affordable health coverage to its employees.

SMALL EMPLOYER HEALTH INSURANCE TAX CREDIT
Even though an employer may not be an “applicable large employer” and thereby subject to a penalty for failing to provide health coverage, the law encourages small employers to provide health coverage through the Small Employer Health Insurance Tax Credit. This law is currently in effect and is not affected by the postponement of the implementation of the law for large employers.

For tax years beginning in 2010, eligible small employers could receive a tax credit for providing health coverage to its employees. An eligible small employer is defined as an employer with:
Less than 25 full-time equivalent employees for the tax year, AND
Average annual wages of less than $50,000 per full-time equivalent employee

HOW MUCH IS THE CREDIT?
In 2010 through 2013, the full credit is 35% of the employer’s contribution. For 2014, the tax credit amount will increase to 50%. However, even though an employer may qualify as a small employer, he may not be able to take the full credit. The amount of the credit may be adjusted depending on the number of employees or the amount of average annual wages. Furthermore, the credit is reduced if the employer premiums paid are more than the employer premiums that would have been paid if the employees are enrolled in a small group market in the state where the employee works. The average premium paid in Ohio in 2012 for single, employee-only coverage in a small group market was $4,987.

The full credit amount is available for small employers who have 10 or fewer full-time equivalent employees and the average annual wages are $25,000 or less. If there are more than 10 full-time equivalent employees, or average annual wages exceed $25,000, an initial credit is computed and then a reduction is calculated.

There are two possible reductions to the credit. First, if the number of full-time equivalent employees exceeds 10, the reduction is determined by multiplying the initial credit by a fraction. The numerator of the fraction is the number of full-time equivalent employees exceeding 10 and the denominator is 15. The result is subtracted from the initial credit amount.

EXAMPLE: Fred Farmer owns a business with 10 full-time equivalent employees during 2013. Total wages were $230,000, or an average of $23,000 per FTE employee. Fred paid $48,000 in insurance premiums for the 10 employees. The credit is 35% of $48,000, or $16,800, which is the full credit allowed for 2013. If Fred Farmer has 13 FTE employees during 2013, the credit is reduced by 20% (3/15 = 20%), so the credit would be $13,440.

The second possible reduction to the full credit amount is if the average annual wages exceeds $25,000 per employee. If the average annual wage per employee exceeds $25,000, the full credit amount is reduced by a fraction where the numerator of the fraction is the amount of average annual wage exceeds $25,000 and the denominator is $25,000. The result is subtracted from the initial credit amount.

EXAMPLE: Assume the same facts as above with the exception that the average annual wage is $30,000. The full credit amount is $16,800. The full credit amount is reduced by 20% (5,000/25,000 = 20%) leaving a credit of $13,440.

NOTE: If Fred Farmer has more than 10 full-time equivalent employees AND the average annual wage per employee exceeds $25,000, there will be two reductions to calculate.

PREMIUM DEDUCTION REDUCED BY CREDIT AMOUNT
An employer can deduct the amount of health insurance premiums paid. The amount of the deduction for the health insurance premiums paid by an eligible small employer will be reduced by the allowable credit amount. In the previous example, if Fred farmer paid $48,000 in health insurance premiums and he receives the full credit of 16,800 for 2013, his deduction for the premiums paid is $31,200.

FURTHER RESTRICTION
For the employer to receive the credit, he must pay a uniform percentage of not less than 50% of the premium amount for a single, employee-only premium for each employee enrolled in the health insurance coverage offered by the employer.

WHERE TO REPORT
The Small Employer Health Insurance Tax Credit is computed on IRS Form 8941. The credit is non-refundable, which means that if the full credit amount cannot be deducted in the current tax year, the excess can be carried back or forward.

Though SPCC Rule is not Enforceable, Farm Fuel Spills Still Prove Costly

Catharine Daniels, Attorney, OSUE Agricultural & Resource Law Program.    Back in April, we alerted readers to Congress delaying the requirement for farm oil spill prevention plans (find post here).  The US EPA had set a deadline of May 10, … Continue reading

Should your Agricultural Business Consider a Non-Disclosure Agreement?

 Catharine Daniels,  Attorney, OSU Extension Agricultural and Resource Law Program Attorneys across Ohio recently came together for the 2013 Ohio Agricultural Law Symposium to learn about current legal issues for Ohio farmers and agribusinesses.  In a session about protecting the farm and agribusiness,  Cari Rincker, a … Continue reading

Employer Health Insurance Mandate Postponed One Year

by David Marrison, OSU Extension Educator

On July 3, 2013 it was announced by the Obama administration that they will delay a crucial provision of the health-care law. One of the major components of ObamaCare was the requirement for employers to either provide health insurance or face a penalty. The insurance mandate applies to employers with 50 full-time equivalent employees and would have taken place starting January 1, 2014. If affordable insurance was not offered, than a business could face a fine up to $3,000 per employee. The enforcement of the employer mandate will now be delayed until 2015. For most Ohio farmers, this law will not apply, however many of our orchards, vineyard and related operations may have been dramatically affected by this mandate.