ACRE Payments not Probable in Ohio for 2012

By: Chris Bruynis, PhD, Assistant Professor & Extension Educator, OSU Extension.

Recently I read an article that suggested that an Average Crop Revenue Election (ACRE) payment might be possible for the corn crop in Illinois. So, I thought maybe it might be possible here in Ohio. We have relatively good estimates from the National Agricultural Statistical Service (NASS) on the 2012 yield for Ohio. Corn yield is estimated at 123 bushels per acre and soybeans at 43 bushels per acre. Corn represents a decline of approximately 22% and soybeans are down 10% from the five year Ohio Olympic average.

The ACRE revenue guarantee for corn in Ohio is $627. To calculate the actual crop revenue for the state, simply multiply the state average yield times the market average price for the year. The market year starts in September of 2012 and goes through August 2013. Since the market average price is not known, one can determine what the market price needs to be less than by dividing the ACRE revenue guaranty by the average yield. For corn this would be $5.10 per bushel. For September through November the Market year average is $6.76 and the USDA is projecting it to be $7.60 for the year. Unless something drastic happens in the grain markets, it is highly unlikely there will be an ACRE payment in Ohio for the 2012 corn crop.

The same calculation can be made for the soybean crop. By dividing the Ohio soybean revenue guarantee of $493 by the average yield of 43 bushels per acre you get the market year average price beans need to be less than. This calculation yields a MYA price of $11.46. So far in the 2012 marketing year the soybean price average is $14.10 and the USDA is projecting an average price of $14.90.

Readers may wonder why other states such as Illinois appear to be in line for an ACRE payment while Ohio does not. The answer is relatively simple. The average corn yield for Illinois was 101 bushels per acre and their ACRE revenue guarantee for corn was higher than it was in Ohio due to higher corn yields historically. This resulted in a greater percent loss for their farmers.

Don’t feel that farmers in other states are special because they may receive some assistance through ACRE. I am sure they would rather have had the additional yield to sell for the prices offered during the past months than the ACRE payments.

Can I Avoid Paying Taxes on Oil/Gas Payments?

By Chris Zoller, Chris Bruynis & David Marrison, OSU Extension Educators & Peggy Hall, Extension Specialist, Agricultural Law

The leasing of land for oil and gas drilling throughout eastern Ohio has provided landowners with substantial revenue.  OSU Extension has received many calls from landowners asking how they can avoid paying taxes on these payments.  The quick answer is that there are very few ways to avoid paying taxes on lease bonus payments or royalty income.  Oil and gas revenue payments are classified as Miscellaneous Income and are subject to both federal income and Ohio taxes (and should be reported appropriately). 

Taxation on Lease Bonus Payments: Cash payments received by the landowner prior to drilling, commonly referred to as lease bonus payments (typically paid on a per acre basis) are considered ordinary income for tax reporting purposes and are subject to ordinary income taxes. These payments might be made on an annual basis each year of the lease’s primary term, or could be made as a lump-sum payment that combines all annual payments into one payment made upon executing the lease.  All lease payments are reported to landowners on IRS form 1099 MISC, Box 1, Rents.  Lease payments must also be reported on page 1 of Schedule E, Supplemental Income and Loss.  This amount then flows to line 17 of IRS Form 1040 and is not subject to any self-employment tax.  Some oil and gas lease agreements will refer to a Delay Rental Payment.  This payment will be made to the landowner to allow the developer additional time to begin drilling activities .  These payments are also considered ordinary income.

Taxation on Royalty Payments: If drilling results in a producing well, you will receive periodic payments for your share of the production in accordance with the terms of the lease. This is known as royalty income , which will continue over the productive life of the  drilling unit Royalty payments are ordinary income reportable on Schedule E (Form 1040) for an individual taxpayer.  The royalty payments are reported in Box 2 of Form 1099MISC. Royalty payments are not subject to self-employment tax and are reported on Schedule E (Form 1040). Royalty payments are reduced by allowable depletion and other related expenses (if any) to arrive at ordinary income to the landowner.

How Much Will I Owe in Taxes for my Lease Bonus Payments? The answer to this depends upon your tax bracket.  These payments are added to other income you receive to determine your tax bracket.  Currently, the highest federal income tax bracket is 35%, for those with an adjusted gross income (AGI) of $379,150 or higher.  The highestOhio income tax bracket is 5.925%, for those withOhio taxable income over $204,200.  When combined, these two equal 40.925%.  However, your actual taxable income will probably be lower because of how the tax is calculated.  Your income tax is calculated separately for each tax bracket you pass through on the way to the 35% rate.  As a general rule, landowners should set aside 35% of the income received to account for their tax liability.

How Can I Avoid these Taxes? Making management decisions to minimize taxes is appropriate.  Evading the taxes due is not a wise management decision and is illegal.  There are some expenses landowners may incur as a result of negotiations or production that may be deducted to help reduce the tax burden.  For instance, in many cases, an attorney is hired to assist in negotiations.  Payments associated with lease negotiation made to the attorney can be deducted.  This expense is reported on Form 1099 MISC,Box 14, Gross Proceeds Paid to an Attorney. 

Because the oil & gas payments are reported on Schedule E there are very few ways to “minimize” the taxable portion of the lease and royalty payments.  However, landowners and farmers should look for ways to reduce their taxable income from Schedule C (small business), and Schedule F (farms).  Many strategies are used by businesses to reduce their taxable income through these Schedules (such as prepaid expenses, Section 179 expensing or Special Bonus Depreciation).  Taxpayers should also examine ways to maximize their 1040 deductions through contributions such as retirement plans and charitable giving.  Landowners who have an operating interest in the production of oil and gas (which are very few)  can deduct intangible drilling and development costs, operating expenses, production taxes, and depletion expenses.

Conclusions: For landowners who lease their oil and gas rights there is the potential for significant income.  While a landowner can’t avoid paying taxes on oil and gas income, the landowner can use strategies to manage the taxes.   To do so, a landowner should seek the assistance of a qualified attorney and accountant before, during and after the negotiations to fully understand and utilize all available tax management strategies.

Financial & Tax Implication of Oil & Gas Leases Meetings to be held

by David Marrison & Clif Little, OSU Extension Educators

OSU Extension is pleased to offer Financial & Tax Implication workshops in selected counties during the winter of 2012. These workshops will help landowners understand the financial and tax implications of oil & gas leases/royalties.

These meetings will help participants become more aware of the potential tax implications of leases and royalty payments. Don’t get caught blindsided by the taxes which will be due. Learn which payments are subject to ordinary income taxes versus capital gain; about the percentage depletion deduction; and how signing a lease may affect your CAUV status. Learn how the IRS handles oil & gas payments. Learn what questions to ask and receive financial planning tips for managing the potential income from these wells.

The following meetings have been scheduled:

Thursday, January 19, 2012
Ashtabula County Extension office
9:30 to 11:00 a.m.
This class is already sold out.

Thursday, February 16, 2012
Mid East Career & Technology Center in Buffalo, Ohio (Guernsey County).
6:00 p.m.
For more information: contact Clif Little at 740-489-5300 or 740-732-5681.

Tuesday, February 21, 2012
Trumbull County Extension office
9:30 to 11:00 a.m.
More information can be obtained by calling 440-576-9008 or click here for the Tax Implications of Oil & Gas Meeting Registration Form

Thursday, February 23, 2012
Ashtabula County Extension office
9:30 to 11:00 a.m.
More information can be obtained by calling 440-576-9008 or click here for the Tax Implications of Oil & Gas Meeting Registration Form

Wednesday, March 14, 2012
Geauga County Extension office
6:30 to 8:00 p.m.
More information can be obtained by calling 440-576-9008 or click here for the Tax Implications of Oil & Gas Meeting Registration Form

More classes will be added throught out the year, so contact David Marrison marrison.2@osu.edu  or Chris Bruynis bruynis.1@osu.edu to see if there will be calss scheduled near you.

 

Computerized Farm Recordkeeping Workshops

Wm. Bruce Clevenger, OSU Extension Educator, Defiance County

Pencil and paper is still the way most farmers keep records. As farm size, income or debt increases, many farmers and lenders look for computer programs that allow fast data entry, have internal checks for accuracy and allow summarizing of data. Most farmers begin their search by asking “Is there a simple computer program that will keep my records like the farm account books?”

Ohio State University Extension and other land grant colleges have recognized the computer software Quicken® as a computerized farm recordkeeping system.  Users can record transactions of both the farm and family and categorize them based on farm enterprises income and expenses as well as family living expenses.  Its popularity is due to the ease of data entry and to its low price of $60 to $100. This single-entry system is essentially an electronic checkbook. It allows users to track loans, write checks,   reconcile the checkbook with the bank statement and quickly create reports for the farm business, family, and tax purposes.

OSU Extension is offering a Computerized Farm Recordkeeping Workshop with Quicken® that will focus on setting up accounts, categorizing income and expenses, hands-on data entry, running tax reports, and preparing farm production reports.  Workshop will utilize a computer laboratory with Quicken® software installed to be used by participants during the workshop.

Workshops will be held:

January 30 & February 6 at OSU Extension Van Wert Co. (1:00pm—3:30pm)

January 31 & February 7 at OSU Extension Defiance Co. (6:30pm—9:00pm)

February 3 & February 10 at OSU Extension Hancock Co. (9:30am—12 noon)

Pre-Registration $35.00 per farm business (2 people) is required and includes two-sessions and a workshop training manual.  Please RSVP by January 18th. Space is limited.

For more information on the meeting, contact your OSU Extension office or OSU Extension Defiance County at (800) 745-4771, clevenger.10@osu.edu, or log on to http://defiance.osu.edu

2011 Farm Business Analysis – The time is now!

by: Dianne Shoemaker, Field Specialist, Dairy Production Economics shoemaker.3@osu.edu      

 Grain prices rocked in 2011 (if you were selling!), and milk prices were pretty nice too, but net farm income will vary from outstanding to poor depending on a number of factors.  Were you selling grain or buying feed being one of the major factors.  How did your farm do?  You surely have a general sense…you were either pre-paying to manage income tax liabilities or that wasn’t an issue…but how did it do by the numbers?

Direct costs, total costs, and net returns per acre, per bushel, per ton of crops grown.  Total cost of production per cwt, feed cost per cwt, net farm income per cow.   These are important numbers for every farm as they monitor individual enterprise profitability, develop and monitor risk management plans, and look for opportunities. 

What was the return on assets? Return on equity?  What were the Farm Financial Standards Council “Legal 21” financial measures?  How did your farm do this year compared to last year? How does your farm stack up against all of your competition?  Against all farms your size?  Against the top 20% of both groups? 

Need help answering all of these questions?  Completing your farm’s financial analysis for 2011 using the FINAN with enterprise analysis program is an organized and effective way of getting those answers done each year…with the added benefit of a growing state, regional and national database for benchmarking.

Through grant funding from the National Farm Benchmarking project, we are able to offer a full 2011 FINAN financial analysis, including enterprise analysis to 100+ farms.  Field crop, dairy, livestock, poultry and horticultural crop farms are welcome to participate.  Analyses will be completed by either Extension or Farm Business Consultants who previously worked with the Farm Business Planning and Analysis program. 

Participants in the project will work with their Extension Educator or Farm Business Consultant to complete their farm’s analysis by May 2012.  Maintaining each farm’s confidentiality is critical and farm analyses are coded before submission to the database where data is only shared as group data so individual farms are never identifiable.

In July,Ohio’s farms are invited to participate in a meeting to reviewOhio’s farm business summary and learn how to use their individual farm’s analysis,Ohio’s data and the national database to enhance their farm’s financial and risk management.

We invite and encourage you to participate inOhio’s 2011 Farm Business Summary.  This is a prime opportunity with the benchmarking grant covering the $600 per farm cost of analysis.  Questions?  Contact Dianne Shoemaker at (330) 533-5538 to discuss this opportunity. 

Extension and Financial Analysis Consultants who can help you with this project include:

Dianne Shoemaker MahoningCountyExtension 330-533-5538 shoemaker.3@osu.edu
Ann Gano McCleary Keeping Tabs, Inc 330-339-7511 agano@bright.net
Thomas Weygandt Farm Consulting 330-465-8019 tweyg@embarqmail.com
Don Garrett Ag Data Solutions 937-286-0407 don@agdatasolutions.com
Tom Ackerman Farm & Sm Bus Consulting, LLC 937-382-4760 tackerman32@gmail.com
Eric Barrett WashingtonCountyExtension 740-376-7431 barrett.90@osu.edu
Chris Bruynis RossCountyExtension 740-702-3200 bruynis.1@cfaes.osu.edu
Bruce Clevenger DefianceCountyExtension 419-782-4771 clevenger.10@osu.edu
Jeff McCutcheon MorrowCountyExtension 419-947-1070 mccutcheon.30@osu.edu
Heather Neikirk PortageCountyExtension 330-296-6432 neikirk.2@osu.edu
Jon Rausch UnionCountyExtension 937-644-8117 rausch.7@osu.edu

 

Tree Harvesting on Your Land: Legal Liability Issues and Precautions

By: Peggy Kirk Hall, Director of Agricultural Law, OSU Agricultural and Resource Law Program

Imagine that you have a number of dead and downed trees on your property and someone asks for permission to harvest the trees.  Typically, that person seeks an exchange:  removal of the trees at no cost in exchange for rights to the wood.  If you grant permission and the person suffers an injury while removing the trees, will you be liable for that person’s medical bills and other costs?   Are there any actions you could take to protect yourself from the potential of liability?  These are important questions a landowner should address before allowing someone to harvest dead and downed trees.  Click here to read the firewood liability factsheet.

AEDE New Faculty: Sathya Gopalakrishnan

The Department of Agricultural, Environmental and Development Economics (AEDE) at The Ohio State University, is welcoming several new faculty during the 2011-2012 academic year.  This month we highlight Professor Gopalakrishnan, who teaches several key environmental and resource economics courses in the department.  Here’s Sathya’s short biography and statement of interests:

I am an Assistant Professor in the Department of Agricultural, Environmental and Development Economics at The Ohio State University. I obtained a PhD in Environmental and Resource Economics from Duke University in 2010. I also have a Master of Science degree in Agricultural Economics from Michigan State University and a Master of Arts in Economics from the University of Hyderabad, India. I am originally from Chennai (Madras), India.

An interest in exploring the ubiquitous interdependencies between economic agents with conflicting interests and dynamic natural resources motivates my research. I study feedbacks between physical processes and economic decisions, and the policy implications of these interconnected dynamic systems. I have a specific interest in coupled models of complex coastal (physical) and economic systems, non-market valuation of environmental amenities and bioeconomic modeling. When I am not working, I enjoy classical Indian Music and nurture my interest vegetarian cooking.

Welcome Sathya!

Departmental Website: http://aede.osu.edu/about-us/our-people/sathya-gopalakrishnan    

Publications in GoogleScholar: http://scholar.google.com/scholar?hl=en&q=Sathya+Gopalakrishnan&btnG=Search&as_allsubj=some&as_subj=bus&as_sdt=1%2C36&as_ylo=&as_vis=0

Ohio Farm Custom Rate Survey 2012

Barry Ward, Leader, Production Business Management, OSU Extension

Custom farming providers and customers often arrive at an agreeable custom farming machinery rate by utilizing Extension surveys results. Ohio State University Extension collects surveys and publishes survey results from the Ohio Farm Custom Survey every other year. This year we are updating our published custom farm rates for Ohio.

 We need your assistance in securing up-to-date information about farm custom work rates, machinery and building rental rates and hired labor costs in Ohio. 

Please download the Ohio Farm Custom Rates 2012 survey and respond even if you know only a few rates.  We want information on actual rates, either what you paid to hire work or what you charged if you perform custom work. Custom Rates should include all ownership costs of implement & tractor (if needed), operator labor, fuel and lube. If fuel is not included in your custom rate charge there is a place on the survey to indicate this.

The survey is available for download as a Word document at:

http://aede.osu.edu/sites/drupal-aede.web/files/Custom%20Rate%20Survey%20Instrument%202012%20Survey.doc

 Or you may access the survey at:

 http://aede.osu.edu/programs-and-research/osu-farm-management/publications

Surveys can be completed and returned via email, mail or fax.

 email   ward.8@osu.edu

Fax     (614) 292-4749

 Address:   Attn: Barry Ward, The Ohio State University, Department of AEDE, Agricultural Administration Building, 2120 Fyffe Road, Columbus, Ohio 43210-1067

Ag Lease 101 – New Website Housing North Central Lease Bulletins and Sample Leases

Barry Ward, Leader, Production Business Management

More than half the cropland in the North Central Region of the United States is rented. Rental rate and leasing information is highly sought by both land owners and land operators.

AgLease101.org includes multi-state materials which help land owners and land operators discuss and resolve issues to avoid legal risk. The website also guides both land owners and land operators towards informed and equitable decisions.

AgLease101 was created by a team of economists and attorneys as a part of the North Central Farm Management Extension Committee. AgLease101 is online at: http://www.aglease101.org/

The “Document Library” within AgLease101 contains the newly revised bulletins and sample leases in pdf format for free download and use. The sample lease forms are all in a fillable pdf format to allow users to input their own lease values and other specifics.

Revised Lease Bulletins include:

Fixed and Flexible Cash Rental Arrangements For Your Farm (NCFMEC-01)

Crop Share Rental Arrangements For Your Farm (NCFMEC-02)

Pasture Rental Arrangements For Your Farm (NCFMEC-03)

Newly revised sample leases include:

Fixed and Flexible Cash Rental Arrangements For Your Farm (NCFMEC-01A)

Crop Share Rental Arrangements For Your Farm (NCFMEC-02A)

Pasture Rental Arrangements For Your Farm (NCFMEC-03A)

AgLease101 also includes a section of “Frequently Asked Questions” (FAQ) and a section “For Educators” that includes curriculum, teaching materials and web resources that can be used by state and county level Extension educators to conduct producer land rent / leasing workshops.

The North Central Farm Management Extension Committee is comprised of Extension Educators from the North Central Region of the United States. They provide leadership in the development of high quality research based extension programs and publications that anticipate and meet the ever changing business management educational needs of agricultural producers of the North Central States. Their programs and publications capitalize on the expertise of farm management faculty from throughout the region and country.

Ohio Court of Appeals Denies Township Challenge to ODA Anhydrous Regulations

A claim that the Ohio Department of Agriculture’s (ODA) anhydrous ammonia regulations are unreasonable and fail to protect public health and safety has again been rejected by the courts.  A recent decision by Ohio’s Fifth District Court of Appeals concluded that the challenge by Sharon Township’s Board of Trustees in Medina County failed to establish a valid legal claim.

The case raised considerable controversy in Sharon Township, where the owner of South Spring Farms requested ODA approval to install a 12,000 gallon anhydrous ammonia storage tank.   Ohio law grants ODA the authority to adopt rules concerning the handling and storage of anhydrous ammonia and other fertilizers and also prohibits any local regulation of fertilizers.   ODA created anhydrous regulations in the late 1970s; those regulations require ODA approval of the location and design of a stationary ammonia system.

ODA approved South Spring Farms’ application in 2010 and granted a permit for installation of the tanks.  Sharon Township filed a lawsuit against ODA, asking the trial court to grant an injunction prohibiting the ODA from permitting the installation of anhydrous storage tanks “until the ODA established regulations which would reasonably protect the health, safety, and welfare of people and property which can be reasonably foreseen to be exposed to the toxic and deadly effect of an uncontrolled release of this dangerous material, anhydrous ammonia.”

The legal basis for the denial of Sharon Township’s request for an injunction by both the trial and appeals courts concerns the issue of whether there is a “real and substantial controversy” that necessitates injunctive relief by the court, rather than “an opinion advising what the law would be upon a hypothetical state of facts.”  The Court of Appeals could not find any support for Sharon Township’s claim that the ODA regulations are unreasonable or fail to protect public health and safety.  Without such support, the court concluded that there was no controversy it could resolve.  Granting the township’s request for an injunction would thus amount to “judicial legislation,” said the court.

The case is one that raises questions about the relationships between agriculture and its surrounding communities.  Are communities becoming less willing to tolerate agricultural activities, even though Ohio laws are often set up to support and encourage agriculture?

The use of anhydrous ammonia is a routine practice farmers have engaged in for several decades, yet it upset a surprising number of local leaders and residents in this instance.  The large size of the tank may have been a factor, as well as the extent of non-farm residents in the area.  In addition to the possibility of a leak or spill, concerns raised by the community included proximity to many residents, fear of tampering by methamphetamine producers, an earlier chemical spill by the farm and lack of requirements for fencing.  Whether these are real or perceived threats, the fact that they were raised so strongly and taken to the court of appeals gives us cause for concern.

The case is Bd. of Twp. Trustees Sharon Twp. v. Zehringer, 2011-Ohio-6885 (Dec. 28, 2011).