Bank Drafts & Oil and Gas Related Payments

By: Clif Little, Extension Educator, Guernsey & Noble Counties

The provisions of an oil and gas lease and right-of-way grant, outlines payment details and can be a complex element of a lease or grant. Understanding these provisions is integral when considering the financial aspects of an oil and gas lease or right-of-way grant.  In modern oil and gas transactions landowners are often offered a signing bonus in consideration for granting a lease or right-of-way grant.   It is a common practice for companies to offer this payment in the form of a bank draft once the agreement is signed and notarized.  For many landowners who are accustomed to exchanging paper notes or personal checks for things they purchase, a bank draft can be a new financial experience.  Understanding the elements of a bank draft can assist a landowner who may come across one when entering into oil and gas related agreements.

A bank draft in simple terms is a “conditional” form of payment to be honored within a described time period.  The draft itself may appear similar to a personal check.  One key element that typically appears in a bank draft are a list of conditions for payment. The conditions of payment are important for a landowner to review prior to signing any agreement.  A number of companies involved in shale development and the leasing of land utilize bank drafts. A landowner may be informed that this is the standard form of payment. However, it is important to know that the landowner may have the option to control the form of payment. Ultimately, the landowner determines the standards of payment. The wording contained within the bank draft can have serious effects in terms of when a landowner may expect payment. Terminology and conditions written into the bank draft can cause a substantial delay or cancellation of payment, even in cases where landowners have clear title and ownership.

How Bank Drafts Work

A transaction involving a bank draft may occur between a landman (a landman typically refers to an agent who serves to secure mineral rights to a private property through negotiations with a landowner) and a landowner.  A landman may offer a bank draft in exchange for a signed and notarized agreement. The landowner may be instructed to take the draft to the bank.  Some banks are not familiar with the type of bank drafts oil and gas companies use for payment and may not know how to process the draft.

If a landowner should choose to utilize this form of payment, it is important to have the leasing company’s bank contact information. Next, the landowner’s bank or the landowner sends the bank draft to the leasing company’s bank. There is potentially a cost associated with this transaction, either in the form of a bank charge or a priority mail charge. After which, the company’s bank confirms and notifies the sending party that the bank draft has been received. Bank drafts typically contain language which details time parameters for paying the landowner. The conditions may stipulate a specific length of time a company has before they must honor the draft.  After the party which sent the draft is notified that it has been received, the time limit included in the draft for payment to the landowner begins.

During this time period the landman or company often records a memorandum of the lease or grant, creating a cloud on the landowner’s title that the landowner must have removed from the title if payment is not received in due time.

What are the Conditions of the Bank Draft?

Although each respective company has their own preferences and conditions in terms of bank drafts, there are a number of key features that a landowner should be aware of. The following are key terms and conditions that surface within a typical bank draft presented to a landowner:

Payment within a specified period of time.  There is not a standard for this time period; it can range from 15 days to 180 days or more.  Landowners should keep in mind that these are not calendar days but are typically business days.  Weekend and holidays do not usually count in this time period.  There are a number of reasons for this payment within a specified period of time. A company may find it desirable to include this stipulation to delay payment in order to check title thoroughly, investigate production potential of the area being leased, secure more areas of interest, secure a purchaser of the lease, or grant, etc.  A landowner has the right to negotiate this period of time included in a bank draft before signing.

Payable on approval and/or approval of title.  This term can be vague and confusing. What exactly does payment on approval mean? Landowners should request a clear explanation of what constitutes clear title and what does not. This should be put clearly in writing in the bank draft and the lease or grant. Likewise, define what constitutes company non-approval of payment and secure it in writing.

Nether party shall be liable for payment.  This is the most significant feature of a bank draft.  Can a company back out of the deal if they are short on funds? What if the company could not tie-up enough acreage in your area?  It may be that neither the landowner nor the company is bound to honor the lease.  Prior to signing, it is advisable to consult an attorney in considering the “no liability” aspect of a bank draft.

Alternatives to the Bank Draft

It is possible to work with companies and have them conduct thorough research, prior to signing an agreement and exchange the lease or grant for an unconditional, nonrefundable, certified check. Another method is to keep the signed notarized original lease or grant in your attorney’s office and exchange it for payment after the company has had time to research the title. It also may be possible for your bank to hold the lease or grant in escrow and then exchange it for payment.

Summary

The conditions of payment described in bank drafts are a critical component of an oil and gas lease and right-of-way grant for landowners and their attorneys to consider.   Have your attorney look at the entire document including the payment terms and bank draft prior to signing.   If you choose to accept a bank draft, define what is considered clear title, limit the “no liability” clause and keep the days to payment as short as can be negotiated.  In addition, it is advisable that the lease or grant memorandum not be officially recorded on your property until you have been paid in full.

 

Tax Treatment of Income from Drought Related Livestock Sales

By: Chris Bruynis, Assistant Professor & Extension Educator

Producers that were forced to sell all or part of their livestock herd as a result of this past summer’s drought, and the resulting shortage of feed, have some options to defer the income from their 2012 tax return to future tax returns. There are two different tax treatments available to defer recognition of the weather-related sales of livestock income that is in excess of the producer’s normal business practice. The first option, called an involuntary conversion, applies to draft, breeding, or dairy animals that will be replaced within a 2-year period. The second option, a 1 year deferral of income, applies to all livestock and allows a 1-year postponement of reporting the sales proceeds as taxable income.

Involuntary conversion rules state that the breeding, dairy, or draft animals need to be replaced within two years. This delay of gain recognition can be postponed up to four years if there is a persistent drought. One of the requirements of this election is that the replacement animals are of the same type as the relinquished animals.  When the animals are replaced the taxpayer’s basis in the new livestock is equal to the basis in the livestock sold plus any amount above the proceeds received from the sale of the livestock sold.  If there is a persistent weather condition lasting 3 years or longer that makes it infeasible to replace the livestock with similar livestock, the taxpayer can elect to replace livestock with any property, including real property, used in the farming business. This election does not require the producer to reside in a declared disaster area.

The 1 year deferral of income allows a producer that is in a federally declared disaster area to defer the income until the following tax year.  If the taxpayer decides to use this election, only income from excess sales of livestock, defined as sales above normal or usual sales, can be deferred.   To use the 1 year deferral election the taxpayer must meet four conditions. They are:

  1. Their principle business must be farming
  2. They must be using the cash method of accounting
  3. They must document that the sale would not have normally occurred in the current tax year, and
  4. The weather related disaster caused the sale of the livestock.

In addition to deferring gain from the sale of livestock due to weather related disasters, farmers have other tax management tools such as prepaid expenses, deferred payment sales, income averaging, and net operating loss rules to minimize the impact of the income fluctuations.  Please consult your tax professional to see if deferred recognition of gain or one or more of the other tax tools listed makes sense for your income tax return.

2012 Agricultural Tax Issues Workshops to be held across Ohio on December 17, 2012

by: David Marrison, OSU Extension Educator

Tax practitioners with an interest in farm income taxes will have an opportunity to attend a one day farm tax workshop scheduled for Monday, December 17, 2012 from 8:30 a.m. to 3:00 p.m. in ten locations across Ohio. This workshop will be taught by Dr. Phil Harris, Professor of Agricultural Economics, University of Wisconsin via tele-conference.

This program has been designed for tax practitioners who have a significant number of farm clients and therefore need a substantial amount of information on agricultural tax issues. Participants will hear an audiotape of a live lecture given by Phil Harris, supplemented with a showing of the slide presentation Dr. Harris used during his lecture. Dr. Harris will be available for questions during two conference calls during the day, and OSU faculty will be in the meeting rooms to answer questions. Registrants will receive a valuable 203 page supplemental book.

The summer drought caused havoc across Ohio for crop producers. This year’s tax school will examine how to handle crop insurance and disaster payments as well as the special provisions to delay income from weather related sales of livestock. Some of the additional topics which will be included in discussion are: Repairs versus capital improvements; Improvements by a tenant; Sale of sand and gravel; Depletion; Information reporting issues; and Income in respect of a decedent.

The Agricultural Tax Issues program has been accepted for continuing education credits by the Accountancy Board of Ohio, and the IRS Office of Professional Responsibility. The locations for the 2012 Agricultural Issues Workshops are: Caldwell, Chillicothe, Columbus, Greenville, Jefferson, Ottawa, Upper Sandusky, Urbana, Wapakoneta, and Wooster, Ohio. The cost for this program is $125 per person and includes continuing education credits, lunch, refreshments and the agricultural tax manual.

Complete workshop information and on-line registration are available at the OSU Income Tax Schools’ website located at: http://incometaxschools.osu.edu or can be obtained by contacting David Marrison at (440) 576-9008 or marrison.2@osu.edu. The Agricultural Tax Issues Workshop is sponsored by OSU Extension.

Click here for the Ag Issues Brochure

Get Ready to Pay More–Tax Reductions Set to Expire in 2013!

by David L. Marrison, Associate Professor

One change that all taxpayers should be aware of is on January 1, 2013 the tax rates will be increasing for all Americans. What? Didn’t our candidates say they would not be raising taxes? Actually, Congress did not vote to increase your taxes, but rather are allowing the Bush-era tax reductions enacted in 2001 to expire. Thus higher rates will return in 2013.

When you file your federal income tax return before April 15, 2013, you’re filing your taxes using the 2012 income tax brackets so these changes will not be felt then. Instead you will notice them on your first paycheck or monies you earn in 2013. In 2013, the tax brackets will increase to 15, 28, 31, 36 and 39.6 percent from the present levels of 10, 15, 25, 28, 33 and 35 percent. As you can tell this increase will affect the top four marginal brackets and eliminate the 10% bracket, resulting in higher taxes for nearly everybody unless there’s a political solution.

Employers will also have to deal with changes in the payroll tax as well in 2013. A cut in the payroll tax that funds the Social Security pension program was extended earlier in 2012. The current 4.2 percent rate paid, down from the previous 6.2 percent rate, expires on December 31. And it seems highly unlikely that Congress will extend this payroll reduction. This cut had boosted the take-home pay of the average worker in 2012 by about $85 per month, or $1,000 per year.

The capital gains rates will also be changing in 2013. In 2012, there was not a tax on long-term capital gains earned by those in the two lowest rate brackets of 10 percent and 15 percent. Beginning on January 1, 2013, taxpayers in the lowest two brackets will pay 10 percent on long-term gains. For filers in the four higher tax brackets (25%, 28%, 33% and 35%), the long term capital gains rate will revert back to 20% in 2013 from its current level of 15%.A new 3.8% medicare surtax will also take effect in January. This tax will apply to investment income for taxpayers with adjusted gross incomes of either $200,000 or more (if single) or $250,000 or more (if married).

My biggest concern going into 2013, is not the new tax rates, payroll tax or capital gain rates, it is the Federal Estate Tax. If nothing is changed on January 1, 2013 the estate tax exemption is due to drop from $5.12 million to $1 million and the estate tax rate will jump from 35% to 55%. This could affect hundreds of farms, small businesses and recipients of oil & gas lease payments. It is not hard for many of our farms to be valued at over $1 million dollars. Can you afford to pay a 55% estate tax on the value above $1 million when a family member passes away? This could be a nail in the coffin for many small farms trying to transition their farm to the next generation.

Of course with any tax legislation, it is very likely that all of the fore-mentioned changes could be averted by Congress in 2013 which will leave individuals and businesses scrambling to keep up with the changes. Hang on tight as 2013 will be a bumpy tax year!

Farmland Value and Rent Outlook 2013

Barry Ward, Leader, Production Business Management, OSU Extension, Department of Agricultural, Environmental and Development Economics

Cropland values in Ohio have increased again in 2012. Data from the Oho Ag Statistics Service shows an increase of 13.6% for bare cropland in Ohio for 2012. According to their data, bare cropland averages $5000/acre, up from $4400/acre the previous year.

An OSU Extension survey conducted in December 2011 estimated that the increase in value of Western Ohio cropland in 2012 would be 7.5-9.1% depending on region and land class. The Chicago Federal Reserve Bank and Purdue University both conducted surveys in June 2012 and found that cropland values in Indiana had appreciated 10-18.1% from one year ago.

Crop profitability prospects were positive in 2011 as they have been for the most part since 2007. Profit margins in 2012 were highly variable across Ohio due to moderate to severe drought. Crop insurance proceeds will alleviate much of the yield shortfall and financial stress associated with the 2012 drought. This period has seen some of the most profitable years in the last 50 years of crop production. These profit streams and healthier balance sheets have led many farmers to seek an investment option for these profits and many have chosen to invest in land. Investors outside of agriculture have also been strongly considering and looking to farmland as an investment alternative.

With many dollars and buyers chasing farmland, it isn’t a surprise to see land values increase again substantially in 2012. Crop profitability along with low interest rates have been the primary drivers in this unprecedented run-up in cropland values. The relative scarcity of farmland has also been a driver in cropland values.

So all of this begs the question, “Where are land prices headed in 2013?” The projected numbers for 2013 point towards higher cropland values for 2013. Projected budgets for Ohio’s primary crops for 2013 show the potential for strong profits. The Federal Reserve has indicated that it plans to maintain current low interest rates through mid-2015.

Returns to Land (Gross Revenue minus all costs except land cost) are projected to be $309-$627/acre for Ohio Corn in 2013 depending on the land production capabilities. Budget projections for 2013 soybeans show “returns to land” to be $179-$396. Wheat budget projections for 2013 find “returns to land” to be between $135 and $312 per acre. This is assuming current prices of inputs and present December, November and September 2013 futures prices, respectively. These projections are based on OSU Extension Ohio Crop Enterprise Budgets available online at: http://aede.osu.edu/programs-and-research/osu-farm-management/budgets

With strong balance sheets in spite of the drought many farmers will continue to be in the land buying mode.

The Income Method of Capitalization, an appraiser’s method of valuing assets, yields high land valuations based on 2013 projections for returns to land and interest rates. For example, using a $287.50/acre “return to land” (the midpoint of the projected soybean “return to land” for 2013) and a 4% capitalization rate, farmland would be appraised (valued) at $7187.50/acre. This is only an example and is not meant to reflect the land value for your area. Lower “returns to land and/or higher interest rates would yield lower “appraised” land values using this approach.

There should be a note of caution in deriving budgets and using the Income Method of Capitalization for valuing cropland for 2013 and beyond. Assumptions used to formulate these budgets and appraisals may change. Crop prices could fall and input costs may increase. Interest rates, currently at very low levels, may increase.

The latest OSU Extension Survey of Cropland Values and Cash Rents found that cash rents were predicted to increase 5.7 to 11.5% in 2012. Cash rental rates will see continued upward pressure as higher commodity crop prices and good prospects for profit in 2013 drive competition in local markets. Producers that want to continue to operate their existing rented land base will have to pay at or near the market rate for their area. See the “Western Ohio Cropland Values and Cash Rents 2011-12” Factsheet online at: http://aede.osu.edu/programs-and-research/osu-farm-management/publications to see data on yields and cash rents for various land classes.

To manage risk of volatile crop and input markets, producers and landowner should also strongly consider flexible cash leases.

Producers and landowners should also understand and attempt to quantify in some way the non-cash benefits provided by the producer to the landowner and vice-versa.

Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other Land Grant research, futures markets and retail sector surveys. While gauged to the best of this author’s capabilities, forward looking statements contained in this document may prove to be incorrect due to changes in supply and demand and other political and economic related events.

Some of the Major Changes in U.S. Agriculture and the Forces Influencing the Agricultural Economy in the Past Half Century

By: Luther Tweeten, Emeritus Chaired Professor, Department of Agricultural, Environmental, and Development Economics, Ohio State University

The era of falling real price of food is over.

Two “megatrends” are underway, one on the food supply side and another on the food demand side.

  • First look at food supply. I measure excess production capacity in U.S. agriculture as the surplus of production over market utilization at politically acceptable prices–calculated by adding up production removed by government acreage diversion, net stock accumulation, and the portion of exports due to government subsidies. U.S. excess production capacity totaled 6 percent in 1962 and averaged near that proportion throughout the 1960s (Tweeten 1989). In sharp contrast, excess production capacity in U.S. agriculture today is near zero. As argued later, the rest of the world also has little excess production capacity. World agricultural resources will be challenged indeed to provide food, fiber, and bioenergy in future years without major price increases!
  • The 2012 drought is transitory, but, if the preponderance of today’s climatologists are correct in their judgments, global warming is secularly underway with attendant unusual weather events such as storms and drought.
  • Of greater concern is the falling percentage rate of increase in agricultural yield and productivity. Yields of cereals such as corn, wheat, and rice that supply two thirds of our calories increased at a trend rate of 3.2%/yr. in 1962 but by only a 1.2%/yr.trend rate in 2012 (See Tweeten and Thompson, 2009)! Overall world crop and livestock productivity per hectare for crops and per animal unit for livestock increased at a trend rate of 2%/yr. in 1962 and 1%/yr. in 2012!
  • Arezki et al. (2012) claim in an IMF publication that there are 1 billion acres of world land that are not now but potentially could be cropland, most of it in Africa (496 million acres) and South America (304 million acres). But those acres will not go into gainful crops without substantial investment in roads, irrigation, fertilizers, drainage, property rights, law and order, etc. Those investments will not be forthcoming in the absence of higher crop prices. Meanwhile, about as much cropland will be lost to urban development, soil degradation, depleted water tables for irrigation, biofuel crops, etc. as is likely to be added each year.
  • Now look at the demand side. Given the above supply trend, another megatrend of great importance is declining global birth and population growth rates in the past half century—a trend expected to continue and relieving some pressures on the faltering global supply of food.
  • Food demand grows mainly from population and income growth. World population growth increased at the trend rate of 1.9%/yr. in 1962 and by only 1.1%/yr. in 2012. Total food demand growth, a trend rate of 2.1%/yr. in 1962, gradually fell to a trend rate of 1.3%/yr. in 2012.
  • In short, unless there is an unexpected increase in global cropland, future food demand is likely to grow faster than food supply—a considerable turnaround from 1962 when food supply growth sharply outstripped demand growth. Real prices of farm food ingredients projected to rise on average by1%/yr. in future decades contrast considerably with real farm prices decreasing 1%/yr. on average in the 1960s.In conclusion, the above is no counsel of Malthusian despair—American consumers will hardly notice the trend reversal, but living standards will be retarded especially in poor countries.

Another major change is in the national economic environment in the past half century.

  • U.S. farmers operated in a supportive national economy in 1962. Unemployment was only 5.5% in 1962, a considerable contrast with 8.2% in 2012. The nation’s inflation rate was 1.1% in 1962 and 2.0% in 2012.
  • In 1962 federal debt was $303 billion ($248 billion of that owed to the public rather than to government agencies). Federal debt was $16.35 trillion by 2012, $11.58 trillion of it owed to the public. Federal debt as a proportion of GDP was 53% (44% for publically held debt only) in 1962, proportions that had increased to 105% and 74% respectively in 2012.
  • The federal government deficit of $7.1 billion in 1962 had ballooned to $1.3 trillion in 2012. The former constituted a 2.3% annual growth rate, well below the 7.5 % growth in national income (GDP). Hence federal debt was a declining share of national income so that servicing that debt constituted less and less burden over time. In 2012, federal debt grew at a rate of 8.0%, well above the 2%/yr. rate of GDP growth. Thus, current fiscal policy is unsustainable—if debt continues to be accumulated at the current rate, interest on the federal debt will in time consume the entire national income. The economic dead end is much sooner if account is taken of contingent liabilities to future recipients of Social Security, Medicaid, and Medicare.
  • Congress and President seem hell-bent on a fiscal course whose end game is best illustrated today by the “Greek tragedy” playing out in Europe. The proximate cause of the present political course is “Washington” but the root cause is Americans who demand a high level of government services they are unwilling to pay for. “Borrow and spend” policies rule.
  • I have often said that the greatest economic problem facing U.S. farmers is risk and uncertainty. Continuation along the nation’s current fiscal path adds to the risks. As national debt rises to multiples of national income, interest rates rise to attract and hold government bond buyers, giving rise to a cost-price squeeze on indebted farmers and other debtors. A country with critically burdensome debt is likely to print money (quantitative easing) to finance government. Consequent inflation brings real wealth losses to current holders of financial securities and raises interest rates as investors withhold investment for fear of falling bond values. High interest rates compensate for inflation.
  • The federal government eventually will be forced by circumstances to cut spending (including on farm commodity supports?), raise interest rates, end the biofuel mandate, and otherwise enact policies that will adversely impact American agriculture.
  • The farming industry has shown some restraint in bidding for farmland and otherwise responding to the prosperity of recent years. (Livestock and poultry producers are a notable exception to the prosperity.) Farmer’s debt-asset ratio was 14 percent in 1962 and 11 percent on 2011 (latest available data). The return on equity in farming was 5.74 percent in 1962 and 6.75 percent in 2011. Whether the strong current financial situation for farmers can be maintained depends heavily on two conditions. One is for Washington to bring runaway, unsustainable fiscal policy under control without massive collateral damage to the economy. A second condition is that investors in farmland (in majority, farmers) show restraint in bidding for land.  While the longer term outlook for the farming economy is bright, current low interest rates and high commodity prices are transitory. As farmers bid (and most farmland buyers are farm operators) high current land earnings into land values, they collectively risk creating  a bubble very likely to burst with attendant trauma to farm and  nonfarm investors in farmland.
  • Farmers currently receive 80-90 percent (large farms much less) of their household income from off-farm sources. High unemployment attending nationwide fiscal austerity constitutes another future burden and uncertainty facing farmers.
  • A bright spot in this otherwise bleak fiscal outlook is the stimulus to farm exports induced by a falling value of the dollar in international exchange. Unable to borrow easily in international financial markets, a cheaper dollar will expand American exports to pay for imports. As an industry of strong comparative advantage, U.S. agriculture will benefit through expanding exports.

In conclusion, American agriculture has undergone massive changes in the past half century and on the whole has remained internationally competitive and prosperous. Long-term supply-demand trends favor agriculture. Possible roadblocks include dangers of excessive prices of U.S.farmland and an irresponsible fiscal policy currently headed toward a worldwide financial debacle. American agriculture has much to gain if the current fiscal trajectory is corrected. Properly timing the turnaround in current policy is critical if harsh adjustment pain is to be avoided.

References

Arezki, Rabah, Klaus Deininger, and Harris Selod. ”Global Land Rush.” In Finance and Development, March 2012, p.46.

Council of Economic Advisors. Economic Report of the President. Washington, DC: U.S. Government Printing Office, 2012.

Tweeten, Luther and Stanley Thompson. “Long-term Global Agricultural Supply-demand Balance, and Real Farm and Food Prices.” Farm Policy Journal. 6,1 (February 2009): 1-15.

U.S. Department of Agriculture. Agricultural Outlook. Washington, DC: Economic Research Service, 2012.

Accelerating Economic Recovery

By: Luther Tweeten, Emeritus Chaired Professor, Department of Agricultural, Environmental, and Development Economics, Ohio State University

Conclusion: After elections, Congress and the President will attempt to address the nation’s fiscal problems. Farm commodity program spending will be scrutinized as never before.

At the annual economic symposium sponsored by the Kansas City Federal Reserve Bank and held this summer at Jackson Hole, Wyoming, bankers and economists wrung their hands in frustration over the persistent torpor of the American economy.  Neither monetary nor fiscal policies– traditional means to avoid or ameliorate downturns in the business cycle–have succeeded in lowering the stubborn 8 percent unemployment rate. This brief addresses policies including reforms in fiscal policy institutions to overcome the nation’s economic lethargy. Click here to download the pdf.

Can I Defer my 2012 Crop Insurance Check?

David Marrison, Associate Professor

Ohio and other Midwestern states were hit hard by the 2012 drought. With reported yields as low as 7 bushels to the acre for corn, many farmers will be relying on insurance and disaster payments to make ends meet. Due to the severity of this year’s drought, many farmers will be receiving a sizable insurance check with might put them in a unique tax bind.

Generally, farmers who use the cash accounting method must report income in the year in which they receive it. In 2012, this could create a bunching of income for farmers who would normally sell a portion or all of their crop in the year following harvest. If they receive an insurance or disaster payment for their 2012 crop before the end of the year, this could lead to sizable taxable income because they already have reportable receipts from selling their 2011 crop in 2012.

So what can farmers do? Thankfully, the Internal Revenue Service understands how farmers sell crops and allows for the postponement (for one year) of reporting compensatory payments received for crop loss under IRC section 451(d) and Treasury Regulation section 1.451-6. Generally, this exception applies when crops cannot be planted or are damaged or destroyed by a natural disaster such as a drought or flood. To qualify for the exception, a farmer must use the cash method for accounting and must show that it is his or her normal business practice for crop income to be reported in the year following the year it was grown (ie. sold in the following year).

The election must cover all eligible crops from a single farming business. If a farmer has more than one farming business, he or she must make a separate election for each farming business. The exception does not allow the taxpayer to postpone or accelerate reporting a crop loss payment if the payment is received the year after the year of the crop loss. So if the farmer receives his insurance payment in 2013 for the 2012 affected crops, it cannot be deferred.

To choose to postpone reporting crop insurance proceeds received in the current year, farmers should report the amount received on line 8a of the Schedule F. However this amount is not included as a taxable amount on line 8b. Check the box on line 8c and attach a statement to your tax return. It must include the taxpayer’s name and address and contain the following information:

• A statement that you are making a choice under IRC section 451(d) and Treasury Regulation section 1.451-6
• The specific crop or crops destroyed or damaged
• A statement that under your normal business practice you would have included income from the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged
• The cause of the destruction or damage and the date or dates it occurred
• The total payments you received from insurance carriers, itemized for each specific crop and the date you received each payment
• The name of each insurance carrier from whom you received payments

Potential Snags
Some farmers receive compensation under revenue protection policies purchased from
a crop insurance agency. These payments are based on the price, the quantity, and the quality
of the commodity produced. Only the payment for destruction or damage is eligible for the deferral. Therefore, a farmer who receives compensation from a revenue protection policy must determine the portion of the payment that is due to crop destruction or damage, rather than due to a reduced market price.

Some farmers may also receive payments under group risk protection (GRP) and group risk income protection (GRIP) insurance. These policies pay an insured producer if the county average yield or average revenue falls below the specified level of coverage (typically 70-95%). Because information on average county yields and the average revenues necessary to compute payments for corn and soybeans are generally not available until the year following the year of loss, these insurance payments are not eligible for deferral. As with proceeds from an revenue protection policies, proceeds from a GRP, GRIP, or other risk management policy qualify for the I.R.C. § 451(d) election to postpone the income to the following year only to the extent the proceeds are paid for damage or destruction of a crop. Because there is no direct relationship between an individual producer’s yield and insurance payments under GRP and GRIP, insurance payments from those policies are not eligible for deferral.

Professional Assistance:
Because of some of the potential ambiguities in the I.R.C. § 451(d) election, it is suggested that farmers meet with their tax accountant to see if this election is in the best interest for their operation. Tax practitioners will learn more about this subject at the OSU Income Tax Schools which will be held across Ohio this fall. More information about these schools can be found at: http://incometaxschools.osu.edu

Sources:
2012 Land Grant University Tax Education Foundation Inc. Tax Work Book

Internal Revenue Service. Find article at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Crop-Insurance-and-Crop-Disaster-Payments—Agriculture-Tax-Tips

Ohio State University Extension is hosting a workshop on shale energy development on Nov. 10.

“Shale and You: A Workshop for Landowners and Communities” will be held at the Pritchard Laughlin Civic Center, 7033 Glenn Highway, Cambridge, from 1 p.m. to 6 p.m. Registration is $10 and must be received by Monday, Nov. 5, by the Guernsey County office of OSU Extension in Old Washington, Ohio. Registration forms with the office’s address and other details can be downloaded (PDF) at http://go.osu.edu/shaleandyouPDF or by going to http://shalegas.osu.edu and clicking on the “Shale and You” event under “Upcoming Extension Events.”

“What we hope to do is help landowners and community leaders make the best decisions possible,” Hall said. “We’re not attempting to discuss the pros and cons of such development — that’s something for individuals and policy-makers to consider. As an educational institution, OSU Extension simply aims to provide relevant information to help inform those who are dealing with shale energy development.”

The workshop will include presentations by OSU Extension educators on:
• Update on Ohio Shale Development and Activity, by Chris Penrose, OSU Extension educator in Morgan County.
• Community and Strategic Planning, by Eric Romich, OSU Extension field specialist in energy development.
• Tax Issues for Communities and Landowners, by Dave Marrison, OSU Extension educator in Ashtabula and Trumbull counties.
• What to Do When “Sudden Wealth Happens,” by Polly Loy, OSU Extension educator in Belmont County.
• Leasing Issues for Farms and Rural Land, by Clif Little, OSU Extension educator in Guernsey County, and Peggy Hall, OSU Extension Agricultural Law Program.
• Pumping the Product: Pipeline Easements and Construction, by Mark Landefeld, OSU Extension educator in Monroe County, and Chris Zoller, OSU Extension educator in Tuscarawas County.
• Natural Resource Issues: Where to Find Helpful Resources, by Steve Schumacher, OSU Extension educator in Belmont County, and Mike Lloyd, OSU Extension educator in Noble County.
• A Landowner’s Point of View, featuring Schumacher and a panel of landowners who have dealt with shale development directly.

The program ends with “What If Problems Arise,” featuring a panel of Extension educators and moderated by Dale Arnold of the Ohio Farm Bureau. In addition, tables with information in the lobby of the auditorium will be staffed throughout the afternoon to allow participants to get more information on issues they are specifically concerned about, Hall said. “OSU Extension has been a leader in providing educational programs to landowners and community leaders who are being confronted with what are sometimes very difficult decisions about this issue,” Hall said. “We’ve offered more than a hundred educational sessions on topics such as lease agreements and pipeline easements in the last two years and have reached more than 12,000 people. But this is the first time we’ve pulled together a program with so much of our expertise in one place. I think it will be a valuable program for anyone interested in learning more about these issues.”

By Martha Filipic
Source: Peggy Kirk Hall
614-247-7898
aglaw@osu.edu