Tax

By: Barry Ward, Wednesday, February 07th, 2024

Barry Ward, Leader, Production Business Management

Large increases in the Current Ag Use Value (CAUV) of farmland throughout Ohio in 2023 has resulted in higher property taxes (some have seen significant increases) for farmland owners in 2024. Forty-one of Ohio’s eighty-eight counties will see property tax increases in 2024 due to higher CAUV. Several factors have led to this increase in ag use valuation.

The Current Agricultural Use Value (CAUV) Program is a differential real estate tax assessment program for owners of farmland. The program allows for the farmland parcels to be taxed according to their use value in agriculture (or their value related to income from agriculture) rather than the market value (defined as the value if the land were sold by a willing seller to a non-related willing buyer). To arrive at this “use value”, a formula is used that includes several variables to capitalize the net income from agricultural products.

Landowners with farmland and woodlands in Ohio are eligible to sign-up for the CAUV program through their county auditor’s office if they meet the requirements.

There are two paths for a parcel to qualify for the Current Agricultural Use Valuation (CAUV) Program. To qualify for CAUV, land must meet one of the following requirements during the three years preceding an application.

•             Ten or more acres must be devoted exclusively to commercial agricultural use; or

•             If under ten acres are devoted exclusively to commercial agricultural use, the farm must produce an average yearly gross income of at least $2,500.

Each of the approximately 3500 different soil types in Ohio is assigned a CAUV value each tax year. The value represents the expected net present value of an acre of land devoted solely to agricultural production for the dominant field crops in Ohio. To determine this value, an average of yields and prices for corn, soybeans, and wheat is used to determine gross income. Non-land costs are then subtracted from gross income for a measure of net income. Finally, this net income is divided by a capitalization rate based upon recent values of farm interest and equity rates.

Large increases in the Current Ag Use Value (CAUV) of farmland in Ohio in 2023 has resulted in higher property taxes (some have seen significant increases) for farmland owners in 2024. Counties are subject to an update in CAUV every 3 years so only a portion (41 of the 88 Ohio counties) have been updated in 2023 that have impacted 2024 property taxes. As counties see updated values only every three years, there is the opportunity for large changes as many farmland owners will see this year.

Several factors have led to much of this increase in ag use valuation. Higher crop market prices and increased crop yields included in the formula have been significant drivers in the higher current ag use values. Price increases have been substantial as compared to the prices used in the 2020 calculations.

Corn price increased 16%, soybean price increased 12% and wheat price increased 7.4%. Yields used to determine values for each soil type increased 7.3% for corn, 5.4% for soybeans and 7.2% for wheat as compared to the yields used for the 2020 calculations. These are substantial increases in both prices and yields in an historical context.

Low interest rates (capitalization rate) have also contributed to the increasing current ag use values as recent higher interest rates aren’t yet fully represented in the formula. The capitalization rate used in the formula in 2023 CAUV calculations was 8.0% as compared to the rate of 7.9% used in 2020, the last time these counties saw an update in CAUV. Recent higher interest rates will increase the capitalization rate (denominator in the CAUV calculation) in future years which will likely help to moderate current ag use values.

For a detailed look at the variables and calculations that are used to determine CAUV for farmland, access the Ohio Department of Taxation online publication “2023 Current Agricultural Use Value of Land Tables Explanation of the Calculation of Values for Tax Year 2023”.

The Ohio Department of Taxation annually publishes this explanation of the CAUV valuation method complete with the measures used to calculate CAUV and examples of the calculations for certain soil units for the present year. This year’s document is titled “2023 Current Agricultural Use Value of Land Tables Explanation of the Calculation of Values for Tax Year 2023” and is available online at:

https://tax.ohio.gov/government/real-state/cauv

 

Posted In: Business and Financial, Crop Issues, Tax
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Ohio capitol lit with red and green lights and a lampost wrapped in garland
By: Peggy Kirk Hall, Thursday, December 21st, 2023

Written by Ellen Essman, J.D., OSU CFAES Government Relations

Just like there won’t be snow flurries on Christmas this year, there was not a flurry of activity at the Statehouse over the last few months. That being said, we will be carefully following several ag-related bills that progressed in committees but have not yet been passed by the full body, as the calendar turns to 2024. Here’s a summary of the bills we’re watching. 

H.B. 162—Agriculture Designations. H.B. 162 was introduced by Representatives Roy Klopfenstein (R-Haviland) and Darrell Kick (R-Loudonville) on May 5, 2023, and was passed by the House in October, and had its first hearing in the Senate Agriculture and Natural Resources Committee on December 5. The bill would designate the following days and weeks to honor Ohio Agriculture:

  • March 21 of each year as “Agriculture day;”
  • The week beginning on the Saturday before the last Saturday of each February through the last Saturday in February as “FFA Week;”
  • October 12 of each year as “Farmer’s Day;” and
  • The week ending with the second Saturday of March as “4-H Week.”

H.B. 347—Farming Equipment Taxes. This bill was introduced by Representative Don Jones (R-Freeport) and referred to the House Ways and Means Committee in early December.  The bill would change the way farmers claim a tax exemption on certain purchases. 

Currently, when an Ohioan engaged in farming, agriculture, horticulture, or floriculture is buying a product for “agricultural use,” they must provide the seller with an exemption certificate. This certificate comes from the Ohio Department of Taxation and relieves the seller of the obligation to collect the sales tax on behalf of the state.  However, the Department of Taxation can later determine that the purchase does not qualify for exemption, and then the farmer would be expected to pay the tax. 

H.B. 347 would slightly alter this current way of doing things when it comes to the purchase of certain vehicles and trailers.  Under the bill, the purchaser could receive an agricultural use exemption for taxes on these vehicles if the purchaser shows the seller copies of the purchaser’s Schedule F—the federal income tax profit of loss from farming form—for three most recent preceding years. Alternatively, a farmer could obtain a certificate from the Department of Taxation verifying that they have filed a Schedule F for three years in lieu of providing the forms directly to the seller.  Notably, the bill states that “no other documentation or explanation shall be required by the vendor or the tax commissioner” to prove that the purchase qualifies for the agricultural use exemption.

The following vehicles and trailers would be included under the bill:

  • Trailers, excluding watercraft trailers;
  • Utility vehicles, (vehicles with a bed, principally for the purpose of transporting material or cargo in connection with construction, agricultural, forestry, grounds maintenance, land and garden, materials handling, or similar activities);
  • All-purpose vehicles, (vehicles designed primarily for cross-country travel on land and water, or on multiple types of terrain, but excluding golf carts);
  • Compact tractors (garden tractors, small utility tractors, and riding mowers).

H.B. 364—Agriculture (seed sharing). House Bill 364 was introduced in the House by representatives Dave Dobos (R-Columbus) and Roy Klopfenstein (R-Haviland) on December 14.  The bill would allow the Ohio Prairie Association to distribute milkweed seeds non-commercially to its members, with the intent of promoting habitats for pollinators like monarch butterflies.

The bill would legally define “non-commercial seed sharing” as the distribution or transfer of ownership of seeds with no compensation or remuneration.  Also included in the definition are a list of situations that are not considered “non-commercial seed sharing,” including when:

  • The seeds are given as compensation of work or services rendered;
  • The seeds are collected outside of Ohio;
  • The seeds are patented, treated, or contain noxious weed species or invasive plants.

H.B. 364 also includes a definition of “seed library,” which it defines as a non-profit, governmental, or cooperative organization or association to which both of the following apply:

  • It is established for the purpose of facilitating the donation, exchange, preservation, and dissemination of seeds among the seed library’s members or the general public.
  • The use, exchange, transfer, or possession of seeds acquired by or from the non-profit governmental, or cooperative organization or association are obtained free of charge.

The bill would further exempt non-commercial seed sharing for the purposes of pollinator conservation, creating and conserving native habitats, and operation of a seed library from labeling, advertising, handling, and sales restrictions under Ohio law.

To further the goal of promoting pollinators and habitats, H.B. 364 would make changes to the requirements for maintaining toll roads, railroads, or electric railways. Current law requires managers of such thoroughfares to destroy a number of noxious weeds along the roadway or in right of ways. The bill would no longer require the destruction of Russian thistle, Canadian thistle, common thistle, wild lettuce, wild mustard, wild parsnip, ragweed, milkweed, or ironweed. 

Ohio statehouse and lawn
By: Peggy Kirk Hall, Friday, December 08th, 2023

Responding to concerns about potential increases in Ohio property taxes, the Senate passed House Bill 187 (HB 187) this week to provide some relief from property tax hikes.  That relief, however, affects only the Ohio homestead exemption.  The Senate removed provisions the House had passed in HB 187 offering relief on other property taxes, including Current Agricultural Use Valuation (CAUV) taxes.  The House and Senate differences mean the CAUV adjustments originally in HB 187 are currently at a standstill.

House Bill 187.  The House passed its version of HB 187 in October.  The House version included provisions that would temporarily adjust CAUV calculations until 2026.  When updating the CAUV value, a county auditor would be required to use an average of the CAUV formula value for the current year along with CAUV values that would have been assigned in each of the preceding two years, since the last update.  This three year averaging would lower the expected increase in the new CAUV value.  But the Senate drafted and passed a substitute of HB 187, and the substitute bill does not contain the CAUV language. The House and Senate must now confer on its differing versions of HB 187 to work out the differences.

Senate Bill 153.  The Senate isn’t completely ignoring the CAUV adjustments—they exist in another bill.  Senate Bill 153 (SB 153), introduced in the Senate back in September, contains the same CAUV language as HB 187.  The Senate Ways and Means Committee held four hearings on SB 153 in September and October.  But the committee has not taken any action on the bill since the last hearing on October 11.

What’s next for CAUV relief?  There are two avenues to enacting the CAUV three year averaging provisions that could bring some relief from CAUV increases.  First is for the Senate to reinsert the provisions in HB 187.  The second is for the Senate to pass SB 153 and send it over to the House for consideration.  From our view, it’s difficult to gauge if the House and Senate are on the same page for completing either route.

Follow HB 187on the legislature’s website at https://www.legislature.ohio.gov/legislation/135/hb187 and track SB 153 at https://www.legislature.ohio.gov/legislation/135/sb153.

Combine in a field.
By: Jeffrey K. Lewis, Esq., Friday, December 01st, 2023

Farmer and Farmland Owner Income Tax Webinar
Barry Ward & Jeff Lewis, OSU Income Tax Schools

Are you a farmer or farmland owner wanting to learn more about the recent tax law issues? If so, join us for this webinar on Friday, December 15th, 2023 from 10am to noon. This webinar is a part of our Farm Office Live Series and serves as our Farm Office Live! Webinar for December. To register for this webinar go to: https://go.osu.edu/register4fol

This webinar will focus on issues related to farmer and farmland owner income tax returns as well as the latest news on CAUV and property taxes in Ohio and the big changes to the Ohio Commercial Activity Tax (CAT). This two-hour program will be presented in a live webinar format via Zoom by OSU Extension Educators Barry Ward, David Marrison and Jeff Lewis along with Purdue faculty member Dr. Michael Langemeier. Individuals who operate farms, own property, or are involved with renting farmland should participate.

Topics to be discussed during this webinar include (subject to change based on tax law change):

  • Economic Outlook 

  • Depreciation Update 

  • Employee vs. Independent Contractor 

  • Corporate Transparency Act/Beneficial Owners Information Reporting

  • 1099-K Changes 

  • Charitable Remainder Trusts 

  • Basis Allocation Land Acquisition – Allocating Basis to Residual Fertility for Future Deductions 

  • Defining Farm Income to Avoid Paying Estimated Tax 

  • Keeping an Eye Forward on Estate/Gift Tax Limitation 

  • Reminder – Keeping an Eye on Tax Cuts and Jobs Act Provisions Sunsetting After 2025 Tax Year

  • Ohio Tax Update (CAUV/Property Tax Update, CAT Changes, Beginning Farmer Tax Credit, Ohio Tax Law Interpretation – Ohio Supreme Court Issues New Ruling)

  • Indiana Tax Update

To register: https://go.osu.edu/register4fol

For more information, contact Barry Ward at ward.8@osu.edu or Jeff Lewis at lewis.1459@osu.edu

Posted In: Tax
Tags: Farm Tax, Ag Tax, Income Tax
Comments: 0
Combine in the field.
By: Jeffrey K. Lewis, Esq., Friday, October 27th, 2023

Agricultural & Natural Resources Income Tax Issues Webinar
Barry Ward, Director, Income Tax Schools at The Ohio State University
Jeff Lewis, Income Tax Schools at The Ohio State University

Tax practitioners, farmers, and farmland owners are encouraged to connect to the Agricultural and Natural Resources Income Tax Issues Webinar (via Zoom) on December 13 from 8:45 a.m. to 3:20 p.m. The event is sponsored by Income Tax Schools at The Ohio State University.

The webinar focuses on issues specific to farm tax returns related to agriculture and natural resources and will highlight timely topics and new regulations.

The program is an intermediate-level course for tax preparers whose clients include farmers and rural landowners. Farmers who prepare and file their own taxes will also benefit from the webinar.

Tentative topics to be covered during the Ag Tax Issues webinar include:

  • Timely Tax Issues Facing Agricultural Producers
    • Employee vs Independent Contractor
    • Cost-Sharing Exclusion
    • Farm Trade or Business
    • Farming S Corporations
    • Timber Taxation
  • Legislative and Regulatory Update
  • Form 1099s Requirements for Farmers and Ranchers
  • Tax Schemes Targeting the Farm 
  • Tax Issues Arriving at the Death of a Farmer
  • Ohio Tax Update

Other chapters included in the workbook not included in the webinar includes: Material Participation Rules for Farmers, Ranchers and Landowners, Livestock Tax Issues, Depreciating and Expensing Farm Assets, Sale and Exchange of Farm Property, Sample Tax Return.

The cost for the one-day school is $180 if registered by November 29th. After November 29th, the registration increases to $230. Additionally, the course has been approved for the following continuing education credits:

•          Accountancy Board of Ohio, CPAs (6 hours)

•          Office of Professional Responsibility, IRS (6 hours)

•          Supreme Court of Ohio, Attorneys (5 hours)

Registration includes the Agricultural Tax Issues Workbook. Early registration (at least two weeks prior to the webinar) guarantees that you’ll receive a workbook prior to the webinar. 

The live webinar will also feature options for interaction and the ability to ask questions about the presented material.

More information on the workshop, including how to register, can be found at: https://farmoffice.osu.edu/tax/2023-ag-tax-issues-webinar

Contact Barry Ward at ward.8@osu.edu or Jeff Lewis at lewis.1459@osu.edu

The word "taxes" laid in grain.
By: Jeffrey K. Lewis, Esq., Friday, October 20th, 2023

Income Tax Schools 2023
OSU Extension Announces Two-Day Tax Schools for Tax Practitioners &
Agricultural & Natural Resources Income Tax Issues Webinar 
Barry Ward & Jeff Lewis, OSU Income Tax Schools

Tax provisions related to new legislation as well as issues related to trusts and estates, retirement, sales of business property, and income for both individuals and businesses are among the topics to be discussed during the upcoming Tax School workshop series offered throughout Ohio in October, November, and December.

The annual series is designed to help tax preparers learn about federal tax law changes and updates for this year as well as learn more about issues they may encounter when filing individual and small business 2023 tax returns.

The tax schools are intermediate-level courses that focus on interpreting tax regulations and changes in tax law to help tax preparers, accountants, financial planners and attorneys advise their clients. The schools offer continuing education credit for certified public accountants, enrolled agents, attorneys, annual filing season preparers and certified financial planners.

Our instructors are what make the difference in our program. Most have been teaching OSU tax schools for over 20 years and make themselves available long after the class to make sure attendees get through the tax filing season.

Attendees also receive a class workbook that alone is an extremely valuable reference as it offers over 600 pages of material including helpful tables and examples that will be valuable to practitioners. Summaries of the chapters in this year’s workbook can be viewed by visiting: 
2023 National Income Tax Workbook Topics

A sample chapter from a past workbook can be found at: 
https://taxworkbook.com/about-the-tax-workbook/

This year, OSU Income Tax Schools will offer both in-person schools and an online virtual school presented over the course of four afternoons.

In-person schools:
October 26-27, Ole Zim’s Wagon Shed, Gibsonburg/Fremont
October 30-31, Presidential Banquet Center, Kettering/Dayton
November 2-3, Old Barn Restaurant & Grill, Lima
November 7-8, Muskingum County Conference and Welcome Center, Zanesville
November 16-17, Hartville Kitchen, Hartville
November 20-21, Ashland University, John C. Meyers Convocation Center, Ashland
November 28-29, Nationwide & Ohio Farm Bureau 4-H Center, Columbus

Virtual On-Line School presented via Zoom:
December 1, 4, 6, & 8, 12:30 – 4:45 p.m.

Register two weeks prior to the school date and receive the two-day tax school early-bird registration fee of $425.  This includes all materials, lunches, and refreshments. The deadline to enroll is 10 business days prior to the date of each school. After the school deadline, the fee increases to $475. 

Additionally, the 2023 Checkpoint Federal Tax Handbook is available to purchase by participants for a discounted fee of $70 each. Registration information and the online registration portal can be found online at: https://go.osu.edu/tax2023

In addition to the tax schools, the program offers a separate, two-hour ethics webinar that will broadcast Monday, December 11th at 1 p.m. The webinar is $25 for school attendees and $50 for non-attendees and is approved by the IRS and the Ohio Accountancy Board for continuing education credit.

A webinar on Ag Tax Issues will be held Wednesday, December 13th from 8:45 a.m. to 3:20 p.m. If you are a tax practitioner that represents farmers or rural landowners or are a farmer or farmland owner that prepares your own taxes, this five-hour webinar is for you. It will focus on key topics and new legislation related specifically to those income tax returns.

Registration, which includes the Ag Tax Issues workbook, is $180 if registered at least two weeks prior to the webinar. After November 29, registration is $230. Register by visiting: https://go.osu.edu/tax2023.

NEW! Introduction to Tax Preparation Course. 
New this year, we are offering an introduction to tax preparation course. Our instructors are highly qualified tax professionals presenting a real-world approach to tax preparation. This course is designed for professionals with 0-5 years of experience and seeks to help build a foundation for which all tax professionals can continue to build off of. To read more about our introductory course and the topics covered visit, https://farmoffice.osu.edu/tax/new-introduction-tax-preparation-course.

The introductory course will be held on November 13th and 14th at the Der Dutchman in Bellville, Ohio. The course has been approved for continuing education credits by the IRS, the Ohio Accountancy Board, and the Ohio Supreme Court. Registration is $425 prior to October 30th. Registration fees increase to $475 beginning November 1st. Registration includes a 300+ page workbook created by our instructors to help you throughout the beginning of your career! 

Contact Barry Ward at 614-688-3959, ward.8@osu.edu or Jeff Lewis at 614-247-1720, lewis.1459@osu.edu for more information.

Posted In: Legal Education, Tax
Tags: tax, Tax Preparation, Tax Professional
Comments: 0
Sunset over farmland.
By: Jeffrey K. Lewis, Esq., Friday, October 06th, 2023

Two separate, but very similar, pieces of legislation are working their way through the Ohio Legislature and could end up affecting your farmland’s current agricultural use value (“CAUV”). House Bill 187 (“HB 187”) and Senate Bill 153 (“SB 153”) both seek to adjust how property values are assessed in Ohio and some of those proposed changes specifically affect CAUV. 

Both proposed bills aim to make temporary adjustments to CAUV for farmland. These changes will impact farmland that undergo reappraisal or triennial updates in 2023, 2024, or 2025. The adjustment does not alter the CAUV formula itself but rather calculates a farm's CAUV at its next reappraisal or update as the average between the CAUV for that year and the CAUV it would have if it were in a county that had reappraisals or updates in the two previous years.

The Ohio Legislature has provided the following example: “[C]onsider a farm located in a county that undergoes a reappraisal in 2023. If the formula were applied for that year, the farm’s CAUV would be $200 per acre. However, if the farm had been reappraised in 2022, its value would have been $190 per acre, and if it had been reappraised in 2021, its value would have been $180 per acre. Under the bill, the farm’s reappraisal value will be $190 per acre (the average of $180, $190, and $200).” 

Again, these proposals for CAUV adjustments are only temporary, and the current valuation rules will be reinstated starting in 2026. For example, if the farm mentioned above undergoes a triennial update in 2026, its value will be determined without averaging, following the currently existing rules. Furthermore, if the 2023 CAUV tables, which prescribe the per-acre value of each soil type, have already been published before the proposed legislation takes effect, the Ohio Department of Taxation must update these tables within 15 days after the bill becomes effective to reflect the changes introduced by the Legislature.

As of the morning of October 5, 2023, HB 187 has gone through committee and is ready to be voted on by the House. The Ohio Senate had its third hearing on SB 153 on October 3, 2023, but has yet to report the bill to the floor for a vote. Some County Auditors have come out in “indirect opposition” to both bills, arguing that the proposed legislation would create a logistical nightmare for tax billing purposes. Lastly, there are some differences between the two pieces of legislation - unrelated to CAUV - that would have to be worked out between the House and Senate before we have a final bill that could take effect. We will continue to monitor the situation and keep you up to date on any changes. 

Posted In: Property, Tax
Tags: Farmland, cauv, tax, property tax
Comments: 0
By: Robert Moore, Thursday, September 14th, 2023

Legal Groundwork

Your residence is one of the few assets that can be sold for a gain without creating tax liability.  The IRS rules allow $250,000/person of gain from the sale of a residence to be excluded from income.  This rule is why most people do not need to worry about capital gains taxes when they sell one residence to buy another.  This exception to capital gains taxes is important when considering business structures for the farming operation and when buying/selling a farm with a residence.

To qualify for the $250,000 residence exemption, the residence being sold must have been owned and used as the primary residence for two of the last five years.  Houses that have not been used as the residence or that were acquired through a like-kind exchange are not eligible.  For married couples, each spouse is eligible for the $250,000 deduction for a total of $500,000.

Consider the following example:

Andy and Betty purchased a house in 2000 for $200,000.  They used the house as their residence until 2023 when they sold it and moved into a retirement community.  The sale price for their house as $500,000.  Assuming they otherwise qualify, there will be no tax on the sale of the house.  The transaction creates a $300,000 gain but Andy and Betty may reduce their income by $300,000 to match the gain.   Therefore, there is effectively no tax on the gain and Andy and Betty will receive the entire $500,000 sale price free of capital gain taxes.

The residence exemption has many implications but for farm families two come to the forefront.  The first involves the sale of a farm that includes the residence.  The $250,000 exemption only applies to the residential “curtilage” – the land immediately surrounding the residence and any closely associates buildings or structures.  Generally, this means that the residence can include a lawn area, garage, storage shed and similar structures.  The exemption does not apply acreage adjacent to the residence that is used to grow crops.

When selling a farm with the residence, the sale price should be allocated between the residence and farmland.  As much of the sale price as can be legitimately justified should be allocated to the residence because this amount, up to $250,000, will not be taxed.  Again, the allocation should be consistent with the true value of the residence.

Consider the following example:

Carl and Diane decide to sell their 80-acre farm for $1,000,000.  The farm includes their residence and 80 acres.  When negotiating with the buyer, they agree to allocate $300,000 of the sale price to the residence and 1 acre and $700,000 to the 79 acres used as farmland.  Provided the residence otherwise qualifies, the $300,000 will not be taxed but the $700,000 will likely have capital gain taxes.

Carl and Diane may be tempted to try to use their entire $500,000 exemption on the sale.  They should only take the entire exemption if they can justify valuing the residence and curtilage at $500,000.  An appraisal may be appropriate if using the maximum exemption.  Also, Carl and Diane cannot include 20 acres of the farmland with the residence to justify using a $500,000 value.  Any part of the 80 acres that is used to plant crops will not be considered part of the curtilage and will not be eligible for the residential exemption.

Another situation where the residential exemption may arise involves establishing land LLCs.  Many farm operations have an LLC or other business entity to hold the farmland and/or farm facilities.  Land LLCs provide many benefits including liability protection and preventing land transfers outside of the family.  The issue that arises with land LLCs is that LLCs do not live in homes so are not eligible for the residence deduction.  That is, only people can receive the residence deduction, not business entities.

A farmer’s residence is often part of a larger parcel that includes farmland and/or farm facilities.  Before transferring the parcel with the residence to an LLC, careful consideration should be made as to the implications to the residence tax exemption.  In some cases, the residence should be surveyed off and remain owned by the original owners.  In other cases, it may not be feasible to survey the residence from the farm and/or it may be very unlikely that the residence is ever sold.  The decision to transfer or not transfer the residence to an LLC should be made on a case-by-case basis.

Consider the following example:

Earl and Fran own 500 acres of farmland.  As part of their farm succession planning, they decide to transfer their land to an LLC.  The 500 acres include their residence and their “home base” – shop, bins and other buildings used in the farming operation.  Their residence sits in the middle of home base and would not be feasible to survey it from the rest of the farm.  Also, Earl and Fran are unlikely to ever sell the residence because their children will be taking over the farm and the residence is likely to stay within the family for at least another generation.

In this situation, Earl and Fran decide to transfer their residence to the LLC.  They will lose the residential exemption but because it is not feasible to survey off and they are unlikely to ever sell the residence, they are willing to forgo the exemption.

Let’s change the scenario a bit to see how the residential exemption can be preserved.  Earl and Fran’s residence is located in the corner of a parcel away from home base.  Before Earl and Fran transfer the land to an LLC, they survey off their residence and one acre.  They keep the residence and one acre in their name and transfer the remaining 499 acres to the LLC.

In this scenario, Earl and Fran have preserved the residential exemption.  If they sell their home in the future, they will be eligible to deduct up to $500,000 of gain.  The extra cost of a survey is worth preserving the exemption.

It should be noted that it is possible to transfer a residence to a single-member LLC and maintain the residential tax exemption.  The IRS considers most single-member LLCs to be the same as the owner.  So, in the above example, the residence could be transferred to an LLC and the residential exemption kept as long as only Earl or Fran is the owner of the LLC – although the exemption may be limited to only a single, $250,000 exemption.

The residential exemption for sales can save considerable taxes when selling a home.  When selling the residence with a farm, as much of the purchase price as reasonable should be allocated to the residence.  If transferring farmland to an LLC, the residence should remain outside of the LLC if possible and/or if the residence is likely to be sold in the future.  Like most tax and legal issues, there are exemptions, exemptions to the exemptions and nuances that must be addressed for each individual situation.  Be sure to consult with a tax and legal professional for guidance on the rules and regulations regarding the sale or transfer of your residence.

 

Posted In: Business and Financial, Tax
Tags: residential exemption
Comments: 0
Post-it notes with insurance coverage questions.
By: Jeffrey K. Lewis, Esq., Friday, August 25th, 2023

With just over a week left until echoes of “Hang on Sloopy” and chants of “O-H” and “I-O” can be heard from Buckeye faithful across the nation, we thought we would provide you with some light reading to hold you over until that long awaited 3:30 kick off. In this edition of our Ag Law Harvest, we focus on three recent Ohio Supreme Court cases that could potentially impact business owners, Northern Ohio landowners, and Ohio taxpayers. 

Assault and Battery: Is it Covered Under an Insurance Policy?
A victim of a stabbing at an Ohio adult care facility is unable to collect judgment from the facility’s insurance company after a recent decision by the Ohio Supreme Court. The victim was living at the facility when another resident stabbed him. The perpetrator was later indicted on criminal charges but found not guilty by reason of insanity. 

The victim then filed a civil lawsuit against the perpetrator and the facility to recover for damages resulting from the stabbing injuries. The victim ultimately dropped his lawsuit against the perpetrator and entered into a settlement agreement with the facility. As part of the settlement agreement, the victim agreed not to pursue the judgment against the facility, and instead, sought to collect his judgment from the facility’s insurance company.   

At the time of the stabbing, the adult care facility had a commercial general liability policy. When the victim sought judgment from the facility’s insurance company, the insurance company refused to provide coverage. The insurance company explained that the insurance policy contained a provision that specifically excluded coverage for any bodily injury resulting from an assault or battery. The specific provision at issue stated: 

 

The victim argued that because the perpetrator was found to be not guilty by reason of insanity in the criminal trial, the exclusion provision was nullified because the perpetrator lacked the subjective intent to commit any assault or battery. 

The Ohio Supreme Court disagreed. The Court explained that the plain language of the exclusion provision of the insurance policy at issue is clear – there is no intent requirement included in the exclusion language. Therefore, the Court held that coverage did not exist for the willful assault on the victim. The Court sympathized with the victim but ultimately could not interpret the insurance policy language to include a subjective intent requirement where none existed. 

This case demonstrates the importance of reading and understanding your business insurance policy. Insurance policies are, at the core, contracts between two parties and the language contained within the policy will usually govern that contractual relationship. What you assume is covered under your policy may not necessarily be the case. Furthermore, not all insurance policies are the same. We have seen Ohio cases where an insurance policy does require the presence of some subjective intent in order for an assault and battery exclusion to apply. Speak with your insurance agent and/or attorney to make sure you understand when and where coverage exists, knowing this can be critical to protecting you, your farm, and/or your business. 

Ohio Supreme Court Approves Northern Ohio Wind Farm. 
Residents of Huron and Erie Counties along with Black Swamp Bird Conservatory (the “Plaintiffs”) recently lost their battle in court to prevent the construction of a new wind farm in Northern Ohio. The Plaintiffs argued that the Ohio Power Siting Board (the “Board”) failed to satisfy Ohio law before granting the new wind farm its certificate of environmental compatibility and public need. Specifically, the Plaintiffs assert that the wind farm could “disrupt the area’s water supply, create excessive noise and ‘shadow flicker’ for residents near the wind farm, and kill bald eagles and migrating birds.” 

The Ohio Supreme Court found otherwise. The Court concluded that the Plaintiffs failed to establish that the Board’s granting of the certificate was unlawful or unreasonable. As approved, the new wind farm will consist of up to 71 turbines and cover 32,000 acres of leased land. To read more about the Ohio Supreme Court’s decision visit: In re Application of Firelands Winds, L.L.C.

Ohio Supreme Court Sets New Precedent on Interpreting Ohio Tax Law.
In Ohio, most retail sales are subject to sales tax unless a certain exemption applies. Ohio law does have a sales tax exemption for equipment used directly in the production of oil and gas. A fracking business recently challenged a decision by Ohio’s Tax Commissioner and Board of Tax Appeals that levied the sales tax on certain equipment purchased by the business. The fracking equipment at issue included: a data van, blenders, sand kings, t-belts, hydration units, and chemical-additive units.

The Tax Commissioner concluded that the fracking equipment was not used directly in the extraction of oil and gas, only indirectly, and therefore, did not qualify for the tax exemption. The Ohio Supreme Court felt differently. 

The Court found that all the equipment, except the data van, is used in unison to expose the oil and gas. Because the equipment is used to expose the oil and gas – a necessary part of fracking – the Court had little difficulty concluding that the equipment is being used directly in the production of oil and gas. 

In addition to the equipment’s direct use in the production of oil and gas, the Court also recognized that the fracking equipment may also have a storage or delivery function/purpose. However, the Court reasoned that a piece of equipment’s function must be viewed through the “primary purpose” lens. For example, the Court held that although the blender equipment in this case performs a holding function, the primary use of the blender is to mix “the critical ingredients in the fracking recipe seconds before the mixture is inserted into the well.” Therefore, the Court found that the blender’s holding function did not disqualify it from Ohio’s sales tax exemption. 

Additionally, in this case, the Court also issued an opinion on how Ohio courts should interpret tax law moving forward. Normally, courts use the ever-important legal principal of stare decisis to help it decide on new cases. Stare decisis is the principal that courts and judges should honor the decisions, rulings, and opinions from prior cases when ruling on new cases. Here, the Court took its opportunity to acknowledge that in the past the Court interpreted tax exemptions against the taxpayer, favoring tax collection. But the Court made clear that from here on out, the Court “will apply the same rules of construction to tax statutes that [it applies] to all other statutes” without a slant toward one side or the other. The Court concluded that its task “is not to make tax policy but to provide a fair reading of what the legislature has enacted: one that is based on the plain language of the [law].” 

To read the Ohio Supreme Court’s decision visit: Stingray Pressure Pumping, L.L.C. v. Harris

Statehouse lawn with row of Ohio flags
By: Peggy Kirk Hall, Thursday, June 22nd, 2023

Despite the arrival of summer and continuing disagreements over the state budget, Ohio legislators have been working on several pieces of legislation relevant to Ohio agriculture.  All of the proposals are at the committee level but may see action before the Senate and House after the budget bill process ends. Here’s a summary of the ag related proposals currently under consideration.

Senate Bill 111 – Urban Agriculture

Senator Paula Hicks-Hudson (D-Toledo) targets barriers for farmers in urban settings in SB 111, which has had three hearings before the Senate Agriculture and Natural Resources Committee. OSU Extension, the Ohio Municipal League, and several farmers have testified in support of the  proposal, which contains three components:

  • Establishes an Urban Farmer Youth Initiative Pilot Program to provide youth between the ages of six and eighteen living in urban areas with programming and support for farming and agriculture.  The bill would appropriate $250,000 over 2024 and 2025 for the pilot, to be administered by OSU Extension and Central State Extension.
  • Exempts temporary greenhouses, such as hoop houses, from the Ohio Building Code, consistent with Ohio law’s treatment of other agricultural buildings and structures. 
  • Codifies the Department of Taxation’s current treatment of separate smaller parcels of agricultural land under the same farming operation, which allows the acreages to be combined to meet the 10 acre eligibility requirement for Current Agricultural Use Valuation.

House Bill 64 – Eminent Domain

A proposal to make Ohio’s eminent domain laws more favorable to landowners remains on hold in the House Civil Justice Committee.  HB 64 is receiving more opposition than support, with dozens of parties testifying against it in its fourth hearing on May 23.  Read more about the proposal in our previous blog post.

House Bill 162 - Agriculture Appreciation Act

Rep. Roy Klopfenstein (R-Haviland) and Rep. Darrell Kick (R-Loudonville) introduced HB 162 on May 1 and the bill received quick and unanimous approval from the House Agriculture Committee on May 16.  The proposal would make several designations under Ohio law already recognized by federal law:

  • March 21 as "Agriculture Day."
  • October 12 as "Farmer's Day."
  • The week beginning on the Saturday before the last Saturday of February as "FFA Week."
  • The week ending with the second Saturday of March as "4-H Week."

House Bill 166 – Temporary Agricultural Workers

A bill addressing municipal income taxes for H2-A agricultural workers has met opposition in the House Ways and Means Committee.  HB 166, sponsored by Rep. Dick Stein (R-Norwalk) would subject foreign agricultural workers’ income to municipal income taxes.  The current municipal tax base in Ohio is based on federal tax laws that exclude foreign agricultural worker pay from Social Security and Medicare taxes since the workers cannot use those programs, and HB 166 would remove that exclusion and add H2-A income to the municipal tax base.  The bill would also require employers to withhold the taxes for the municipality of the workers’ residences. While municipal interests support the bill, Ohio Farm Bureau and other agricultural interests testified against it in its third hearing on June 13. Opponents argue that H2-A workers are not residents because they are “temporary,” that the proposal would have many potential adverse effects on how Ohio handles the H2-A program, and would hamper the ability of agricultural employers to use the H2-A program to hire employees.

House Bill 193 – Biosolid and biodigestion facilities  

Biosolid lagoons and biodigestion facilities would have new legal requirements and be subject to local regulation under a proposal sponsored by Rep. Kevin Miller (R-Newark) and Rep. Brian Lampton (R-Beavercreek).  HB 193 would grant county and township zoning authority over the lagoons and facilities, require a public meeting and county approval prior to seeking a facility permit from the Ohio EPA, require the Ohio EPA to develop rules requiring covers on new biosolid lagoons, and modify feedstock requirements for biodigestion facilities to qualify for Current Agricultural Use Valuation property tax assessment.  HB 193 had its first hearing before the House Agriculture Committee on June 13.

House Bill 197 – Community Solar Development   

A “community solar” proposal that did not make it through the last legislative session is back in a revised form.  HB 197 proposes to define and encourage the development of “community solar facilities,” smaller scale solar facilities that are directly connected to an electric distribution utility’s distribution system and that create electricity only for at least three “subscribers.”  The bill would establish incentives for placing such facilities on distressed sites and Appalachian region sites through a “Community Solar Pilot Program” and a “Solar Development Program.” Rep. James Hoops (R-Napoleon) and Sharon Ray (R-Wadsworth) introduced the bill on June 6, and it received its first hearing before the House Public Utilities Committee on June 21. “The goal of this legislation is to create a small-scale solar program that seeks to be a part of the solution to Ohio’s energy generation and aging infrastructure need,” stated sponsor Hoops.

House Bill 212 – Foreign ownership of property

Ohio joins a movement of states attempting to limit foreign ownership of property with the introduction of HB 212, the Ohio Property Protection Act.  Sponsored by Representatives Angela King (R-Celina) and Roy Klopfenstein (R-Haviland), the proposal would prohibit foreign adversaries and certain businesses from owning real property in Ohio. The bill was introduced in the House on June 13 and has not yet been referred to a committee for review.

 

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