Tax
Hello, readers! We hope you are all staying safe and healthy. Understandably, news related to agricultural law seems to have slowed down a little bit over the last few weeks as both the federal and state governments have focused mainly on addressing the unfolding COVID-19 outbreak. That being said, there have been a few notable ag law developments you might be interested in.
Federal government extends the tax deadline. The IRS announced on March 21 that the deadline for filing or paying 2019 federal income taxes will be extended to July 15, 2020.
Ohio Coronavirus Legislation. The Ohio General Assembly quickly passed House Bill 197 on Wednesday March 25, 2020. HB 197 originally just involved changes to tax laws, but amendments were added to address the current situation. Amendments that made it into the final bill include provisions for education—from allowing school districts to use distance learning to make up for instruction time, to waiving state testing. Other important amendments make it easier to receive unemployment, move the state tax filing deadline to July 15, extend absentee voting, allow recently graduated nurses to obtain temporary licenses, etc. Of particular note to those involved in agriculture, HB 197 extends the deadlines to renew licenses issued by state agencies and political subdivisions. If you have a state license that is set to expire, you will have 90 days after the state of emergency is lifted to renew the license. HB 197 is available here. A list of all the amendments related to COVID-19 is available here.
Proposed changes to hunting and fishing permits in Ohio. In non-COVID news, Ohio House Bill 559 was introduced on March 18. HB 559 would allow grandchildren to hunt or fish on their grandparents’ land without obtaining licenses or permits. In addition, the bill would give free hunting and fishing licenses or permits to partially disabled veterans. You can get information on the bill here.
EPA simplifies approach to pesticides and endangered species. Earlier this month, the U.S. EPA released its “revised method” for determining whether pesticides should be registered for use. Under the Endangered Species Act (ESA), federal agencies must consider whether an action (in this case, registration of a pesticide) will negatively impact federally listed endangered species. EPA is authorized to make decisions involving pesticides under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). The revised method consists of a three-step process. First, EPA will consider whether use of the pesticide “may affect” or conversely, have no effect on the listed species. If no effect is found, EPA can register the pesticide. On the other hand, if EPA finds that the pesticide may affect the endangered species, it must examine whether the pesticide is “likely to adversely affect” the species. In this second step, if EPA decides that the pesticide may affect the endangered species, but is not “likely to adversely affect” the species, then the agency may register the pesticide with the blessing of the Fish and Wildlife Service (FWS) or the National Marine Fisheries Service (NMFS). Conversely, if EPA finds that the pesticide is likely to adversely affect the species, it must move on to step three, where it must work with FWS or NMFS to more thoroughly examine whether an adverse effect will “jeopardize” the species’ existence or “destroy or adversely modify its designated critical habitat.” The revised method is meant to simplify, streamline, and add clarity to EPA’s decision-making.
EPA publishes rule on cyazofamid tolerances. Continuing the EPA/pesticide theme, on March 18, EPA released the final rule for tolerances for residues of the fungicide cyazofamid in or on commodities including certain leafy greens, ginseng, and turnips.
Administration backs off RFS In our last edition of the Ag Law Harvest, we mentioned that the Tenth Circuit Court of Appeals had handed a win to biofuels groups by deciding that EPA did not have the authority to grant three waivers to two small refineries in 2017. By granting the waivers, the EPA allowed the refineries to ignore the Renewable Fuel Standard (RFS) and not incorporate biofuels in with their oil-based fuels. The Tenth Circuit decision overturned this action. The Trump administration has long defended EPA’s action, so that’s why it’s so surprising that the administration did not appeal the court’s decision by the March 25 deadline.
Right to Farm statute protects contract hog operation. If you’re a regular reader of the blog, you may recall that many nuisance lawsuits have been filed regarding large hog operations in North Carolina. In Lewis v. Murphy Brown, LLC, plaintiff Paul Lewis, who lives near a farm where some of Murphy Brown’s hogs are raised, sued the company for nuisance and negligence, claiming that the defendant’s hogs made it impossible for him to enjoy the outdoors and caused him to suffer from several health issues. Murphy Brown moved to dismiss the complaint, arguing that the nuisance claim should be disqualified under North Carolina’s Right to Farm Act, and that the negligence claim should be barred by the statute of limitations. The U.S. District Court for the Eastern District of North Carolina made quick work of the negligence claim, agreeing with Murphy Brown that the statute of limitations had passed. North Carolina’s Right to Farm Act requires a plaintiff to show all of the following: that he is the legal possessor of the real property affected by the nuisance, that the real property is located within one-half mile of the source of the activity, and that the action is filed within one year of the establishment of the agricultural operation or within one year of the operation undergoing a fundamental change. Since the operation was established in 1995 and the suit was not brought until 2019, and no fundamental change occurred, the court determined that Lewis’s claim was barred by the Right to Farm Act. Since neither negligence or nuisance was found, the court agreed with Murphy Brown and dismissed the case.
Tags: ag law harvest, taxes, tax, hunting, fishing license, pesticides, endangered species, EPA, renewable fuel standard, RFS
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In Ohio and around the country, farmers are gearing up for a new planting season. Spring is (almost) here! Before we leave winter totally behind, we wanted to keep you up to date on some notable ag law news from the past few months.
Here’s a look at what’s going on in ag law across the country…
New law signed to ramp up ag protections at U.S. ports of entry. Last summer, a bill was introduced in the United States Senate by a bipartisan group of senators. The purpose of the bill was to give more resources to Customs and Border Control (CBP) to inspect food and other agricultural goods coming across the U.S. border. On March 3, 2020, the President signed the bill into law. The new law authorizes CBP to hire and train more agricultural specialists, technicians, and canine teams for inspections at ports of entry. The additional hires are meant to help efforts to prevent foreign animal diseases like African swine fever from entering the United States. You can read the law here.
The Renewable Fuel Standard gets a win. We reported on Renewable Fuel Standard (RFS) issues last fall, and it seems as though the battles between biofuel producers and oil refineries have spilled over into 2020. For a refresher, the RFS program “requires a certain volume of renewable fuel to replace the quantity of petroleum-based transportation fuel” and other fuels. Renewable fuels include biofuels made from crops like corn, soybeans, and sugarcane. In recent years, the demand for biofuels has dropped as the Trump administration waived required volumes for certain oil refiners. As a result, biofuels groups filed a lawsuit, asserting that EPA did not have the power to grant some of the waivers it gave to small oil refiners. On January 24, 2020, the U.S. Court of Appeals for the Tenth Circuit agreed with the biofuels groups. You can find the 99-page opinion here. If you’re not up for that bit of light reading, here’s the SparkNotes version: the court determined that EPA did not have the authority to grant three waivers to two small refineries in 2017. The court found that EPA “exceeded its statutory authority” because it extended exemptions that had never been given in the first place. To put it another way, the court asked how EPA could “extend” a waiver when the waiver had not been given in previous years. The Trump Administration is currently contemplating whether or not to appeal the decision.
Virginia General Assembly defines “milk.” To paraphrase Shakespeare, does “milk by another name taste as sweet?” Joining the company of a number of other states that have defined “milk” and “meat,” the Virginia General Assembly passed a bill on March 4, 2020 that defines milk as “the lacteal secretion, practically free of colostrum, obtained by the complete milking of a healthy hooved mammal.” The bill would make it illegal to label products as “milk” in Virginia unless they met the definition above. Essentially, products like almond milk, oat milk, soy milk, coconut milk, etc. would be misbranded if the labels represent the products as milk. Governor Ralph Northam has not yet signed or vetoed the bill. If he signs the bill, it would not become effective until six months after 11 of 14 southern states enact similar laws. The 11 states would also have to enact their laws before or on October 1, 2029 for Virginia’s law to take effect. The states are: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and West Virginia. North Carolina has already passed a similar law.
And now, for ag law in our neck of the woods.
Purple paint bill reintroduced in Ohio. You may recall that the Ohio General Assembly has been toying with the idea of a purple paint law for the past several years. On March 4, 2020, Senator Bill Coley (R-Liberty Township) once again introduced a purple paint bill. What exactly does “purple paint” mean? If passed, the bill would allow landowners to put purple paint on trees and/or fence posts. The marks would have to be vertical lines at least eight inches long, between three and five feet from the base of the tree or post, readily visible, and placed at intervals of at most 25 yards. If the bill passed, such marks would be sufficient to inform those recklessly trespassing on private property that they are not authorized to be there. People who recklessly trespass on land with purple paint marks would be guilty of a fourth degree criminal misdemeanor. You can read the bill here.
Bill giving tax credits to beginning farmers considered. Senate Bill 159, titled “Grant tax credits to assist beginning farmers” had a hearing in the Senate Ways & Means Committee on March 3, 2020. The bill, introduced last year, seeks to provide tax incentives to beginning farmers who participate in an approved financial management program, as well as to businesses that sell or rent agricultural land, livestock, facilities, or equipment to beginning farmers. A nearly identical bill is being considered in the House, HB 183. Back in February, Governor Mike DeWine indicated he would sign such a bill if it passed the General Assembly. SB 159 is available here, and HB 183 is available here.
Tags: ag law harvest, tax credits, beginning farmers, Food Labeling, milk labeling, purple paint, renewable fuel standard, RFS, African Swine fever
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The year is still fairly new, and 2020 has brought with it some newly-introduced legislation in the Ohio General Assembly. That being said, in 2020 the General Assembly also continues to consider legislation first introduced in 2019. From tax exemptions to CAUV changes, to watershed programs and local referendums on wind turbines, here is some notable ag-related legislation making its way through the state house.
New legislation
- House Bill 400 “To authorize a nonrefundable income tax credit for the retail sale of high-ethanol blend motor fuel”
HB 400 was introduced after our last legislative update in November, so while it was first introduced in 2019, it still technically qualifies as “new” to us. Since its introduction, the bill has been discussed in two hearings in the House Ways & Means Committee. The bill would give owners and operators of gas stations a tax rebate of five cents per gallon for sales of ethanol. To apply, the fuel would have to be between 15% and 85% ethanol (E15). If passed, the tax credit would be available for four years. The bill is meant to encourage gas station owners in Ohio to sell E15, which is much more readily available in other states. The bill is available here.
- House Bill 485 “To remove a requirement that owners of farmland enrolled in the CAUV program must file a renewal application each year in order to remain in the program”
Introduced on January 29, 2020, HB 485 would make it easier for farmers to stay enrolled in the Current Agricultural Use Valuation (CAUV) program. CAUV allows agricultural land to be taxed at a much lower rate than other types of land. If HB 485 were to pass, the initial application for CAUV on land more than 10 acres would automatically renew each year but the landowner must notify the auditor if the land ceases to be devoted exclusively for agricultural use. Owners of agricultural land less than 10 acres in size, who can qualify for CAUV if gross income from the land exceeds $2,500, would have to submit documentation on the annual gross income of the land to the county auditor each year rather than filing the renewal application. The CAUV bill can be found here.
Legislation from 2019 still being considered
- House Bill 24 “Revise Humane Society law”
In November, we reported that HB 24 passed the House unanimously and was subsequently referred to the Senate Committee on Agriculture & Natural Resources. Since that time, the committee has held two hearings on the bill. The hearings included testimony from the bill’s House sponsors, who touted how the bill would improve humane societies’ public accountability. The bill would revise procedures for humane society operations, require humane society agents to successfully complete training in order to serve, and would establish procedures for seizing and impounding animals. It would also remove humane societies’ current jurisdiction over child abuse cases and make agents subject to bribery laws. Importantly, HB 24 would allow law enforcement officers to seize and impound any animal the officer has probable cause to believe is the subject of an animal cruelty offense. Currently, the ability to seize and impound only applies to companion animals such as dogs and cats. You can read HB 24 here.
- House Bill 109 “To authorize a property tax exemption for land used for commercial maple sap extraction”
HB 109 was first introduced in February of 2019, but has recently seen some action in the House Ways & Means Committee, where it was discussed in a hearing on January 28, 2020. The bill would give owners of “maple forest land” a property tax exemption if they: (1) Drill an average of 30 taps during the tax year into at least 15 maple trees per acre; (2) use sap in commercially sold maple products; and (3) manage the land under a plan that complies with the standards of reasonable care in the protection and maintenance of forest land. In addition, the land must be 10 contiguous acres. Maple forest land that does not meet that acreage threshold can still receive a tax exemption if the sap produces an average yearly gross income of $2,500 or more in the three preceding years, or if evidence shows that the gross income during the current tax year will be at least $2,500. You can find the text of the proposed bill here.
- House Bill 160 “Revise alcoholic ice cream law”
Have you ever thought, “Gee, this ice cream is great, but what could make it even better?” Well this is the bill for you! At present, those wishing to sell ice cream containing alcohol in Ohio must obtain an A-5 liquor permit and can only sell the ice cream at the site of manufacture, and that site must be in an election precinct that allows for on- and off-premises consumption of alcohol. This bill would allow the ice cream maker to sell to consumers for off-premises enjoyment and to retailers who are authorized to sell alcohol. HB 160 passed the House last year and is currently in Agriculture & Natural Resources Committee in the Senate. Since our last legislative update, the committee has had three hearings on the bill. In the hearings, proponents testified in support of the bill, arguing that it would allow their businesses to grow and compete with out of state businesses. Senators asked questions about how the ice cream would be kept away from children, how the bill would help business, and about other states with similar laws. To read the bill, click here.
- Senate Bill 2 “Create watershed planning structure”
In 2019, SB 2 passed the Senate and moved on to the House Energy and Natural Resources Committee. If passed, this bill would do four main things. First, it would create the Statewide Watershed Planning and Management Program, which would be tasked with improving and protecting the watersheds in the state, and would be administered by the ODA director. Under this program, the director of ODA would have to categorize watersheds in Ohio and appoint watershed planning and management coordinators in each watershed region. The coordinators would work with soil and water conservation districts to identify water quality impairment, and to gather information on conservation practices. Second, the bill states the General Assembly’s intent to work with agricultural, conservation, and environmental organizations and universities to create a certification program for farmers, where the farmers would use practices meant to minimize negative water quality impacts. Third, SB 2 charges ODA, with help from the Lake Erie Commission and the Ohio Soil and Water Conservation Commission, to start a watershed pilot program that would help farmers, agricultural retailers, and soil and water conservation districts in reducing phosphorus. Finally, the bill would allow regional water and sewer districts to make loans and grants and to enter into cooperative agreements with any person or corporation, and would allow districts to offer discounted rentals or charges to people with low or moderate incomes, as well as to people who qualify for the homestead exemption.
Since SB 2 moved on to the lower chamber, the House Energy and Natural Resources Committee has held multiple hearings on the bill, and has consented to two amendments. The first amendment would keep information about individual nutrient management plans out of the public record. Similarly, the second amendment would keep information about farmers’ agricultural operations and conservation practices out of the public record. The text of SB 2 is available here.
- Senate Bill 234 “Regards regulation of wind farms and wind turbine setbacks”
SB 234 was introduced on November 6, 2019. Since that time, the bill was assigned to the Senate Energy & Public Utilities Committee, and three hearings have been held. The bill would give voters in the unincorporated areas of townships the power to have a referendum vote on certificates or amendments to economically significant and large wind farms issued by the Ohio Power and Siting Board. The voters could approve or reject the certificate for a new wind farm or an amendment to an existing certificate by majority vote. The bill would also change how minimum setback distances for wind farms might be measured. The committee hearings have included testimony from numerous proponents of the bill. SB 234 is available here. A companion bill was also introduced in the House. HB 401 can be found here.
Tags: legislation, Ohio legislation, tax credit, ethanol, cauv, humane society, property tax, water quality
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Written by Barry Ward, Production Business Management Leader and OSU Income Tax Schools Director
Soon after the Tax Cuts and Jobs Act became law in December of 2017 it became evident that cooperatives had been granted a significant advantage under the new tax law. Sales to cooperatives would be allowed a Qualified Business Income Deduction (QBID) of 20% of gross income and not of net income. Sales to businesses other than cooperatives would be eligible only for the QBID of net income which was a significant disadvantage. Suddenly cooperatives had an advantage that non-cooperative businesses couldn’t match and most of the farm sector scrambled to position themselves to take advantage of this tax advantage. Some farmers directed larger portions of their sales or prospective sales toward cooperatives. Non-cooperative businesses lobbied for a change to this piece of the new tax law while looking for ways to add a cooperative model to their own businesses to stay competitive.
Congress passed the Consolidated Appropriations Act of 2018 in March of 2018 which eliminated this advantage to cooperatives and replaced it with a new hybrid QBID for sales to cooperatives which offered more tax neutrality between sales to cooperatives and non-cooperatives. While this new legislation leveled the playing field between cooperatives and non-cooperatives, it left many questions unanswered; chief among them was how taxpayers should allocate expenses between sales to cooperatives and non-cooperatives.
One area that was clarified for calculating the QBID for all businesses including cooperatives was how certain deductions should be handled with respect to the Qualified Business Income Deduction (QBID).
For purposes of the QBID (IRC §199A), deductions such as the deductible portion of the tax on self-employment income under § 164(f), the self-employed health insurance deduction under § 162(l), and the deduction for contributions to qualified retirement plans under § 404 are considered attributable to a trade or business (including farm businesses) to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis.
Under the final regulations, expenses for half the self-employment (SE) tax, self-employed health insurance, and pension contributions must be subtracted from preliminary QBI figure, before any cooperative reductions are made (if applicable).
While final regulations on the new QBID were published on Jan. 18, 2019, there were still many questions left unanswered as to how the deduction would be handled in relation to cooperatives. As the QBID is calculated differently between the income from sales to cooperatives and non-cooperatives, taxpayers and tax practitioners were left with uncertainty.
A simplified explanation of the steps used to calculate the QBID under Internal Revenue Code (IRC) §199A for income attributable to sales to cooperatives is listed here:
Step 1: First, patrons calculate the 20 percent §199A QBID that would apply if they had sold the commodity to a non-cooperative.
Step 2: The patron must then subtract from that initial §199A deduction amount whichever of the following is smaller:
- 9 percent of the QBI allocable to cooperative sale(s) OR
- 50 percent of W2 wages paid allocable to income from sales to cooperatives
Step 3: Add the “Domestic Production Activities Deduction (DPAD)-like” deduction (if any) passed through to them by the cooperative pursuant to IRC §199A(g)(2)(A). The determination of the amount of this new “DPAD-like” deduction will generally range from 0 to 9 percent of the cooperative's qualified production activities income (QPAI) attributable to that patron's sales.
Parts of the new tax law do offer some simplification. Calculating the QBID isn’t necessarily one of those parts.
The result of all of these calculations is that income attributable to sales to cooperatives may result in an effective net QBID that is:
- Possibly greater than 20% if the farmer taxpayer pays no or few W2 wages and coop passes through all or a large portion of the allocable “DPADlike” deduction
- Approximately equal to 20% if the farmer taxpayer pays enough W2 wages to fully limit their coop sales QBID to 11% and the coop passes through all allocable “DPADlike” deduction
- Possibly less than 20% if farmer taxpayer pays enough W2 wages to fully limit their coop sales QBID to 11% and the coop passes through less than the allocable “DPADlike” deduction
On June 18th, the IRS released proposed regulations under IRC §199A on the patron deduction and the IRC §199A calculations for cooperatives. The proposed regulations provide that when a taxpayer receives both qualified payments from cooperatives and other income from non-cooperatives, the taxpayer must allocate deductions using a “reasonable method based on all the facts and circumstances.” Different reasonable methods may be used for the different items and related deductions. The chosen reasonable method, however, must be consistently applied from one tax year to another and must clearly reflect the income and expenses of the business.
So what “reasonable methods” might be accepted by the IRS? The final regulations (when they are provided) may give us further guidance or we may be left to choose some “reasonable” method in allocating expenses between the two types of income. Acceptable methods may include allocating expenses on a prorated basis by bushel/cwt or by gross sales attributable to cooperatives and non-cooperatives. Producers may also consider tracing costs on a per field basis and tracking sales of those bushels/cwt to either a cooperative or non-cooperative.
Included in the proposed regulations released in June was a set of rules for “safe harbor”. A taxpayer with taxable income under the QBID threshold ($157,500 Single Filer / $315,000 Joint Filer) may ratably apportion business expenses based on the amount of payments from sales to cooperative and non-cooperatives as they relate to total gross receipts. In other words, expenses may be allocated between cooperative and non-cooperative income based on the respective proportions of gross sales that fall to cooperatives and non-cooperatives.
Some questions that haven’t been answered clearly is how certain other income should be allocated between income from cooperatives and non-cooperatives. Tax reform now requires farmers to report gain on traded-in farm equipment. In many cases, farm income will be negative and all of the income for the business will be from trading-in farm equipment. The question is how do we allocate this income (IRC §1245 Gain)? Some commentators contend that none of these gains should be allocated to cooperative income which would eliminate the issue, however, the depreciation deduction taken on the equipment was likely allocated to cooperative income, thus reducing the effect of the 9% of AGI patron reduction. This would suggest that these gains may have to be allocated between cooperative and non-cooperative income.
How should government payments be allocated? If a farmer sells all of their commodities to a cooperative and receive a government payment (i.e. ARC or PLC), should that be treated as cooperative income or not. Hopefully, the final regulations will provide some further clarity on these issues.
The information in this article is the opinion of the author and is intended for educational purposes only. You are encouraged to consult professional tax or legal advice in regards to your facts and circumstances regarding the application of the general tax principles cited in this article.
Written by Barry Ward, Leader, Production Business Management & Director, OSU Income Tax Schools
Prevented Planting Crop Insurance Indemnity Payments
With unprecedented amounts of prevented planting insurance claims this year in Ohio and other parts of the Midwest, many producers will be considering different tax management strategies in dealing with this unusual income stream. In a normal year, producers have flexibility in how they generate and report income. In a year such as this when they will have a large amount of income from insurance indemnity payments the flexibility is greatly reduced. In a normal year a producer may sell a part of grain produced in the year of production and store the remainder until the following year to potentially take advantage of higher prices and/or stronger basis. For example, a producer harvests 200,000 bushels of corn in 2019, sells 100,000 bushels this year and the remainder in 2020. As most producers use the cash method of accounting and file taxes as a cash based filer, the production sold in the following year is reported as income in that year and not in the year of production. This allows for flexibility when dealing with the ups and downs of farm revenue.
Generally, crop insurance proceeds should be included in gross income in the year the payments are received, however Internal Revenue Code Section (IRC §) 451(f) provides a special provision that allows insurance proceeds to be deferred if they are received as a result of “destruction or damage to crops.”
As prevented planting insurance proceeds qualify under this definition, they can qualify for a 1 year deferral for inclusion in taxable income. These proceeds can qualify if the producer meets the following criteria:
- Taxpayer uses the cash method of accounting.
- Taxpayer receives the crop insurance proceeds in the same tax year the crops are damaged.
- Taxpayer shows that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred.
The third criteria is the sometimes the problem. Most can meet the criteria, although if producers want reasonable audit protection, they should have records showing the normal practice of deferring sales of grain produced and harvested in year 1 subsequently stored and sold in the following year. To safely “show that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred” the taxpayer should follow IRS Revenue Ruling 75-145 that requires that he or she would have reported more than 50 percent of the income from the damaged or destroyed crops in the year following the loss. A reasonable interpretation in meeting the 50% test is that a farmer may aggregate the historical sales for crops receiving insurance proceeds but tax practitioners differ on the interpretation of how this test may be met.
One big problem with these crop insurance proceeds is that a producer can’t divide it between years. It is either claimed in the year the damage occurred and the crop insurance proceeds were received or it is all deferred until the following year. The election to defer recognition of crop insurance proceeds that qualify is an all or nothing election for each trade or business IRS Revenue Ruling 74-145, 1971-1.
Tax planning options for producers depend a great deal on past income and future income prospects. Producers that have lower taxable income in the last 3 years (or tax brackets that weren’t completely filled) may want to consider claiming the prevented planting insurance proceeds this year and using Income Averaging to spread some of this year’s income into the prior 3 years. Producers that have had high income in the past 3 years and will experience high net income in 2019 may consider deferring these insurance proceeds to 2020 if they feel that this year may have lower farm net income.
Market Facilitation Payments
When the next round(s) of Market Facilitation Payments (MFPs) are issued, they will be treated the same as the previous rounds for income tax purposes. These payments must be taken as taxable income in the year they are received. As these payments are intended to replace income due to low prices stemming from trade disputes, these payments should be included in gross income in the year received. As these payments constitute earnings from the farmers’ trade or business they are subject to federal income tax and self-employment tax. Producers will almost certainly not have the option to defer these taxes until next year. Some producers waited until early 2019 to report production from 2018 and therefore will report this income from the first round of Market Facilitation Payments as taxable income in 2019.
Producers will likely not have the option of delaying their reporting and subsequent MFP payments due to the fact they are contingent upon planted acreage reporting of eligible crops and not yield reporting as the first round of MFP payments were.
Cost Share Payments
Increased prevented planting acres this year have many producers considering cover crops to better manage weeds and erosion and possibly qualify for a reduced MFP. There is also the possibility that producers will be eligible for cost-share payments via the Natural Resources Conservation Service for planting cover crops. Producers should be aware that these cost-share payments will be included on Form 1099-G that they will receive and the cost-share payments will need to be included as income.
You are advised to consult a tax professional for clarification of these issues as they relate to your circumstances.
This article is being reposted with the author's permission from the Ohio Ag Manager blog.
Tags: agricultural tax law, farm tax law, Tax Planning, prevented planting, market facilitation, cost-share
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The decision on whether to take prevented planting is a tough one, but don’t let concerns about increased property taxes on idle land enter into the equation. Ohio’s Current Agricultural Use Valuation program allows landowners to retain the benefit of CAUV tax assessment on agricultural land even if the land lies idle or fallow for a period of time.
Ohio’s CAUV program provides differential property tax assessment to parcels of land “devoted exclusively to agricultural use” that are ten acres or more or, if less than ten acres, generated an average gross income for the previous three years of $2,500 or more from commercial agricultural production. Timber lands adjacent to CAUV land, land enrolled in federal conservation programs, and land devoted to agritourism or bio-mass and similar types of energy production on a farm also qualify for CAUV.
There must have been some farmers in the legislature when the CAUV law was enacted, because the legislature anticipated the possibility that qualifying CAUV lands would not always be actively engaged in agricultural production. The law allows CAUV land to sit "idle or fallow" for up to one year and remain eligible for CAUV, but only if there's not an activity or use taking place on the land that's inconsistent with returning the land to agricultural production or that converts the land from agricultural production. After one year of lying idle or fallow, a landowner may retain the CAUV status for up to three years by showing good cause to the board of revision for why the land is not actively engaged in agricultural production.
The law would play out as follows. When the auditor sends the next CAUV reenrollment form for a parcel that qualifies for CAUV but was not planted this year due to the weather, a landowner must certify that the land is still devoted to agricultural production and return the CAUV form to the auditor. The auditor must allow the land to retain its CAUV status the first year of lying idle or fallow, as long as the land is not being used or converted to a non-agricultural use. If the land continues to be idle or fallow for the following year or two years, the auditor could ask the landowner to show cause as to why the land is not being used for agricultural production. The landowner would then have an opportunity to prove that the weather has prevented plans to plant field crops, as intended by the landowner. After three years, the landowner would have to change the land to a different type of commercial agricultural production to retain its CAUV status if the weather still prevents the ability to plant field crops on the parcel. Other agricultural uses could include commercial animal or poultry husbandry, aquaculture, algaculture, apiculture, the production for a commercial purpose of timber, tobacco, fruits, vegetables, nursery stock, ornamental trees, sod, or flowers, or the growth of timber for a noncommercial purpose, if the land on which the timber is grown is contiguous to or part of a parcel of land under common ownership that is otherwise devoted exclusively to agricultural use.
Being forced out of the fields due to rain is a frustrating reality for many Ohio farmers today. One positive assurance we can offer in the face of prevented planting is that farmers won't lose agricultural property tax status on those fields this year. Read Ohio’s CAUV law in the Ohio Revised Code at sections 5713.30 and 5713.31.
Tags: cauv, current agricultural use valuation, property tax, prevented planting
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Since our last legislative update in March, Ohio’s legislators and staffers have been busy introducing more legislation. As of this morning, there are 332 bills that have been introduced by members of the Ohio General Assembly since January. Some have already passed both the Ohio House and Senate, but most are still pending. While we cannot write about every pending bill, the following bills relate to agricultural, local government, or natural resource law. In addition to these bills that we have not yet covered, see the end of this post for an update about bills we mentioned in our last blog post.
Tax
- Senate Bill 183, titled “Allow tax credits to assist beginning farmers.” Many agricultural news outlets quickly picked up on this bill. The bill would authorize two nonrefundable tax credits. One is for beginning farmers who attend a financial management program, while the other is for individuals or businesses that sell or rent farmland, livestock, buildings, or equipment to beginning farmers. The Ohio Department of Agriculture would be responsible for certifying individuals as beginning farmers and for approving eligible financial management programs. Click HERE for more information about the bill, and HERE for the current official bill analysis.
- House Bill 109, titled “Grant tax exemption for land used for commercial maple syruping.” The bill would exempt “maple forest land” from having to pay property taxes. The landowner would have to apply for the designation with the Ohio Department of Taxation. Eligible lands are those lands bearing a stand of maple trees where 1) an average of at least thirty taps are drilled each year into at least fifteen different maple trees per acre of land, 2) the harvested sap is incorporated into a maple product for commercial sale, 3) the land is managed under a forest land maintenance plan, and 4) the property has ten or more acres or the sap harvest produces an average yearly gross income of more than $2,500. Note that all four requirements must be met in order to qualify as an exempt maple forest land. Click HERE for more information about the bill.
Real property
- House Bill 103, titled “Change law relating to land installment contracts.” Ohio’s Land Installment Contract Law, which applies to contracts involving properties with a residence but not contracts involving only open farmland, would see some significant changes under this proposed legislation. The bill would shift the burden of paying property taxes and homeowner’s insurance from the buyer to the seller. The seller would also be prohibited from holding a mortgage on the property. The contract would have to include provisions stating that the seller is responsible for all repairs and maintenance on the property. Interest rates would also be capped so that the rate cannot exceed the Treasury bill rate for loans of the same length of time by 2%. For example, if a 5-year land installment contract is entered into on September 7th and the 5-year Treasury bill rate on that day is 2.64%, the interest rate for the land installment contract would not be able to exceed 4.64% under this bill. Click HERE for more information about the bill, and HERE for the current official bill analysis.
Estate planning
- House Bill 209, titled “Abolish estate by dower.” Dower provides a surviving spouse with rights in any real property owned by a decedent spouse. This bill would end dower estates moving forward, but any interests that vest before the change would take effect would still be valid. Click HERE for more information about the bill.
Local government
- Senate Bill 114, titled “Expand township authority-regulate noise in unincorporated area.” A board of township trustees is currently limited to regulate noise coming from either areas zoned as residential or premises where a D liquor permit has been issued. The bill would expand the township’s authority to regulate noise anywhere within the unincorporated territory of the township. However, the bill does not affect another section of the law that exempts agriculture from noise ordinances, so agricultural activities would not be subject to any new noise ordinances, should this law pass. Click HERE for more information about the bill, and HERE for the current official bill analysis.
- Senate Bill 12, titled “Change laws governing traffic law enforcement.” Notably for townships, this bill would prohibit township law enforcement officers or representatives from using a traffic camera on an interstate highway. Click HERE for more information about the bill, and HERE for the current official bill analysis.
Regulation of Alcohol
- House Bill 181, titled “Promote use of Ohio agricultural goods in alcoholic beverages.” The bill would authorize the Ohio Department of Agriculture to create promotional logos that producers of Ohio craft beer and spirits may display on their products. Specifically, the bill would authorize an “Ohio Proud Craft Beer” and an “Ohio Proud Craft Spirits promotion. Click HERE for more information about the bill.
- House Bill 160, titled “Revised alcoholic ice cream law.” Under current Ohio law, those wishing to sell ice cream containing alcohol must obtain an A-5 liquor permit and can only sell the ice cream at the site of manufacture, and that site must be in an election precinct that allows for on- and off-premises consumption of alcohol. This bill would allow the ice cream maker to sell to consumers for off-premises enjoyment and to retailers that are authorized to sell alcohol. Click HERE for more information about the bill.
- House Bill 179, titled “Exempt small wineries from retail food establishment licensing.” The bill would exempt small wineries that produce less than 10,000 gallons of wine annually from having to obtain a retail food establishment license in order to sell commercially prepackaged foods. The sales of the prepackaged foods cannot exceed more than 5% of the winery’s gross annual receipts. The winery would have to notify the permitting authority that it is exempt, and also notify its customers about its exemption. Click HERE for more information about the bill.
Energy
- House Bill 20, titled “Prohibit homeowner associations placing limits on solar panels.” The bill would prohibit homeowners and neighborhood associations, along with civic and other associations, from imposing unreasonable restrictions on the installation of solar collector systems on roofs or exterior walls under the ownership or exclusive use of a property owner. Condominium properties would similar be prohibited from imposing unreasonable restrictions where there are no competing uses for the roof or wall space where a solar collector system would be located. According to the bill analysis, an unreasonable limitation is one that significantly increases the cost or significantly decreases the efficiency of a solar collector system. Individual unit owners would also have the right to negotiate a solar access easement. Click HERE or more information about the bill, and HERE for the current official bill analysis.
- Senate Bill 119, titled “Exempt Ohio from daylight savings time.” The bill would require Ohio to observe Daylight Savings Time on a permanent basis effective March 8, 2020. The state’s clocks would spring forward in March, but there would be no falling back in the fall. Click HERE for more information about the bill, and HERE for the current official bill analysis.
As for the bills that we previously covered in our March legislative update, the following chart explains where those bills stand. Those that have passed at least one chamber have their passage status underlined in the column on the right. Those that have had at least one committee hearing list the number of hearings, while those that have not had any activity in committee state only the committee that the bill has been referred to from the floor.
|
Category |
Bill No. |
Bill Title |
Status |
|
Hemp |
SB 57 |
Decriminalize hemp and license hemp cultivation |
- Passed Senate - Completed first committee hearing in House |
|
Watershed Planning |
SB 2 |
Create state watershed planning structure |
- Referred to Senate Agriculture and Natural Resources Committee |
|
Animals |
HB 24 |
Revise humane society law |
- Completed third committee hearing in House |
|
Animals |
HB 124 |
Allow small livestock on residential property |
- Referred to House Agriculture and Rural Development Committee |
|
Oil and Gas |
HB 55 |
Require oil and gas royalty statements |
- Completed first committee hearing in House |
|
Oil and Gas |
HB 94 |
Ban taking oil or natural gas from bed of Lake Erie |
- Referred to House Energy and Natural Resources Committee |
|
Oil and Gas |
HB 95 |
Revise oil and gas law about brine and well conversions |
- Referred to House Energy and Natural Resources Committee |
|
Mineral Rights |
HB 100 |
Revise requirements governing abandoned mineral rights |
- Referred to House Energy and Natural Resources Committee |
|
Regulations |
SB 1 |
Reduce number of regulatory restrictions |
- Completed three committee hearings in Senate |
|
Business Law |
SB 21 |
Allow corporation to become benefit corporation |
- Passed Senate - Completed first hearings in two separate House committees |
|
Animals |
SB 33 |
Establish animal abuse reporting requirements |
- Completed fifth committee hearing in Senate |
|
Local Gov’t |
HB 48 |
Create local government road improvement fund |
- Referred to House Finance Committee |
|
Local Gov’t |
HB 54 |
Increase tax revenue allocated to the local government fund |
- Referred to House Ways and Means Committee |
|
Property |
HB 74 |
Prohibit leaving junk watercraft or motor uncovered on property |
- Completed first committee hearing in House |
Tags: Ohio 133rd General Assembly, hemp, industrial hemp, animal welfare, oil and gas law, mineral rights, regulatory reform, corporations, benefit corporations, local government funding
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Last month a lawsuit about Ohio’s Current Agricultural Use Value (CAUV) calculation showed back up on our radar. As we explain in another blog post, the state of Ohio uses CAUV to calculate how much tax owners of land devoted exclusively to an agricultural use must pay. The plaintiffs sought reimbursements from the state by arguing that the state failed to properly calculate CAUV in accordance with Ohio law. The case was dismissed by the Franklin County Court of Common Pleas, and the 10th District Court of Appeals affirmed that decision as appropriate. However, that does not necessarily spell the end for these plaintiffs.
What started the lawsuit: good times meant higher taxes
Many farmland owners likely remember what happened around the middle of this decade to property tax assessments under Ohio’s CAUV formula as it was calculated at that time. In part because Ohio’s CAUV assessment formula takes agricultural commodity prices into account, a couple of strong years for crop prices contributed to a drastic and generally unanticipated increase in property tax bills for farmers across the state. Those assessment increases led to a successful effort to change the CAUV formula so that drastic fluctuations would be less likely to occur moving forward. However, some property owners wanted a reimbursement for previous assessments, not just a new formula.
What the plaintiffs wanted: equitable restitution
The case began on June 26, 2015, when three parties filed a complaint in a county court of common pleas against the state tax commissioner. The three plaintiffs sought a class action certification to act on behalf of all owners of Ohio lands devoted to agricultural production. The complaint alleged that the state of Ohio illegally collected more than a billion dollars of property taxes from those owners. Therefore, the landowners first sought repayment under the legal doctrine of unjust enrichment.
Over the next few months, the plaintiffs amended their complaint twice. The first amended complaint added a claim for repayment under the doctrine of equitable restitution. It also added more named plaintiffs, added then-Governor Kasich as a defendant, and asked for compensatory damages. The second amended complaint removed the Governor and tax commissioner as defendants, added the state of Ohio as a defendant, and removed all claims except for equitable restitution and a declaratory judgment. Lots of adjustments, but what is equitable restitution?
Equitable restitution is a type of recovery under the law that says one party has improperly benefitted at the expense of another, and therefore should return the benefit to its rightful owner. Here, the plaintiffs argued that allegedly illegal CAUV collections meant that the state of Ohio had improperly benefitted at the expense of owners of CAUV lands. Therefore, the state of Ohio should have to return that benefit, which would mean a return of the property tax overpayments.
However, there are two types of restitution under the law: legal and equitable. Legal restitution is available when a plaintiff cannot assert a right of possession to a particular property but is nonetheless able to shows grounds for compensation from the defendant. When money is involved, the distinction is largely based upon whether money clearly identifiable as belonging to the plaintiff can be traced to particular funds in the defendant’s possession. If the money can be traced to particular funds, then equitable restitution is more likely to apply.
For example, say that a plaintiff gave a defendant a five dollar bill, but something goes wrong and the plaintiff wants her money back. The plaintiff may have an equitable remedy if she seeks the return of that specific five dollar bill. However, she may only have a legal remedy if she simply wants five dollars back. This distinction played an important role in the outcome of this case.
Why the case was dismissed: lack of jurisdiction
The lawsuit was ultimately dismissed because the common pleas court determined that it could not hear the case because of the nature of the remedy sought. Instead, in ruling on the state’s motion to dismiss, the common pleas court decided, and the appellate court affirmed, that only the Ohio Court of Claims has jurisdiction for this type of case.
The Ohio Court of Claims is a special kind of state court that exists primarily to handle lawsuits against the state of Ohio. Its existence stems from the idea in the U.S. Constitution’s Eleventh Amendment that states have immunity as sovereigns. States may choose if and when to be sued; however, most have waived that immunity to some extent. Ohio chose to partially waive its sovereign immunity in particular types of cases by allowing people to sue it in a special court instead of in a county court of common pleas.
When it created the Ohio Court of Claims, the Ohio General Assembly decided that people seeking relief at law must file their lawsuit with the Ohio Court of Claims, while those seeking equitable relief may file their lawsuit with a county court of common pleas.
Restitution happens to be a type of remedy that can be classified as either legal or equitable in nature. The focus is not on what the parties call the restitution they seek, but what they actually want from it. In this case, it was not enough that the plaintiffs called what they wanted “equitable restitution.” The court only cared about what the plaintiffs actually sought.
In looking at the facts, the court determined that the plaintiffs sought the return of funds that could not be traceable into any state account, and therefore the remedy sought was legal in nature. The court explained that Ohio’s property taxes are collected and held at the county level, and there was no evidence that the CAUV property tax collected by the counties ever made it to the state. Absent this transfer, the specific tax dollars that the plaintiffs allege were wrongfully paid to the state were not traceable to any state accounts. Without this traceable link, the plaintiffs could only seek a return of money in general, rather than the return of specific funds. Because of this, only the Ohio Court of Claims could hear this case and award this remedy.
It was on the basis of this distinction that the Franklin County Court of Common Pleas dismissed the case, and that the Tenth District Court of Appeals affirmed the dismissal.
What are the plaintiffs’ next steps: Ohio Court of Claims or the end?
The trial court dismissed the case “without prejudice,” meaning that the parties are not barred from filing the case again in a proper court. This can be common when the case is dismissed on a procedural basis where there could be a claim with some merit that has neither been decided on the merits nor settled. At this time, it does not appear that the plaintiffs have refiled the case in the Ohio Court of Claims, and we cannot predict whether or not they will do so.
The case is cited as Vance v. State, 2019-Ohio-1027 (10th Dist.), and the opinion is available on the Ohio Supreme Court’s website HERE.
Tags: cauv, current agricultural use valuation, Current Agricultural Use Value, Ohio ag law, Ohio case law
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When we are not on the road presenting, in the classroom teaching, or keeping up with the news for the blog, our team is busy working on large scale research projects for the Agricultural & Food Law Consortium. One of our recent projects looked at how states assess farmland for property tax purposes, and we then created a compilation of every state’s laws on this topic. Based upon the research, we found that property taxes are a fact of life for virtually all landowners in the United States, but that each state uses a “differential tax assessment” for agricultural lands.
What exactly is a differential tax assessment? Many Ohio farmers know about and use Ohio’s special property tax assessment known as CAUV, which is short for Current Agricultural Use Valuation. Instead of assessing property taxes on the basis of the market rate for developable land, CAUV uses a different formula that assesses the land on its value for agricultural production. CAUV is a form of differential tax assessment.
While each state utilizes differential tax assessments for agricultural lands, they use different definitions of agriculture, different formulas, and different application processes. Some areas of law utilize model acts that states may adopt in order to make it easier to do business across state lines. Differential tax assessments of agricultural land do not have a model act, so each state’s language reflects the culture, norms, and conditions of the respective state at the time the state adopted or amended its differential tax assessment.
An example close to home illustrates what this means. Under Ohio Revised Code § 5713.30(A), agricultural use means commercial animal or poultry husbandry, aquaculture, algaculture, apiculture, the commercial production of field crops, tobacco, fruits, vegetables, nursery stock, ornamental trees, and sod. Commercial timber qualifies, but non-commercial timber only qualifies if it located on or next to land that otherwise would qualify for CAUV. Exclusive use requires just that: the land is exclusively used for an activity listed as an agricultural use. Lands of more than 10 acres that are exclusively devoted to agricultural uses qualify, but lands of less than 10 acres only qualify if the average yearly gross income exceeds $2,500 over the preceding three years. That is an example of a definition of what qualifies as agriculture for the purposes of the differential tax assessment.
The differential tax assessment project compiled the approaches taken by all fifty states, and the compilations are available on the National Agricultural Law Center website HERE. This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.
Tags: differential tax assessment, cauv, property tax, real property tax, real property law
Comments: 0
The holiday season stands out as one of the most generous times of year as people give gifts to the people they love. What better way to get into the holiday spirit than to talk about the tax implications of your gifts? There are three shopping weekends left until December 25th, so here are three highlights about the federal gift tax that you should know:
1. The federal gift tax is assessed on the person who gives the gift, not the person who receives the gift.
An individual who gives a gift of cash or assets with a fair market value greater than $15,000 to any one person in a given year will have to report the gift(s) using IRS Form 709 when filing taxes for that year. These forms cannot be filed jointly, so if a married couple gives a gift that is worth more than $30,000 to any one person, both of them must file IRS Form 709 and report half of the value of the gift.
Form 709 requires a few pieces of information about the gift and who receives the gift. It asks for things like a description of the gift, the recipient’s name and address, when it was given, and its value. While documentation or receipts do not have to be submitted with Form 709, filers should keep records for themselves about the gift in case the IRS has questions.
The gift tax rates for 2018 range from 18 to 40 percent. The rates depend upon how much in excess of the $15,000 exclusion the gift is valued. For instance, a gift valued at $20,000 would have no taxes on the first $15,000, but the $5,000 over the $15,000 threshold would be subject to an 18 percent tax. The 40 percent rate applies to gifts valued at $1,015,000, or $1,000,000 over the $15,000 exclusion.
Fortunately for the recipient, the gift does not count as income to the recipient because the gift falls under the gift tax rules instead of the income tax rules.
2. Each individual may give up to $15,000 in gifts to any person per year free of federal gift taxes. Because this rule focuses on the individual giver, a married couple could give up to a combined $30,000 in gifts to any one person tax free.
To illustrate, if Bob and Betty Buckeye have a daughter, Bernice, both Bob and Betty can give Bernice $15,000 worth of gifts in 2018, for a total of $30,000, without having to pay taxes on the gift. If Bernice is married to Brutus, then Bob and Betty could also give a combined $30,000 gift to Brutus; however, that money is Brutus’s. The gift to Brutus cannot be used to hide a gift to Bernice.
Importantly, some gifts are excluded from the gift tax and do not count toward the $15,000 exclusion threshold. These include gifts to a spouse, gifts of tuition paid directly to the college or institution, gifts of medical expenses, gifts to certain exempt organizations like charities, and gifts to certain political organizations.
However, things like forgiving a debt, contributing to a 529 education plan, making an interest-free or below market rate loan, transferring the benefits of an insurance policy, or giving up an annuity in exchange for the creation of a survivor annuity do count as gifts. When these gifts exceed the $15,000 exclusion threshold, they are taxable.
The $15,000 threshold is new for 2018. In 2017, it was only $14,000. The IRS now revises the amount based upon inflation, but is expected only to do so periodically in $1,000 increments.
3. Under the new tax plan passed by Congress and signed by the President in 2017, the higher estate tax threshold has made gift giving less urgent as a tax planning strategy.
Many individuals used the gift exemption as a way to provide for the next generation while also lessening the risk or burden of federal estate taxes. However, the 2017 tax reform doubled the value of an individual estate that is exempt from the estate tax to $11,180,000. A couple may take advantage of that individual exemption, and, with proper planning, shield $22.4 million in assets from the federal estate tax. Unless an estate is likely to reach the applicable threshold, gifts may not be as important of an estate planning tool solely to avoid estate tax consequences.
Long-term planners may want to keep in mind that the new estate tax exemption is set to expire at the end of 2025. If the $11,180,000 exemption is not extended by the end of 2025, the law will revert back to what it was before the 2017 tax reform, thereby returning the estate tax exemption threshold to around $5.5 million.
Disclaimer: While the estate tax changes may have made gifts less relevant as an estate planning tool for some, this certainly does not mean that gifts should be cancelled this year. The OSU Extension Farm Office cannot take responsibility for that. It only means that more families can focus on giving for love, rather than taxes.
For more information on federal gift taxes, contact an accountant or attorney, or visit the Internal Revenue Service’s “Frequently Asked Questions on Gift Taxes” here. For more general information about how taxes affect agriculture, visit the OSU Extension Farm Office Tax Law Library here.
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