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. 

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. 

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:

1. Taxpayer uses the cash method of accounting.
2. Taxpayer receives the crop insurance proceeds in the same tax year the crops are damaged.
3. 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.

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.