You can count on tax law to generate interest in the agricultural community and that’s certainly the case with several tax bills recently introduced in Congress. Within the last month, members of Congress proposed a flurry of tax proposals that could impact agriculture if enacted. Of course, passing tax legislation is always difficult and subject to partisanship, and we expect that to be the case with these bills.
Here’s a look at the tax proposals receiving the most attention.
Death Tax Repeal Act of 2021. Sen. Thune (R-SD) and Rep. Smith (R-MO) are the primary sponsors of S. 617 and H.R. 1712, companion bills introduced March 9 that propose to repeal the federal estate tax, which the sponsors claim to be “the most unfair tax on the books.” The Act would also repeal the generation-skipping tax and make modifications to the computation of the federal gift tax, beginning at 18% under $10,000 and incrementally increasing by an additional 2%. Cosponsors of the Senate proposal includes 30 other Republicans, and the House bill has 137 cosponsors including one Democrat. The bills were referred to committee but have yet to see any further action.
For the 99.5 Percent Act. Introduced March 25 by Senators Sanders (D-VT), Gillibrand (D-NY), VanHollen (D-MD), Reed (D-RI) and Whitehouse (D-RI) to “tax the fortunes of the top 0.5% and reduce wealth inequality,” this bill would reduce the federal estate tax exemption from its current level of $11.7 million per individual. Under the proposal, estates in excess of $3.5 million per individual and $7 million per couple would pay the estate tax, which would begin at 45% for estates between $3.5 and $10 million. The tax would increase incrementally, reaching 65% for estates over 1 billion. The proposal would also reduce the lifetime gift tax exemption from its current level of $11.7 million to $1 million but would not reduce the annual $15,000 per person per year gift tax exemption for cash gifts. It would limit the exemption for gifts to trust at $20,000 per year. Protections for farmland include allowing farmland value to be lowered by up to $3 million for estate tax purposes and increasing the maximum exclusion for conservation easements to $2 million. The bill would also prohibit reduced valuation for assets held in a pass-through entity, affecting the 35% valuation discount that is typical for farmland LLCs.
Sensible Tax and Equity Promotion (STEP) Act. A group of Democrats in the Senate introduced the STEP Act on March 29 in an effort to “close the stepped-up basis loophole by taxing unrealized capital gains when heirs inherit huge fortunes on which the original owner never paid income taxes.” The proposal would tax the transfer of property that has a net gain either during lifetime or at death. During lifetime, a completed transfer to a non-grantor trust or individual other than spouse would be subject to tax but the first $100,000 of cumulative gain would be exempt. At death, the first $1 million of appreciated assets would pass without taxation. Transfers to charity, spouses, charitable trusts, qualified disability trusts would be exempt, as would gains on residences up to $250,000 per individual or $500,000 for married couples. Taxes on illiquid property such as farms and some farm assets could be paid in installments over a 15-year period, and any taxes paid under the Act would be deductible from the federal estate tax. The bill would also require gains on non-grantor irrevocable trusts to be reported every 21 years.
Corporate Tax Dodging Prevention Act. Another bill by Sen. Sanders (D-VT) would go after the corporate tax rate. The bill would restore the top corporate tax rate to 35%, its level prior to the reduction to 21% by the Tax Cuts and Jobs Act of 2017. It also includes a number of provisions to reduce the ability of corporations to avoid paying federal taxes by moving income and profits offshore.
We are likely to see several more tax proposals in Congress in the coming year and time will tell whether any of them will have traction. Some may merely be bargaining chips among the many legislative agendas in Washington. One thing is certain--tax bills will continue to generate interest in the agricultural world, so we’ll keep readers updated on these and future proposals.
The Ohio General Assembly is off and running in its new session. Many bills that affect agriculture in Ohio are already on the move. Here’s a summary of those that are gaining the most momentum or attention.
Tax Conformity Bill – S.B. 18 and H.B. 48. The Senate has already passed its version of this bill, which conforms our state tax code with recent changes to the Internal Revenue Code made in the latest COVID-19 stimulus provisions of the Consolidated Appropriations Act. Both the Senate and the House will also exempt forgiven Paycheck Protection Program second-draw loan proceeds from the Commercial Activity Tax. The Senate version additionally exempts Bureau of Workers Compensation dividend rebates from the Commercial Activity Tax beginning in 2020, but the House bill does not. Both bills include “emergency” language that would make the provisions effective in time for 2020 tax returns.
Beginning farmers tax credits – H.B. 95. A slightly different version of this bill is returning after not passing in the last legislative session. The bi-partisan bill aims to assist beginning farmers through several temporary income tax credits:
- Businesses that sell or rent agricultural assets such as land, animals, facilities or equipment to certified beginning farmers can receive a 5% income tax credit for sales, a 10% of gross rental income credit for cash rents, and 15% of gross rental income for share rents.
- Certified beginning farmers can receive an income tax credit equal to the cost of participating in a certified financial management program.
Beginning farmers, among other requirements, are those in or seeking entry into farming in Ohio within the last ten years who are not a partner, member or shareholder with the owner of the agricultural assets and who have a net worth of less than $800,000 in 2021, which adjusts for inflation in subsequent years. Beginning farmers must be certified by the Ohio Department of Agriculture or a land grant institution. The House Agriculture and Conservation Committee will discuss the bill at its meeting on February 16.
Wind and solar facilities – S.B. 52. In addition to revising setback and safety specifications for wind turbines, this proposal would amend Ohio township zoning law to establish a referendum process for large wind and solar facility certificates. The bill would require a person applying for a certificate for a large wind or solar facility to notify the township trustees and share details of the proposed facility. That notification sets up opportunities for the township trustees or residents of the township to object to the application and submit the proposed application to a vote of township residents. A certificate would not take effect unless approved by a majority of the voters. A first hearing on S.B. 52 will be held on Tuesday, February 16 before the Senate Energy and Public Utilities Committee.
Grants for broadband services – H.B. 2 and S.B. 8. The Senate passed its version of this bill last week, which sets up a $20 million competitive grant program for broadband providers to extend broadband services throughout the state. The proposal would also allow broadband providers to use electric cooperative easements and poles, subject to procedures and restrictions. The bill had its second hearing before the House Finance Committee last week.
Eminent domain – H.B. 63. Based on a similar bill that didn’t pass last session, this bill changes eminent domain law in regard to property taken for the use of recreational trails, which include public trails used for hiking, bicycling, horseback riding, ski touring, canoeing and other non-motorized recreational travel. H.B. 63 would allow a landowner to submit a written request asking a municipality or township to veto the use of eminent domain for a recreational trail within its borders. The bill would also allow a landowner to object to a use of eminent domain for any purpose at any time prior to a court order for the taking, rather than limiting that time period to ten days as in current law. The bill had its first hearing before the House Civil Justice Committee last week.
Minimum wage increases. S. B. 51 and H.B. 69. Bills on each side of the General Assembly propose gradually increasing the state minimum wage to $15, but have different paths for reaching that amount. S.B. 51 proposes increasing the wage to $12/hour in 2022, followed by $1/hour increases each year and reaching $15 by 2025, which is when a federal bill proposes to establish the $15 minimum wage. H.B. 69 begins at $10/hour in 2022 with $1/hour increases annually, reaching $15 in 2027. S.B. 51 was referred last week to the Workforce and Higher Education Committee and H.B. 69 was referred to the Commerce and Labor Committee.
Barry Ward, Leader, Production Business Management/Director, OSU Income Tax Schools
Congress passed the Consolidated Appropriations Act (CAA), 2021 on Monday, December 21, 2020 which was signed by the President on December 27th. The CAA funds the government through September 30, 2021, implements COVID-19 relief provisions, and extends a number of expiring tax provisions. The $2.3 trillion bill provides $900 billion in COVID-19 relief. This article highlights key provisions for farm related issues from several Acts within the CAA’s 5,593 pages.
Additional 2020 Recovery Rebates
“Economic Impact Payments”
The Act provides for “additional 2020 recovery rebates for individuals.” The additional recovery rebate credit is $600 for “eligible individuals” or $1,200 for “eligible individuals” filing a joint return. “Eligible individuals” are entitled to a $600 credit for each “qualifying child”. (Generally includes dependent children under the age of 17.) Phaseouts apply for higher income taxpayers.
Paycheck Protection Program Loans – Covered Expenses Now Deductible
Previously, the IRS and Treasury indicated that the expenses covered by PPP loans that were forgiven (or would be forgiven) would not be deductible. This new legislation now allows for these expenses to be deducted. This provision overrides IRS Notice 2020-32 and Rev. Rul. 2020-27. The CARES Act indicated that the loan proceeds from PPP loans are not to be included as taxable income. This tax treatment would apply to original PPP loans, as well as any subsequent loans made possible by the Act.
Paycheck Protection Program – Other New Guidelines
Qualified self-employed farmers who did not have employees and had less than $100,000 of net income in 2019 were not originally eligible for the maximum forgivable PPP loan. The new legislation now allows for the PPP loan forgiveness based on gross income rather than net income. Farmers are now able to receive a PPP loan of up to $20,833 (reduced by any loan already received) based on gross receipts of at least $100,000.
The legislation amends the Paycheck Protection Program (PPP) to extend the covered period from December 31, 2020, through March 31, 2021. An allocation of $284 billion is included to provide first and second PPP loans to small businesses. Details of the expanded program will not be known until SBA releases required guidance.
The PPP allows borrowers to spend proceeds on payroll costs and non-payroll costs of business mortgage interest, business rent payments, and business utility payments. This new legislation expands the allowable use of PPP loan proceeds.
The legislation allows borrowers to choose a covered period anywhere between an eight-week and 24-week covered period for purposes of loan forgiveness. The covered period must begin on the date the proceeds are disbursed.
The legislation provides a simplified forgiveness procedure for PPP loans up to $150,000. The new procedure provides that such loans “shall be forgiven” if the borrower signs a certification that shall not be more than one page in length and shall require minimal supporting information.
The legislation repeals the provision in the CARES Act requiring the SBA to reduce a borrower’s PPP forgiveness by the amount of an EIDL advance.
PPP Second Draw Loans
The new legislation establishes a PPP Second Draw Loan program that generally applies to businesses with 300 or fewer employees if the business had gross receipts during any quarter in 2020 that were reduced by at least 25 percent from the gross receipts of the business during the same quarter in 2019.
To be eligible for a second draw loan, the borrower must have received a PPP loan in 2020 and used all of the proceeds of that loan for permitted purposes.
The Act allows borrowers who have not yet received forgiveness to request an increase in their loan amount if they returned all or part of a PPP loan or did not take the full amount of a PPP loan to which they were entitled. This provision allows borrowers who received loans before more favorable regulations were enacted to take advantage of those new provisions.
Employee Retention Credit (ERC)
The legislation extends and expands the employee retention credit, allowing employers to remain eligible up until July 1, 2021. Previously, employers who received a PPP loan were ineligible to claim the ERC. The new legislation retroactively allows employers who receive PPP loans to claim the ERC and to treat payroll costs paid during the loan-covered period as qualified wages to the extent the wages are not paid for with forgiven PPP loan proceeds.
For the period from January 1, 2021 and prior to July 1, 2021 the ERC percentage increases from 50 percent of qualified wages to 70 percent. Employers can count qualified wages up to $10,000 per employee per quarter (instead of for all quarters) in calculating the credit. Employers qualify for the credit if their gross receipts for a calendar quarter are less than 80 percent of the gross receipts of the corresponding calendar quarter in calendar year 2019.
Economic Injury Disaster Assistance (EIDL) Loans and Advances
The Act allows Economic Injury Disaster Assistance (EIDL) Advances provided as emergency grants under the CARES Act to be excluded from gross income while the corresponding expenses would remain deductible. Additionally, loan forgiveness granted to an EIDL loan recipient under discretionary powers provided by the CARES Act does not result in gross income or a denial of deductions for allocable expenses.
New Net Operating Loss (NOL) Options
The new legislation provides farmers new net operating loss options not otherwise available in the wake of the CARES Act. Farmers have the option to temporarily carry back Net Operating Losses 2 or 5 years with some caveats.
Extension of Credits for Paid Sick and Family Leave
The Act extends the tax credits made available to employers by the Families First Coronavirus Response Act through March 31, 2021 (They were set to expire on December 31, 2020). This includes the sick and family leave credits for self-employed individuals. The new legislation does not provide additional credits for employees but allows for a larger window to utilize them if the employer chooses.
Emergency EIDL Grants
The Act appropriates an additional $20 billion for emergency EIDL grants. The Act extends the covered period for this program through December 31, 2021, and extends the period to approve the applications from three days to 21 days.
Temporary Allowance of 100% Deduction for Business Meals
The new legislation allows for a 100 percent deduction for business meals where food or beverages is provided by a restaurant, for the 2021 and 2022 tax years.
Charitable Contributions Deduction by Non-Itemizers
For tax years beginning in 2021, the Act extends and increases the above-the-line deduction for cash contributions by non-itemizers to $300 for individuals and $600 for married filers.
Extension of Deferred Employee Portion of Payroll Taxes
The Act delays the repayment requirement for the employee portion of the payroll taxes that were deferred in response to the President’s August 8 Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. Instead of requiring full repayment of these deferred taxes by April 30, 2021, the new legislation delays this deadline to December 31, 2021.
Tidgren, Kristine A. “What COVID Relief Provisions are in the Spending Bill?” Ag Docket Perspective on Agricultural Law & Taxation, Center for Agricultural Law and Taxation, December 23, 2020
Neiffer, Paul “Deeper Dive into PPP” Agribusiness Blog Farm CPA Today, CliftonLarsenAllen Wealth Advisors, December 22, 2020
H.R. 133 Consolidated Appropriations Act, 2021 https://www.congress.gov/116/bills/hr133/BILLS-116hr133enr.pdf December 27, 2020
Ernst & Young LLP, Consolidated Appropriations Act, 2021 extends many credits and other COVID-19 relief, Tax News Update, December 23, 2020
Barry Ward & Julie Strawser, OSU Income Tax Schools
Dealing with the tax provisions of the COVID-related legislation for both individuals and businesses are among the topics to be discussed during the upcoming Tax School workshop series offered throughout Ohio in 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 2020 tax returns.
The tax schools are intermediate-level courses that focus on interpreting tax regulations and changes in tax laws 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.
This is another important year for tax education as the new COVID-related legislation creates some challenges for tax practitioners to prepare tax returns. These schools offer an excellent set of instructors with a great deal of experience and training along with a top reference workbook to prepare tax practitioners to best serve their clients during this ongoing process of incorporating recent tax law changes in completing tax returns.
The workbook alone is an extremely valuable reference as it offers over 700 pages of material including helpful tables and examples that will be valuable to practitioners. Sample chapters of the reference workbook can be found at: https://go.osu.edu/WorkbookChapters
Topics/chapters to be presented this year during the two-day tax schools include:
Financial Distress, S-Corporation Tax Issues, IRS Issues, Business Entity Issues, Agricultural and Natural Resource Issues, Retirement and Investment Issues, Individual Tax Issues, Business Tax Issues, Trusts and Estates, Rulings and Cases, New Legislation.
This year, OSU Income Tax Schools will offer both in-person schools and online virtual schools.
In person schools:
1. Lima – November 2-3
Old Barn Restaurant and Grill
3175 W Elm Street, Lima, OH 45805
2. Fremont – November 4-5
Ole Zim’s Wagon Shed
1375 State Route 590, Gibsonburg, OH 43431
3. Ashland – November 11-12 SOLD OUT
John C. Meyers Convocation Center
820 Clermont Ave., Ashland, OH 44805
4. Dayton – November 17-18
Presidential Banquet Center
4548 Presidential Way, Kettering, OH 45429
5. Columbus – December 10-11 SOLD OUT
Nationwide & Ohio Farm Bureau 4-H Center
2201 Fred Taylor Dr., Columbus, OH 43221
Virtual Online Schools:
1. Webinar (Zoom)
November 9, 13, 16 and 19
Each Day 12:30 – 5pm
2. Livestream (Zoom)
Livestream of Columbus Tax School Location via Zoom
In addition to the tax schools, the program offers a separate, two-hour ethics webinar that will broadcast Dec. 4 at 10 a.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
Register two weeks prior to the school date and receive the two-day tax school early-bird registration fee of $375. 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 $425.
Additionally, the 2020 RIA Federal Tax Handbook is available to purchase by participants for a discounted fee of $45 each. Registration information and the online registration portal can be found online at:
A webinar on Ag Tax Issues will be held Dec. 18 from 8:45 a.m. to 3:30 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 $150. Register by mail or on-line at http://go.osu.edu/agissues2020
Written by Barry Ward, Director, OSU Income Tax Schools
Significant tax related changes as a result of the new legislation passed in response to COVID-19 have created some questions and perhaps consternation over the past few months. Taxpayers and tax professionals alike are wrestling with how these changes may affect tax returns this year and beyond. OSU Income Tax Schools is offering a Summer Update to address these issues and other important information for tax professionals and taxpayers.
The OSU Income Tax Schools Summer Update: Federal Income Tax & Financial Update Webinar is scheduled for August 13, 2020and will be presented as a webinar using the Zoom platform.
- New tax provisions implemented by the CARES Act and Families First Coronavirus Response Act and how to account for them such as the new net operating loss rules, the payroll tax credit, etc.
- Paycheck Protection Program Loan Issues: loan applications, forgiveness issues and the IRS ruling on loan expenditures that are forgiven under PPP are not tax deductible and how to account for them in preparing a return, etc.
- Dealing with the IRS in these difficult times. Also, what it means to the practitioner as to “dos” and don’ts” regarding the announcement that beginning this summer the IRS will allow the electronic filing of amended returns.
- The “Hot IRS Audit Issues – Pitfalls for S Corporations and Partnerships." Basis of entities as to the rules and related rulings, how to track basis in these entities, creation of basis where none had been computed in prior tax years, losses in excess of basis and when they are not allowed, definition of an excess distribution, taxation of excess distributions, distribution of appreciated property, conversion of C corporations to S corporations - do and don'ts, computation of the Built-In Gains Tax, inference and imputation of a reasonable wage for purposes of the computation of the qualified business income deduction, etc.
- Other rulings, developments, and cases.
- John Lawrence, CPA, John M. Lawrence & Associates: Instructor
- Barry Ward, Director, OSU Income Tax Schools: Co-Host & Question Wrangler
- Julie Strawser, Program Assistant, OSU Income Tax Schools: Co-Host and Webinar Manager
- August 13th, 2020: 10 am – 3:30 pm (lunch break: noon – 12:50 pm)
- Cost: $150
- Registration information and link to the registration page is at https://farmoffice.osu.edu/osu-income-tax-schools
- This workshop is designed to be interactive with questions from the audience encouraged.
Continuing education offered
- Accountancy Board of Ohio (5 hours)
- IRS Office of Professional Responsibility (5 hours)
- Continuing Legal Education, Ohio Supreme Court (4.5 hours)
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.
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.
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.
- 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, 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.