Tax
Your residence is one of the few assets that can be sold for a gain without creating tax liability. The IRS rules allow $250,000/person of gain from the sale of a residence to be excluded from income. This rule is why most people do not need to worry about capital gains taxes when they sell one residence to buy another. This exception to capital gains taxes is important when considering business structures for the farming operation and when buying/selling a farm with a residence.
To qualify for the $250,000 residence exemption, the residence being sold must have been owned and used as the primary residence for two of the last five years. Houses that have not been used as the residence or that were acquired through a like-kind exchange are not eligible. For married couples, each spouse is eligible for the $250,000 deduction for a total of $500,000.
Consider the following example:
Andy and Betty purchased a house in 2000 for $200,000. They used the house as their residence until 2023 when they sold it and moved into a retirement community. The sale price for their house as $500,000. Assuming they otherwise qualify, there will be no tax on the sale of the house. The transaction creates a $300,000 gain but Andy and Betty may reduce their income by $300,000 to match the gain. Therefore, there is effectively no tax on the gain and Andy and Betty will receive the entire $500,000 sale price free of capital gain taxes.
The residence exemption has many implications but for farm families two come to the forefront. The first involves the sale of a farm that includes the residence. The $250,000 exemption only applies to the residential “curtilage” – the land immediately surrounding the residence and any closely associates buildings or structures. Generally, this means that the residence can include a lawn area, garage, storage shed and similar structures. The exemption does not apply acreage adjacent to the residence that is used to grow crops.
When selling a farm with the residence, the sale price should be allocated between the residence and farmland. As much of the sale price as can be legitimately justified should be allocated to the residence because this amount, up to $250,000, will not be taxed. Again, the allocation should be consistent with the true value of the residence.
Consider the following example:
Carl and Diane decide to sell their 80-acre farm for $1,000,000. The farm includes their residence and 80 acres. When negotiating with the buyer, they agree to allocate $300,000 of the sale price to the residence and 1 acre and $700,000 to the 79 acres used as farmland. Provided the residence otherwise qualifies, the $300,000 will not be taxed but the $700,000 will likely have capital gain taxes.
Carl and Diane may be tempted to try to use their entire $500,000 exemption on the sale. They should only take the entire exemption if they can justify valuing the residence and curtilage at $500,000. An appraisal may be appropriate if using the maximum exemption. Also, Carl and Diane cannot include 20 acres of the farmland with the residence to justify using a $500,000 value. Any part of the 80 acres that is used to plant crops will not be considered part of the curtilage and will not be eligible for the residential exemption.
Another situation where the residential exemption may arise involves establishing land LLCs. Many farm operations have an LLC or other business entity to hold the farmland and/or farm facilities. Land LLCs provide many benefits including liability protection and preventing land transfers outside of the family. The issue that arises with land LLCs is that LLCs do not live in homes so are not eligible for the residence deduction. That is, only people can receive the residence deduction, not business entities.
A farmer’s residence is often part of a larger parcel that includes farmland and/or farm facilities. Before transferring the parcel with the residence to an LLC, careful consideration should be made as to the implications to the residence tax exemption. In some cases, the residence should be surveyed off and remain owned by the original owners. In other cases, it may not be feasible to survey the residence from the farm and/or it may be very unlikely that the residence is ever sold. The decision to transfer or not transfer the residence to an LLC should be made on a case-by-case basis.
Consider the following example:
Earl and Fran own 500 acres of farmland. As part of their farm succession planning, they decide to transfer their land to an LLC. The 500 acres include their residence and their “home base” – shop, bins and other buildings used in the farming operation. Their residence sits in the middle of home base and would not be feasible to survey it from the rest of the farm. Also, Earl and Fran are unlikely to ever sell the residence because their children will be taking over the farm and the residence is likely to stay within the family for at least another generation.
In this situation, Earl and Fran decide to transfer their residence to the LLC. They will lose the residential exemption but because it is not feasible to survey off and they are unlikely to ever sell the residence, they are willing to forgo the exemption.
Let’s change the scenario a bit to see how the residential exemption can be preserved. Earl and Fran’s residence is located in the corner of a parcel away from home base. Before Earl and Fran transfer the land to an LLC, they survey off their residence and one acre. They keep the residence and one acre in their name and transfer the remaining 499 acres to the LLC.
In this scenario, Earl and Fran have preserved the residential exemption. If they sell their home in the future, they will be eligible to deduct up to $500,000 of gain. The extra cost of a survey is worth preserving the exemption.
It should be noted that it is possible to transfer a residence to a single-member LLC and maintain the residential tax exemption. The IRS considers most single-member LLCs to be the same as the owner. So, in the above example, the residence could be transferred to an LLC and the residential exemption kept as long as only Earl or Fran is the owner of the LLC – although the exemption may be limited to only a single, $250,000 exemption.
The residential exemption for sales can save considerable taxes when selling a home. When selling the residence with a farm, as much of the purchase price as reasonable should be allocated to the residence. If transferring farmland to an LLC, the residence should remain outside of the LLC if possible and/or if the residence is likely to be sold in the future. Like most tax and legal issues, there are exemptions, exemptions to the exemptions and nuances that must be addressed for each individual situation. Be sure to consult with a tax and legal professional for guidance on the rules and regulations regarding the sale or transfer of your residence.
With just over a week left until echoes of “Hang on Sloopy” and chants of “O-H” and “I-O” can be heard from Buckeye faithful across the nation, we thought we would provide you with some light reading to hold you over until that long awaited 3:30 kick off. In this edition of our Ag Law Harvest, we focus on three recent Ohio Supreme Court cases that could potentially impact business owners, Northern Ohio landowners, and Ohio taxpayers.
Assault and Battery: Is it Covered Under an Insurance Policy?
A victim of a stabbing at an Ohio adult care facility is unable to collect judgment from the facility’s insurance company after a recent decision by the Ohio Supreme Court. The victim was living at the facility when another resident stabbed him. The perpetrator was later indicted on criminal charges but found not guilty by reason of insanity.
The victim then filed a civil lawsuit against the perpetrator and the facility to recover for damages resulting from the stabbing injuries. The victim ultimately dropped his lawsuit against the perpetrator and entered into a settlement agreement with the facility. As part of the settlement agreement, the victim agreed not to pursue the judgment against the facility, and instead, sought to collect his judgment from the facility’s insurance company.
At the time of the stabbing, the adult care facility had a commercial general liability policy. When the victim sought judgment from the facility’s insurance company, the insurance company refused to provide coverage. The insurance company explained that the insurance policy contained a provision that specifically excluded coverage for any bodily injury resulting from an assault or battery. The specific provision at issue stated:
The victim argued that because the perpetrator was found to be not guilty by reason of insanity in the criminal trial, the exclusion provision was nullified because the perpetrator lacked the subjective intent to commit any assault or battery.
The Ohio Supreme Court disagreed. The Court explained that the plain language of the exclusion provision of the insurance policy at issue is clear – there is no intent requirement included in the exclusion language. Therefore, the Court held that coverage did not exist for the willful assault on the victim. The Court sympathized with the victim but ultimately could not interpret the insurance policy language to include a subjective intent requirement where none existed.
This case demonstrates the importance of reading and understanding your business insurance policy. Insurance policies are, at the core, contracts between two parties and the language contained within the policy will usually govern that contractual relationship. What you assume is covered under your policy may not necessarily be the case. Furthermore, not all insurance policies are the same. We have seen Ohio cases where an insurance policy does require the presence of some subjective intent in order for an assault and battery exclusion to apply. Speak with your insurance agent and/or attorney to make sure you understand when and where coverage exists, knowing this can be critical to protecting you, your farm, and/or your business.
Ohio Supreme Court Approves Northern Ohio Wind Farm.
Residents of Huron and Erie Counties along with Black Swamp Bird Conservatory (the “Plaintiffs”) recently lost their battle in court to prevent the construction of a new wind farm in Northern Ohio. The Plaintiffs argued that the Ohio Power Siting Board (the “Board”) failed to satisfy Ohio law before granting the new wind farm its certificate of environmental compatibility and public need. Specifically, the Plaintiffs assert that the wind farm could “disrupt the area’s water supply, create excessive noise and ‘shadow flicker’ for residents near the wind farm, and kill bald eagles and migrating birds.”
The Ohio Supreme Court found otherwise. The Court concluded that the Plaintiffs failed to establish that the Board’s granting of the certificate was unlawful or unreasonable. As approved, the new wind farm will consist of up to 71 turbines and cover 32,000 acres of leased land. To read more about the Ohio Supreme Court’s decision visit: In re Application of Firelands Winds, L.L.C.
Ohio Supreme Court Sets New Precedent on Interpreting Ohio Tax Law.
In Ohio, most retail sales are subject to sales tax unless a certain exemption applies. Ohio law does have a sales tax exemption for equipment used directly in the production of oil and gas. A fracking business recently challenged a decision by Ohio’s Tax Commissioner and Board of Tax Appeals that levied the sales tax on certain equipment purchased by the business. The fracking equipment at issue included: a data van, blenders, sand kings, t-belts, hydration units, and chemical-additive units.
The Tax Commissioner concluded that the fracking equipment was not used directly in the extraction of oil and gas, only indirectly, and therefore, did not qualify for the tax exemption. The Ohio Supreme Court felt differently.
The Court found that all the equipment, except the data van, is used in unison to expose the oil and gas. Because the equipment is used to expose the oil and gas – a necessary part of fracking – the Court had little difficulty concluding that the equipment is being used directly in the production of oil and gas.
In addition to the equipment’s direct use in the production of oil and gas, the Court also recognized that the fracking equipment may also have a storage or delivery function/purpose. However, the Court reasoned that a piece of equipment’s function must be viewed through the “primary purpose” lens. For example, the Court held that although the blender equipment in this case performs a holding function, the primary use of the blender is to mix “the critical ingredients in the fracking recipe seconds before the mixture is inserted into the well.” Therefore, the Court found that the blender’s holding function did not disqualify it from Ohio’s sales tax exemption.
Additionally, in this case, the Court also issued an opinion on how Ohio courts should interpret tax law moving forward. Normally, courts use the ever-important legal principal of stare decisis to help it decide on new cases. Stare decisis is the principal that courts and judges should honor the decisions, rulings, and opinions from prior cases when ruling on new cases. Here, the Court took its opportunity to acknowledge that in the past the Court interpreted tax exemptions against the taxpayer, favoring tax collection. But the Court made clear that from here on out, the Court “will apply the same rules of construction to tax statutes that [it applies] to all other statutes” without a slant toward one side or the other. The Court concluded that its task “is not to make tax policy but to provide a fair reading of what the legislature has enacted: one that is based on the plain language of the [law].”
To read the Ohio Supreme Court’s decision visit: Stingray Pressure Pumping, L.L.C. v. Harris
Tags: Ohio Supreme Court, Ohio Sales Tax, Ohio Sales Tax Exemption, Insurance, Commercial General Liability Policy, Wind Farm, Stare Decisis
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Despite the arrival of summer and continuing disagreements over the state budget, Ohio legislators have been working on several pieces of legislation relevant to Ohio agriculture. All of the proposals are at the committee level but may see action before the Senate and House after the budget bill process ends. Here’s a summary of the ag related proposals currently under consideration.
Senate Bill 111 – Urban Agriculture
Senator Paula Hicks-Hudson (D-Toledo) targets barriers for farmers in urban settings in SB 111, which has had three hearings before the Senate Agriculture and Natural Resources Committee. OSU Extension, the Ohio Municipal League, and several farmers have testified in support of the proposal, which contains three components:
- Establishes an Urban Farmer Youth Initiative Pilot Program to provide youth between the ages of six and eighteen living in urban areas with programming and support for farming and agriculture. The bill would appropriate $250,000 over 2024 and 2025 for the pilot, to be administered by OSU Extension and Central State Extension.
- Exempts temporary greenhouses, such as hoop houses, from the Ohio Building Code, consistent with Ohio law’s treatment of other agricultural buildings and structures.
- Codifies the Department of Taxation’s current treatment of separate smaller parcels of agricultural land under the same farming operation, which allows the acreages to be combined to meet the 10 acre eligibility requirement for Current Agricultural Use Valuation.
House Bill 64 – Eminent Domain
A proposal to make Ohio’s eminent domain laws more favorable to landowners remains on hold in the House Civil Justice Committee. HB 64 is receiving more opposition than support, with dozens of parties testifying against it in its fourth hearing on May 23. Read more about the proposal in our previous blog post.
House Bill 162 - Agriculture Appreciation Act
Rep. Roy Klopfenstein (R-Haviland) and Rep. Darrell Kick (R-Loudonville) introduced HB 162 on May 1 and the bill received quick and unanimous approval from the House Agriculture Committee on May 16. The proposal would make several designations under Ohio law already recognized by federal law:
- March 21 as "Agriculture Day."
- October 12 as "Farmer's Day."
- The week beginning on the Saturday before the last Saturday of February as "FFA Week."
- The week ending with the second Saturday of March as "4-H Week."
House Bill 166 – Temporary Agricultural Workers
A bill addressing municipal income taxes for H2-A agricultural workers has met opposition in the House Ways and Means Committee. HB 166, sponsored by Rep. Dick Stein (R-Norwalk) would subject foreign agricultural workers’ income to municipal income taxes. The current municipal tax base in Ohio is based on federal tax laws that exclude foreign agricultural worker pay from Social Security and Medicare taxes since the workers cannot use those programs, and HB 166 would remove that exclusion and add H2-A income to the municipal tax base. The bill would also require employers to withhold the taxes for the municipality of the workers’ residences. While municipal interests support the bill, Ohio Farm Bureau and other agricultural interests testified against it in its third hearing on June 13. Opponents argue that H2-A workers are not residents because they are “temporary,” that the proposal would have many potential adverse effects on how Ohio handles the H2-A program, and would hamper the ability of agricultural employers to use the H2-A program to hire employees.
House Bill 193 – Biosolid and biodigestion facilities
Biosolid lagoons and biodigestion facilities would have new legal requirements and be subject to local regulation under a proposal sponsored by Rep. Kevin Miller (R-Newark) and Rep. Brian Lampton (R-Beavercreek). HB 193 would grant county and township zoning authority over the lagoons and facilities, require a public meeting and county approval prior to seeking a facility permit from the Ohio EPA, require the Ohio EPA to develop rules requiring covers on new biosolid lagoons, and modify feedstock requirements for biodigestion facilities to qualify for Current Agricultural Use Valuation property tax assessment. HB 193 had its first hearing before the House Agriculture Committee on June 13.
House Bill 197 – Community Solar Development
A “community solar” proposal that did not make it through the last legislative session is back in a revised form. HB 197 proposes to define and encourage the development of “community solar facilities,” smaller scale solar facilities that are directly connected to an electric distribution utility’s distribution system and that create electricity only for at least three “subscribers.” The bill would establish incentives for placing such facilities on distressed sites and Appalachian region sites through a “Community Solar Pilot Program” and a “Solar Development Program.” Rep. James Hoops (R-Napoleon) and Sharon Ray (R-Wadsworth) introduced the bill on June 6, and it received its first hearing before the House Public Utilities Committee on June 21. “The goal of this legislation is to create a small-scale solar program that seeks to be a part of the solution to Ohio’s energy generation and aging infrastructure need,” stated sponsor Hoops.
House Bill 212 – Foreign ownership of property
Ohio joins a movement of states attempting to limit foreign ownership of property with the introduction of HB 212, the Ohio Property Protection Act. Sponsored by Representatives Angela King (R-Celina) and Roy Klopfenstein (R-Haviland), the proposal would prohibit foreign adversaries and certain businesses from owning real property in Ohio. The bill was introduced in the House on June 13 and has not yet been referred to a committee for review.
Tags: legislation, urban agriculture, eminent domain, employment, H2-A, tax law, Income Tax, cauv, biosolids, bioenergy, Zoning, solar, foreign ownership
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We’re back! We are excited to bring back our regular Ag Law Harvest posts, where we bring you interesting, timely, and important agricultural and environmental legal issues from across Ohio and the country. This month’s post provides you with a look into Ohio’s ongoing legal battle of some provisions in the recently enacted “Chicken Bill”, a brief dive into the U.S. Department of Labor’s new H-2A wage rules, a warning about conservation easement fraud, and an explanation of a court’s recent decision to release an insurance company from its duty to defend its insured in a lawsuit.
Battle of “Chicken Bill.”
Ohio House Bill 507 (“HB 507”), sometimes referred to as “the Chicken Bill” went into effect last month and was widely known for reducing the number of poultry chicks that can be sold in lots (from six to three). However, HB 507 contained other non-poultry related provisions that have caused quite a stir. Environmental groups have sued the State, seeking a temporary restraining order, a preliminary and permanent injunction to prevent HB 507 from going into effect, and a declaratory judgement that HB 507 violates Ohio’s Constitution. Two provisions within HB 507 have specifically caught the attention of the Plaintiffs in this case: (1) a revision to Ohio Revised Code § 155.33 that requires state agencies to lease public lands for oil and gas development (the “Mandatory Leasing Provision”); and (2) a revision to Ohio Revised Code § 4928.01 that defines “green energy” to include energy generated by using natural gas, so long as the energy generated meets certain emissions and sustainability requirements (the “Green Energy Provision”).
Plaintiffs argue that the Mandatory Leasing Provision will cause irreparable harm to their members’ “environmental, aesthetic, social, and recreational interests” in Ohio’s public lands. Additionally, Plaintiffs assert that the Mandatory Leasing Provision and Green Energy Provision violate Ohio’s Constitution by not following the “One-Subject Rule” and the “Three-Consideration Rule” both of which require transparency when creating and passing legislation in Ohio. The Franklin County Court of Common Pleas recently denied Plaintiffs’ request for a temporary restraining order, reasoning that no new leases would likely be granted until the Oil and Gas Land Management Commission adopts its rules (as required by Ohio law) and that there is “no likelihood of any immediate and irreparable injury, loss, or damage to the plaintiffs.” Since the hearing on Plaintiffs’ request for a temporary restraining order, the State of Ohio has filed its answer denying Plaintiffs’ claims and currently all parties are in the process of briefing the court on the merits of Plaintiffs’ request for a preliminary injunction.
New H-2A Wage Rules: Harvesting Prosperity or Sowing Seeds of Despair?
On February 28, 2023, the U.S. Department of Labor (the “DOL”) published a final rule establishing a new methodology for determining hourly Adverse Effect Wage Rates (“AEWR”) for non-range farm occupations (i.e. all farm occupations other than herding and production of livestock on the range) for H-2A workers. The new methodology has been in effect since March 30th. Late last month Rep. Ralph Norman and the Chairman of the House Committee on Agriculture, Rep. Glenn “GT” Thompson, introduced a resolution of disapproval under the Congressional Review Act, seeking to invalidate the DOL’s final rule. Similarly, the National Council of Agricultural Employers (“NCAE”) released a statement declaring that it has filed a Motion for Preliminary Injunction against the DOL’s new methodology.
Opponents of the new rule argue that the increased wages that farmers and ranchers will be required to pay will put family operations out of business. On the other hand, the DOL believes “this methodology strikes a reasonable balance between the [law’s] competing goals of providing employers with adequate supply of legal agricultural labor and protecting the wages and working conditions of workers in the United States similarly employed.” Producers can visit the DOL’s frequently asked questions publication to learn more about the new H-2A wage rule. As it stands, the new H-2A regulations remain in effect and producers should be taking all possible steps to follow the new rules. Make sure to speak with your attorney if you have any questions about compliance with H-2A regulations.
Conservation Easement Fraud – Protecting Land or Preying on Profits?
For a while now, conservation easements have been utilized by farmers and landowners to preserve their land while also obtaining a substantial tax benefit. But not all actors in the conservation easement sphere are good ones. Earlier this month, a land appraiser in North Carolina pled guilty to conspiring to defraud the United States as part of a syndicated conservation easement tax shelter scheme. According to a press release by the U.S. Department of Justice (“DOJ”), Walter “Terry” Douglas Roberts II of Shelby, North Carolina conspired with others to defraud the United States by inflating the value of conservation easements which led to $1.3 billion in fraudulent tax deductions. Roberts is guilty of inflating the value at least 18 conservation easements by failing to follow normal appraisal methods, making false statements, and manipulating or relying on knowingly manipulated data to achieve a desired tax deduction amount. Roberts faces a maximum penalty of five years in prison and could be forced to pay back a specified amount to the U.S. Government.
Conservation easement fraud is not new, however. The Internal Revenue Service (“IRS”) has been monitoring the abuse of the conservation easement tax deductions for some time. The IRS has included these fraudulent transactions on its annual “Dirty Dozen” list of tax avoidance scams. The IRS has seen taxpayers, often encouraged by promoters armed with questionable appraisals, take inappropriately large deductions for these types of easements. These promoters twist the law to develop abusive tax shelters that do nothing more than “game the tax system with grossly inflated tax deductions and generate high fees for promoters.” The IRS urges taxpayers to avoid becoming entangled by these dishonest promoters and that “[i]f something sounds too good to be true, then it probably is.” If you have questions about the tax benefits of a conservation easement, make sure to speak with your attorney and/or tax professional.
Alleged Intentional Acts Not Covered by Insurance.
An animal feed manufacturer is in hot water, literally. A city in Mississippi has accused Gold Coast Commodities, Inc. (“Gold Coast”), an animal feed manufacturer, of intentionally dumping hot, greasy wastewater into the City’s sewer system. Prior to the City’s investigation into Gold Coast’s alleged toxic dumping, Gold Coast purchased a pollution liability insurance policy from Crum & Forster Specialty Insurance Company (“Crum & Forster”). After an investigation conducted by the City and the Mississippi Department of Environmental Quality, the City filed a lawsuit against the feed manufacturer alleging that it intentionally dumped toxic waste into the City’s sewer system. Gold Coast then notified its insurance company of the potential claim. However, Crum & Forster denied coverage for Gold Coast’s alleged toxic dumping. According to the insurance policy, coverage exists for an “occurrence” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Crum & Forster refused to provide a defense or coverage for Gold Coast in the City’s toxic dumping lawsuit because the City alleges multiple times that Gold Coast acted intentionally, and therefore, Gold Coast’s actions were not an accident and not covered by the policy.
In response, Gold Coast filed a lawsuit against Crum & Forster asking a federal district court in Mississippi to declare that Crum & Forster is required to defend and provide coverage for Gold Coast under the terms of the insurance policy. On a motion to dismiss, the federal district court in Mississippi dismissed Gold Coast’s lawsuit against the insurance company. The district court reasoned that in the underlying toxic dumping lawsuit, the City is not alleging an accident, rather the City asserts that Gold Coast intentionally dumped the toxic waste. Thus, Crum & Forster is not obligated to provide a defense or coverage for Gold Coast, under the terms of the policy. Gold Coast appealed to the Fifth Circuit Court of Appeals (which has jurisdiction over federal cases arising in Texas, Louisiana, and Mississippi).
The Fifth Circuit affirmed the decision of the federal district court, rejecting Gold Coast’s claim that Crum & Forster is obligated to provide a defense and coverage for Gold Coast in the City’s toxic dumping lawsuit. Gold Coast argued that the City seeks to recover under the legal theory of negligence in the toxic dumping case, therefore Gold Coast’s actions are accidental in nature. The Fifth Circuit was unconvinced. The Fifth Circuit explained that when reading a complaint, the court must look at the factual allegations, not the legal conclusions. The Fifth Circuit found that the factual allegations in the City’s lawsuit all referred to Gold Coast’s intentional or knowing misconduct and any recovery sought under the theory of negligence is not a factual allegation, instead it is a legal conclusion. The Fifth Circuit concluded that using terms like “negligence” do not “transform the character of the factual allegations of intentional conduct against [Gold Coast] into allegations of accidental conduct constituting an ‘occurrence.’” Thus, the Fifth Circuit affirmed the federal district court’s decision to dismiss Gold Coast’s lawsuit against its insurer. Unless the Supreme Court of the United States decides to take up the case, it looks like Gold Coast is all on its own in its fight against the City. The lesson here is that although insurance is important to have, its equally as important to speak with your insurance agent to understand what types of incidents are covered under your insurance policy.
Tags: Ohio legislation, Oil and Gas, Environmental Law, H-2A, Labor and Employment, Insurance, Toxic Dumping, taxes, IRS, Conservation Easement Fraud
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What are “Taxable Gross Receipts” Under Ohio’s Commercial Activity Tax?
By: Jeffrey K. Lewis, Esq., Attorney and Program Coordinator, OSU Income Tax Schools and Barry Ward, Leader, Production Business Management; Director, OSU Income Tax Schools
The privilege of doing business in Ohio comes at a cost. Since July 1, 2005, Ohio has imposed an annual Commercial Activity Tax (“CAT”) on taxpayers doing business in Ohio. The CAT is measured by a taxpayer’s “taxable gross receipts” during the tax period, which for most taxpayers will be the calendar year.
As a general rule, any individual or business entity that is required to register or pay tax under Ohio law is subject to paying Ohio’s Commercial Activity Tax. There are certain “excluded taxpayers” including any taxpayer with $150,000 or less of “taxable gross receipts”, non-profit organizations, governmental entities, and others.
The focus of this article will be on what is and is not a “taxable gross receipt” under the CAT. To determine what is a “taxable gross receipt” a taxpayer must undergo a three-step analysis that starts with determining what is a “gross receipt” under Ohio law. Then a taxpayer must situs (or source) those gross receipts to Ohio in order to calculate their total “taxable gross receipts.” A taxpayer’s total taxable gross receipts will then determine their remaining obligations under the CAT.
Step 1. Determine total “gross receipts.”
“Gross receipts” are broadly defined in Section 5751.01(F) of the Ohio Revised Code as “the total amount realized by a person, without deduction for the cost of goods sold or expenses incurred, that contributes to the production of gross income of the person, including the fair market value of any property and any services received, and any debt transferred or forgiven as consideration.” In other words, a gross receipt is anything that contributes to a taxpayer’s gross income which includes proceeds from the sale of goods or services and income generated from rentals and leases.
However, Ohio law excludes numerous items from the definition of gross receipt and therefore those items are excluded from being subject to the CAT. A full list of items excluded from the definition of gross receipts can be found in Ohio Revised Code Section 5751.01(F)(2). Below, Chart 1 provides a list of those exclusions, and the bolded exclusions will be discussed in further detail below.
It is important to remember a taxpayer’s viewpoint when reading the list of exclusions. A taxpayer must ask themselves: “Did I receive proceeds from the sale or transfer of property, goods, or services, and if so, do those proceeds fall into one of the following categories?” If the receipt of any proceeds falls into one of the categories below, the taxpayer does not have to count those proceeds as gross receipts.
Chart 1: Proceeds Excluded from “Gross Receipts”
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A Closer Look . . .
As can be seen from Chart 1, there are numerous exclusions from the definition of “gross receipts.” Below we discuss a few of those exclusions in further detail.
- Interest Income. Interest income, except for the interest earned from a credit sale, is excluded from gross receipts. For example, if a taxpayer earns interest on a savings account, that interest is excluded from the taxpayer’s gross receipts. However, a taxpayer must include any monthly interest earned on an installment contract in their gross receipts.
Example: A farmer agrees to sell land to a neighbor under a land installment contract. Under the land installment contract, the farmer agrees to convey title to the land to the neighbor and the neighbor agrees to pay the purchase price of the land, plus interest, in monthly payments (the installment payments). The farmer retains title to the land until the neighbor’s installment payment obligations have been fulfilled. In this scenario, the farmer must include the monthly interest earned in their gross receipts. However, the amount earned by the farmer that is applied to the purchase price of the land is not included in the farmer’s gross receipts.
- Dividends and distributions; distributive or proportionate shares. If a taxpayer is a shareholder or member of a corporation, S corporation, or other similar entity, the dividends or distributions paid to the taxpayer from the corporation are expressly excluded from the definition of gross receipts and thus not subject to the CAT. This is also true for the value of any distributive shares or proportionate shares received by the taxpayer by virtue of being a member or partner of a pass-through entity or partnership.
Example: The “patronage dividends” earned by a farmer or farming business that are members of a cooperative are not included in gross receipts. Cooperatives are formed under Ohio’s corporation statute, and these “patronage dividends” are treated the same as a traditional dividend given to a shareholder of any other corporation.
- Sale or transfer of capital assets and assets used in the trade or business of the taxpayer. Ohio law excludes the receipts from the sale or transfer of an asset, described in either Section 1221 or 1231 of the Internal Revenue Code, from the definition of gross receipt, regardless of the length of time the asset is held, and regardless of any gain or loss realized on the transfer of the asset.
When it comes to the Commercial Activity Tax, Ohio is only concerned about the types of assets described within Sections 1221 and 1231. Section 1221 describes those assets held for personal or investment purposes (i.e. capital assets) and Section 1231 describes assets used in the trade or business of the taxpayer.
Interaction between Section 1221 assets and Section 1231 assets. For Ohio CAT purposes, if an asset meets the description in Section 1221’s definition of capital assets or in Section 1231’s description of business assets then the proceeds from the sale of that asset do not need to be included in a taxpayer’s gross receipts. Below is a more detailed explanation of the assets described in Sections 1221 and 1231 of the Internal Revenue Code.
Section 1221 Property: Assets held for personal use and investment. Generally, these assets include property held by a taxpayer, whether or not connected with their trade or business, and used for personal or investment purposes. The proceeds earned by a taxpayer from the sale or transfer of these capital assets are not subject to the CAT.
Section 1231 Property: Assets used in the trade or business of the taxpayer. If an asset is included in the definition of these business assets in Section 1231, then the proceeds from the sale or transfer of the business asset do not need to be included in the taxpayer’s gross receipts. According to Section 1231, property used in the trade or business includes:
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- Depreciable property including, farm machinery, equipment, etc.(so long as it is not considered “inventory”). The entire gross receipt from the sale or transfer of the depreciable asset is exempt from the CAT, regardless of whether a taxpayer recognizes a gain or loss from the sale, including IRC Section 1245 or 1250 recapture income.
- Real property used in the taxpayer’s trade or business (so long as it is not considered “inventory”);
- Timber, coal, and iron ore that are still in the ground (once the mineral is removed from the ground, however, it is no longer an asset used in the trade or business and instead becomes inventory and thus subject to the CAT);
- Livestock held by the taxpayer for draft, breeding, dairy, or sporting purposes. (Livestock is uniquely defined in the Code of Federal Regulations to include cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Livestock does not include poultry, chickens, turkeys, pigeons, geese, other birds, fish, frogs, reptiles, etc.); and
- Unharvested crop on land, which is sold simultaneously to the same person is considered “property used in the trade or business.”
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Therefore, if an asset that is sold/transferred is included in the above definition, then the proceeds from that sale/transfer do not need to be included in a taxpayer’s gross receipts.
Examples: The Ohio Department of Taxation has provided some of the following examples to help demonstrate “property used in the trade or business” of a taxpayer and whether the receipts from the sale or transfer of those assets should be included in gross receipts:
- A farmer trades in a tractor with a FMV of $50,000 and an adjusted tax basis of $0. The farmer would have $50,000 in recapture income recognized. However, under the CAT, this recaptured income is not included in the farmer’s gross receipts.
- A farmer selling land, including the crops grown on the land, can exclude receipts from the sale if both the crops and land are simultaneously sold to the same person. Once the purchaser harvests the crop, it becomes part of the purchaser’s inventory, and the purchaser must report the receipt from the sale of that crop in their gross receipts.
- A farmer who harvests corn for sale must include the proceeds from the sale of the corn in their gross receipts.
- Proceeds from the sale of livestock that are used for draft, breeding, dairy, or sporting purposes are excluded from gross receipts.
- Cattle raised for slaughter are not considered Section 1231 property, instead they are viewed as inventory. Therefore, a farmer or other taxpayer who finishes steers in a feed lot for slaughter must include those proceeds earned in gross receipts.
- A taxpayer who sells acreage including standing timber can exclude the receipts from this sale from CAT.
- A taxpayer who cuts timber for the purpose of selling it in the taxpayer’s trade or business cannot exclude receipts from this transaction from their gross receipts. The opposite is true for a landowner who is not in the business of cutting and selling timber. A landowner that sells timber on their property is selling Section 1221 property. Generally, the landowner is selling title of the timber to another party. The purchaser of the timber will have to include the receipts from the sale of the timber in their gross receipts, but the landowner does not.
- There are some special considerations for the sale of a business. For a business that is selling its stock and assets to another entity/taxpayer, the receipts from this sale are excluded from CAT as Section 1221 property. However, those receipts from any outstanding accounts receivable or inventory held by the business at the time of the sale must be included in the business’s gross receipts and thus subject to CAT.
Chart 2 below, provided by the Ohio Department of Taxation, contains a list of different types of assets and whether the receipts from the sale or transfer of these assets are subject to CAT:
Chart 2: Examples of Assets Subject to the CAT
|
Sale or transfer of . . . |
Subject to CAT? |
|
Personal residence |
NO |
|
Office building sold by investor |
NO |
|
Personal car (used for pleasure) |
NO |
|
Delivery truck not part of inventory |
NO |
|
Stocks and bonds (personal investment) |
NO |
|
Accounts receivable |
YES |
|
Supplies used in taxpayer’s business |
YES |
|
Fishing pole sold at yard sale |
NO |
|
Fishing pole sold by a retailer |
YES |
|
Jewelry not sold by retailer/wholesaler |
NO |
|
Hedging transactions |
NO |
|
Personal sailboat (used for pleasure) |
NO |
|
Copy machine used for business purposes |
NO |
|
Inventory |
YES |
|
Golf clubs sold at yard sale |
NO |
|
Golf clubs sold by a professional player |
NO |
|
Unextracted oil sold with land |
NO |
|
Extracted mineral |
YES |
|
Cattle (livestock) – non-inventory |
NO |
|
Poultry |
YES |
|
Farmland with growing crops |
NO |
|
Harvested crops |
YES |
|
Copyright |
YES |
|
Stock certificates |
NO |
|
Accounts receivable |
YES |
|
Business equipment |
NO |
Step 2. Determine “taxable gross receipts.”
After a taxpayer has calculated their gross receipts, the taxpayer must then determine their “taxable gross receipts.” A “taxable gross receipt” is a gross receipt that is sitused (or sourced) to the state of Ohio. Generally, gross receipts are sourced based on the benefit to the purchaser. Section 5751.033 of the Ohio Revised Code sets forth the rules for determining how to source gross receipts to Ohio. Gross receipts are sitused to Ohio as follows:
Chart 3: Sourcing Gross Receipts to Ohio
|
Real Property:
|
|
|
Tangible Personal Property:
|
|
|
Other Services |
|
Step 3. Only include those taxable gross receipts for the current tax year.
Ohio law provides that a “taxpayer’s method of accounting for gross receipts for a tax period shall be the same as the taxpayer’s method of accounting for federal income tax purposes . . .” The taxpayer’s method of accounting will be either the cash method or accrual method of accounting. Under the cash method, a taxpayer reports income in the tax year the income is received. Under the accrual method, a taxpayer reports income in the tax year it is earned, regardless of when payment is received. Therefore, for a taxpayer that uses the cash method of accounting, gross receipts are only included in the tax year that the receipt is received. Take, for example, a grain farmer that enters into a deferred payment contract with the local grain elevator. If the farmer uses the cash method of accounting, the receipt from the sale of the farmer’s grain is included in the year when payment is received. If the farmer uses the accrual method of accounting, the receipt from the sale of the farmer’s grain must be included in the year the farmer entered into the deferred payment contract because that would be the year when the farmer earned the income.
Conclusion.
In summary, a taxpayer’s obligation under Ohio’s Commercial Activity Tax is largely determined by the amount of “taxable gross receipts” the taxpayer has for the current tax period. A taxpayer must engage in the daunting process of determining what is and is not a “gross receipt” and then must situs (or source) those gross receipts to Ohio in order to calculate their “taxable gross receipts.” However, determining a taxpayer’s obligations under the CAT does not stop there. There are additional requirements such as registration, minimum tax imposed, and filing frequency. For more information about a taxpayer’s obligations under the CAT, please visit the Ohio Department of Taxation’s Commercial Activity Tax (CAT) – General Information website.
Sources
26 U.S. Code § 1221 – Capital Asset Defined
26 U.S. Code § 1231 – Property Used in the Trade of Business and Involuntary Conversions
26 C.F.R. §1.1231-2 – Livestock held for draft, breeding, dairy, or sporting purposes
Ohio Administrative Code Chapter 5703-29: Commercial Activity Tax
Ohio Department of Taxation – Commercial Activity Tax (CAT) - FAQs
Ohio Department of Taxation – Commercial Activity Tax (CAT) – General Information
Ohio Department of Taxation – CAT 2005-17:“Taxable gross receipt,” defined
Ohio Department of Taxation – CAT 2006-04: Commercial Activity Tax: Cash Discounts, Defined
Ohio Revised Code Chapter 5751: Commercial Activity Tax
Tags: commercial activity tax, Taxable Gross Receipts, Gross Receipts under Ohio law
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Recently, there has been renewed interest in a tax strategy involving excess fertilizer in farmland. The idea behind this strategy is to allocate a value to any residual fertilizer in farmland that was recently purchased or inherited. The value of the fertilizer is then deducted to offset income. While this strategy does have merit, it is considered by some tax professionals to be an aggressive tax strategy and caution should be used when implementing.
This strategy is centered on excess fertilizer being in the soil when farmland is acquired. Excess fertilizer is that amount of fertilizer over and above the base nutrient levels. The excess fertilizer is treated as a separate asset that can be distinguished from the soil. A value is attributed to the excess fertilizer and that value is amortized based on the depletion rate of the fertilizer. In essence, the new owner of the farmland is claiming they can put a verifiable value on the excess fertilizer and then amortize the value of the fertilizer.
In a 1992 Technical Advice Memorandum (TAM), the IRS stated that to amortize the cost of fertilizer acquired with land, the landowner must establish the extent of the fertilizer, the value of the fertilizer and the depletion rate of the soil nutrients. The burden is on the taxpayer seeking the deduction to prove the extent, value and depletion rate of the soil nutrients. It is important to note that a TAM is not legal authority and cannot be cited as authority, but it does potentially give insight as to the position the IRS would take in a similar matter.
To help explain this concept, consider the following example:
Arthur applied $15,000 of fertilizer to his farm in November 2022 in anticipation of growing a crop in 2023. In January 2023, Arthur dies unexpectedly, and his son Alex inherits the farm. Alex is a farmer and intends to grow a corn crop on the farm in 2023. Alex hires an agronomist who determines that all the fertilizer applied by Arthur is in excess of base nutrient levels and will be depleted over a three-year period. Alex deducts the $15,000 of excess fertilizer in 2023, 2024 and 2025.
If an attempt is made to deduct excess fertilizer, something like the above example is an ideal scenario. The fertilizer applied is easily documented, no crop has yet been planted, and the agronomist can establish the depletion rate. All aspects of the strategy should be carefully documented, including a report from the agronomist. Peril awaits those who implement this strategy after they have applied additional fertilizer, grown a crop or can otherwise not properly document the excess fertilizer and/or depletion rate.
While the above example uses an inherited farm, the same strategy can be used with purchased farms. Farms purchased at public auction may sell for a premium if excess fertilizer is present. The premium, if properly documented, can potentially be deducted as excess fertilizer. For farms purchased at private sale, the buyer and seller should address excess fertilizer in the purchase contract and declare a mutually agreeable amount and value. If the buyer allocates a portion of the purchase price to excess fertilizer but the seller does not, the inconsistency in reporting could cause the IRS to deny the strategy.
While identifying excess fertilizer can be a benefit to the buyer, it may be detrimental to the seller. The seller should treat the excess fertilizer as a sale of fertilizer which is subject to ordinary income and thus possibly a higher tax rate. Thus, the seller may be reluctant to participate in allocating a portion of the purchase price to excess fertilizer. Also, if the buyer were to sell the land in the future, they will need to recapture the excess fertility as ordinary income.
As stated above, allocating a value to excess fertilizer in newly acquired farmland does have merit. However, this strategy has never been formally approved by the IRS and, until it is, comes with the risk that the IRS could reject the deduction of excess fertilizer. Additionally, states are not obligated to follow the IRS’ lead and one state, Minnesota, has a history of closely scrutinizing the strategy. For anyone considering implementing this strategy, they should seek advice from their tax advisor to minimize risks of an adverse IRS ruling and employ an experienced agronomist or soil scientist to provide technical guidance on fertilizer levels and depletion rate. In addition to seeking good, qualified advice, the landowner should be sure that every aspect of the strategy is well documented.
Note: this strategy can apply to any addition to the soil such as lime or micronutrients.
From: Barry Ward & Jeff Lewis, OSU Income Tax Schools
Are you a farmer or farmland owner wanting to learn more about the recent income tax law changes and proposals? If so, join us for this webinar on Thursday, November 17th, 2022, from 6:30 - 8:30 p.m.
Register for just $40. If you can't attend, you will be sent a link to view the recorded webinar later at your convenience. You have unlimited views of the replay, and it will be available throughout the 2022 tax filing season. Details and registration link can be found at: https://farmoffice.osu.edu/tax/farmer-and-farmland-owner-income-tax-webinar
This webinar will focus on issues related to farmer and farmland owner tax returns. This two-hour program will be presented in a live webinar format via Zoom by OSU Extension Educators Barry Ward, David Marrison and Jeff Lewis along with Purdue faculty member Dr. Michael Langemeier. Individuals who operate farms, own property, or are involved with renting farmland are encouraged to participate.
Topics to be discussed during the webinar include (subject to change based on tax law change):
- Farm Economy and Income in ‘22 and Outlook for ’23
- Deferring Taxes (deferring income, prepaying expenses), Retirement Plan Contributions, Accelerating Depreciation, Bunching Itemized Deductions, Self-employment Tax Planning, and Maximizing Permanent Tax Benefits
- Depreciation, Bonus Depreciation, Section 179, What is “Placed in Service”?
- Income Averaging
- Employee Retention Credits
- Inflation Reduction Act (IRA)
- State Tax Updates – Ohio and Indiana
To register: https://farmoffice.osu.edu/tax/farmer-and-farmland-owner-income-tax-webinar
For more information, contact Barry Ward at ward.8@osu.edu or Jeff Lewis at lewis.1459@osu.edu or call the OSU Extension Farm Office at 614-292-2433.
OSU Income Tax Schools 2022
Two-Day Tax Schools for Tax Practitioners &
Agricultural & Natural Resources Income Tax Issues Webinar
Barry Ward & Jeff Lewis, OSU Income Tax Schools
Tax provisions related to new legislation as well as continued discussion related to COVID-related legislation for both individuals and businesses are among the topics to be discussed during the upcoming OSU Income Tax Schools offered throughout Ohio in October, November, and December.
The annual series is designed to help tax preparers learn about federal tax law changes and updates for this year as well as learn more about issues they may encounter when filing individual and small business 2022 tax returns.
OSU Income Tax Schools are intermediate-level courses that focus on interpreting tax regulations and changes in tax law to help tax preparers, accountants, financial planners, and attorneys advise their clients. The schools offer continuing education credit for certified public accountants, enrolled agents, attorneys, annual filing season preparers and certified financial planners.
Attendees also receive a class workbook that alone is an extremely valuable reference as it offers over 600 pages of material including helpful tables and examples that will be valuable to practitioners. Summaries of the chapters in this year’s workbook can be viewed at this site:
https://farmoffice.osu.edu/tax/2022-tax-school-chapters
A sample chapter from a past workbook can be found at:
https://taxworkbook.com/about-the-tax-workbook/
This year, OSU Income Tax Schools will offer both in-person schools and an online virtual school presented over the course of four afternoons.
In-person schools:
October 27-28, Ole Zim’s Wagon Shed, Gibsonburg/Fremont
October 31-November 1, Presidential Banquet Center, Kettering/Dayton
November 3-4, Old Barn Restaurant & Grill, Lima
November 8-9, Muskingum County Conference and Welcome Center, Zanesville
November 21-22, Ashland University, John C. Meyers Convocation Center, Ashland
November 29-30, Nationwide & Ohio Farm Bureau 4-H Center, Columbus
December 5-6, Hartville Kitchen, Hartville
Virtual On-Line School presented via Zoom:
November 7, 10, 14 & 18, 12:30 – 4:45 p.m.
Register two weeks prior to the school date for the two-day tax school early-bird registration fee of $400. This includes all materials, lunches, and refreshments. The deadline to enroll is 10 business days prior to the date of each school. After the early-bird deadline, the fee increases to $450.
Additionally, the 2022 Checkpoint Federal Tax Handbook is available to purchase by participants for a discounted fee of $60 each. Registration information and the online registration portal can be found online at:
http://go.osu.edu/2022tax
In addition to the tax schools, the program offers a separate, two-hour ethics webinar that will broadcast Thursday, Dec. 8 at 1 p.m. The webinar is $25 for school attendees and $50 for non-attendees and is approved by the IRS and the Ohio Accountancy Board for continuing education credit.
A webinar on Ag Tax Issues will be held Tuesday, Dec. 13 from 8:45 a.m. to 3:20 p.m.
If you are a tax practitioner that represents farmers or rural landowners or are a farmer or farmland owner that prepares your own taxes, this five-hour webinar is for you. It will focus on key topics and new legislation related specifically to those income tax returns.
Registration, which includes the Ag Tax Issues workbook, is $160 if registered at least two weeks prior to the webinar. After November 29, registration is $210. Register by mail or on-line at https://go.osu.edu/agissues2022.
Participants may contact Ward at 614-688-3959, ward.8@osu.edu or Jeff Lewis at 614-247-1720, lewis.1459@osu.edu for more information.
Tags: Ag Tax, Tax School, Business Tax, Individual Tax, Income, Return, IRS, Internal Revenue Service
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UPDATE: Governor DeWine signed H.B. 95, the Beginning Farmer bill, on April 18, 2022. The effective date for the new law is July 18, 2022. The Governor signed the Statutory Lease Termination bill, H.B. 397, on April 21, and its effective date is July 21, 2022.
Bills establishing new legal requirements for landowners who want to terminate a verbal or uncertain farm lease and income tax credits for sales of assets to beginning farmers now await Governor DeWine’s response after passing in the Ohio legislature this week. Predictions are that the Governor will sign both measures.
Statutory termination requirements for farm leases – H.B. 397
Ohio joins nine other states in the Midwest with its enactment of a statutory requirement for terminating a crop lease that doesn’t address termination. The legislation sponsored by Rep. Brian Stewart (R-Ashville) and Rep. Darrell Kick (R-Loudonville) aims to address uncertainty in farmland leases, providing protections for tenant operators from late terminations by landowners. It will change how landowners conduct their farmland leasing arrangements, and will hopefull encourage written farmland leases that clearly address how to terminate the leasing arrangement.
The bill states that in either a written or verbal farmland leasing situation where the agreement between the parties does not provide for a termination date or a method for giving notice of termination, a landlord who wants to terminate the lease must do so in writing by September 1. The termination would be effective either upon completion of harvest or December 31, whichever is earlier. Note that the bill applies only to leases that involve planting, growing, and harvesting of crops and does not apply to leases for pasture, timber, buildings, or equipment and does not apply to the tenant in a leasing agreement. A lease that addresses how and when termination of the leasing arrangement may occur would also be unaffected by the new provisions.
The beginning farmer bill – H.B. 95
A long time in the making, H.B. 95 is the result of a bi-partisan effort by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville). It authorizes two types of tax credits for “certified beginning farmer” situations. The bill caps the tax credits at $10 million, and sunsets credits at the end of the sixth calendar year after they become effective.
The first tax credit is a nonrefundable income tax credit for an individual or business that sells or rents CAUV qualifying farmland, livestock, facilities, buildings or machinery to a “certified beginning farmer.” A late amendment in the Senate Ways and Means Committee reduced that credit to 3.99% of the sale price or gross rental income. The bill requires a sale credit to be claimed in the year of the sale but spreads the credit amount for rental and share-rent arrangements over the first three years of the rental agreement. It also allows a carry-forward of excess credit up to 7 years. Note that equipment dealers and businesses that sell agricultural assets for profit are not eligible for the tax credit, and that an individual or business must apply to the Ohio Department of Agriculture for tax credit approval.
The second tax credit is a nonrefundable income tax credit for a “certified beginning farmer” for the cost of attending a financial management program. The program must be certified by the Ohio Department of Agriculture, who must develop standards for program certification in consultation with Ohio State and Central State. The farmer may carry the tax credit forward for up to three succeeding tax years.
Who is a certified beginning farmer? The intent of the bill is to encourage asset transition to beginning farmers, and it establishes eligibility criteria for an individual to become “certified” as a beginning farmer by the Ohio Department of Agriculture. One point of discussion for the bill was whether the beginning farmer credit would be available for family transfers. Note that the eligibility requirements address this issue by requiring that there cannot be a business relationship between the beginning farmer and the owner of the asset.
An individual can become certified as a beginning farmer if he or she:
- Intends to farm or has been farming for less than ten years in Ohio.
- Is not a partner, member, shareholder, or trustee with the owner of the agricultural assets the individual will rent or purchase.
- Has a household net worth under $800,000 in 2021 or as adjusted for inflation in future years.
- Provides the majority of day-to-day labor and management of the farm.
- Has adequate knowledge or farming experience in the type of farming involved.
- Submits projected earnings statements and demonstrates a profit potential.
- Demonstrates that farming will be a significant source of income.
- Participates in a financial management program approved by the Department of Agriculture.
- Meets any other requirements the Ohio Department of Agriculture establishes through rulemaking.
We’ll provide further details about these new laws as they become effective. Information on the statutory termination bill, H.B. 397, is here and information about the beginning farmer bill, H.B. 95, is here. Note that provisions affecting other unrelated areas of law were added to both bills in the approval process.
Tags: farm lease, verbal farm leases, lease termination, HB 397, beginning farmers, tax credits, HB 95
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It’s time to round up a sampling of legal questions we’ve received the past month or so. The questions effectively illustrate the breadth of “agricultural law,” and we’re happy to help Ohioans understand its many parts. Here’s a look at the inquiries that have come our way,
I’m considering a carbon credit agreement. What should I look for? Several types of carbon credit agreements are now available to Ohio farmers, and they differ from one another so it’s good to review them closely and with the assistance of an attorney and an agronomist. For starters, take time to understand the terminology, make sure you can meet the initial eligibility criteria, review payment and penalty terms, know what types of practices are acceptable, determine “additionality” requirements for creating completing new carbon reductions, know the required length of participation and how long the carbon reductions must remain in place, understand how carbon reductions will be verified and certified, be aware of data ownership rights, and review legal remedy provisions. That’s a lot! Read more about each of these recommendations in our blog post on “Considering Carbon Farming?”
I want to replace an old line fence. Can I remove trees along the fence when I build the new fence? No, unless they are completely on your side of the boundary line. Both you and your neighbor co-own the boundary trees, so you’ll need the neighbor’s permission to remove them. You could be liable to the neighbor for the value of the trees if you remove them without the neighbor’s approval, and Ohio law allows triple that value if you remove them against the neighbor’s wishes or recklessly harm the trees in the process of building the fence. You can, however, trim back the neighbor’s tree branches to the property line as long as you don’t harm the tree. Also, Ohio’s line fence law in ORC 971.08 allows you to access up to 10 feet of the neighbor’s property to build the fence, although you can be liable if you damage the property in doing so.
I want to sell grow annuals and sell the cut flowers. Do I need a nursery license? No. Ohio’s nursery dealer license requirement applies to those who sell or distribute “nursery stock,” which the law defines as any “hardy” tree, shrub, plant, bulb, cutting, graft, or bud, excluding turf grass. A “hardy” plant is one that is capable of surviving winter temperatures. Note that the definition of nursery stock also includes some non-hardy plants sold out of the state. Because annual flowers and cuttings from those flowers don’t fall into the definition of “nursery stock,” a seller need not obtain the nursery dealer license.
Must I collect sales tax on cut flowers that I sell? Yes. In agriculture, we’re accustomed to many items being exempt from Ohio’s sales tax. That’s not the case when selling flowers and plants directly to customers, which is a retail sale that is subject to the sales tax. The seller must obtain a vendor’s license from the Ohio Department of Taxation, then collect and submit the taxes regularly. Read more about vendor’s licenses and sales taxes in our law bulletin at this link.
I’m an absentee landowner who rents my farmland to a tenant operator. Should I have liability insurance on the land? Yes. A general liability policy with a farm insurer should be affordable and worth the liability risk reduction. But a few other steps can further minimize risk. Require your tenant operator to have liability insurance that adequately covers the tenant’s operations, and include indemnification provisions in your farm lease that shift liability to the tenant during the lease period. Also consider requiring your tenant or hiring someone to do routine property inspections, monitor trespass issues, and ensure that the property is in a safe condition.
My neighbor and I both own up to the shoreline on either side of a small lake--do I have the right to use the whole lake? It depends on where the property lines lay and whether the lake is connected to other waters. If the lake is completely surrounded by private property and not connected to other “navigable” waters, such as a stream that feeds into it, the lake is most likely a private water body. Both of you could limit access to your side of the property line as it runs through the lake. You also have the legal right to make a “reasonable use” of the water in the lake from your land, referred to as “riparian rights.” You could withdraw it to water your livestock, for example; but you cannot “unreasonably” interfere with your neighbor’s right to reasonably use the water. The law changes if the lake is part of a “navigable” waterway. It is then a “water of the state” that is subject to the public right of navigation. Others could float on and otherwise navigate the water, and you could navigate over to your neighbor’s side. Public users would not have the riparian rights that would allow them to withdraw and use the water, however, and would be trespassing if they go onto the private land along the shore.
If I start an agritourism activity on my farm, will I lose my CAUV status? No, not if your activities fit within the legal definition of “agritourism.” Ohio law states in ORC 5713.30(A)(5) that “agritourism” activities do not disqualify a parcel from Ohio’s Current Agricultural Use Valuation (CAUV) program. “Agritourism,” according to the definition in ORC 901.80, is any agriculturally related educational, entertainment, historical, cultural, or recreational activity on a “farm” that allows or invites members of the general public to observe, participate in, or enjoy that activity. The definition of a “farm” is the same as the CAUV eligibility—a parcel devoted to commercial agricultural production that is either 10 acres or more or, if under 10 acres, grosses $2500 annually from agricultural production. This means that land that is enrolled in the CAUV program qualifies as a “farm” and can add agritourism activities without becoming ineligible for CAUV.
Send your questions to aglaw@osu.edu and we’ll do our best to provide an answer. Also be sure to check out our law bulletins and the Ag Law Library on https://farmoffice.osu.edu, which explain many of Ohio’s vast assortment of agricultural laws.
Tags: carbon agreements, line fence law, trees, cut flowers, sales tax, Insurance, riparian rights, water rights, agritourism, cauv
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