farm tax law
Written by Barry Ward, Production Business Management Leader and OSU Income Tax Schools Director
Soon after the Tax Cuts and Jobs Act became law in December of 2017 it became evident that cooperatives had been granted a significant advantage under the new tax law. Sales to cooperatives would be allowed a Qualified Business Income Deduction (QBID) of 20% of gross income and not of net income. Sales to businesses other than cooperatives would be eligible only for the QBID of net income which was a significant disadvantage. Suddenly cooperatives had an advantage that non-cooperative businesses couldn’t match and most of the farm sector scrambled to position themselves to take advantage of this tax advantage. Some farmers directed larger portions of their sales or prospective sales toward cooperatives. Non-cooperative businesses lobbied for a change to this piece of the new tax law while looking for ways to add a cooperative model to their own businesses to stay competitive.
Congress passed the Consolidated Appropriations Act of 2018 in March of 2018 which eliminated this advantage to cooperatives and replaced it with a new hybrid QBID for sales to cooperatives which offered more tax neutrality between sales to cooperatives and non-cooperatives. While this new legislation leveled the playing field between cooperatives and non-cooperatives, it left many questions unanswered; chief among them was how taxpayers should allocate expenses between sales to cooperatives and non-cooperatives.
One area that was clarified for calculating the QBID for all businesses including cooperatives was how certain deductions should be handled with respect to the Qualified Business Income Deduction (QBID).
For purposes of the QBID (IRC §199A), deductions such as the deductible portion of the tax on self-employment income under § 164(f), the self-employed health insurance deduction under § 162(l), and the deduction for contributions to qualified retirement plans under § 404 are considered attributable to a trade or business (including farm businesses) to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis.
Under the final regulations, expenses for half the self-employment (SE) tax, self-employed health insurance, and pension contributions must be subtracted from preliminary QBI figure, before any cooperative reductions are made (if applicable).
While final regulations on the new QBID were published on Jan. 18, 2019, there were still many questions left unanswered as to how the deduction would be handled in relation to cooperatives. As the QBID is calculated differently between the income from sales to cooperatives and non-cooperatives, taxpayers and tax practitioners were left with uncertainty.
A simplified explanation of the steps used to calculate the QBID under Internal Revenue Code (IRC) §199A for income attributable to sales to cooperatives is listed here:
Step 1: First, patrons calculate the 20 percent §199A QBID that would apply if they had sold the commodity to a non-cooperative.
Step 2: The patron must then subtract from that initial §199A deduction amount whichever of the following is smaller:
- 9 percent of the QBI allocable to cooperative sale(s) OR
- 50 percent of W2 wages paid allocable to income from sales to cooperatives
Step 3: Add the “Domestic Production Activities Deduction (DPAD)-like” deduction (if any) passed through to them by the cooperative pursuant to IRC §199A(g)(2)(A). The determination of the amount of this new “DPAD-like” deduction will generally range from 0 to 9 percent of the cooperative's qualified production activities income (QPAI) attributable to that patron's sales.
Parts of the new tax law do offer some simplification. Calculating the QBID isn’t necessarily one of those parts.
The result of all of these calculations is that income attributable to sales to cooperatives may result in an effective net QBID that is:
- Possibly greater than 20% if the farmer taxpayer pays no or few W2 wages and coop passes through all or a large portion of the allocable “DPADlike” deduction
- Approximately equal to 20% if the farmer taxpayer pays enough W2 wages to fully limit their coop sales QBID to 11% and the coop passes through all allocable “DPADlike” deduction
- Possibly less than 20% if farmer taxpayer pays enough W2 wages to fully limit their coop sales QBID to 11% and the coop passes through less than the allocable “DPADlike” deduction
On June 18th, the IRS released proposed regulations under IRC §199A on the patron deduction and the IRC §199A calculations for cooperatives. The proposed regulations provide that when a taxpayer receives both qualified payments from cooperatives and other income from non-cooperatives, the taxpayer must allocate deductions using a “reasonable method based on all the facts and circumstances.” Different reasonable methods may be used for the different items and related deductions. The chosen reasonable method, however, must be consistently applied from one tax year to another and must clearly reflect the income and expenses of the business.
So what “reasonable methods” might be accepted by the IRS? The final regulations (when they are provided) may give us further guidance or we may be left to choose some “reasonable” method in allocating expenses between the two types of income. Acceptable methods may include allocating expenses on a prorated basis by bushel/cwt or by gross sales attributable to cooperatives and non-cooperatives. Producers may also consider tracing costs on a per field basis and tracking sales of those bushels/cwt to either a cooperative or non-cooperative.
Included in the proposed regulations released in June was a set of rules for “safe harbor”. A taxpayer with taxable income under the QBID threshold ($157,500 Single Filer / $315,000 Joint Filer) may ratably apportion business expenses based on the amount of payments from sales to cooperative and non-cooperatives as they relate to total gross receipts. In other words, expenses may be allocated between cooperative and non-cooperative income based on the respective proportions of gross sales that fall to cooperatives and non-cooperatives.
Some questions that haven’t been answered clearly is how certain other income should be allocated between income from cooperatives and non-cooperatives. Tax reform now requires farmers to report gain on traded-in farm equipment. In many cases, farm income will be negative and all of the income for the business will be from trading-in farm equipment. The question is how do we allocate this income (IRC §1245 Gain)? Some commentators contend that none of these gains should be allocated to cooperative income which would eliminate the issue, however, the depreciation deduction taken on the equipment was likely allocated to cooperative income, thus reducing the effect of the 9% of AGI patron reduction. This would suggest that these gains may have to be allocated between cooperative and non-cooperative income.
How should government payments be allocated? If a farmer sells all of their commodities to a cooperative and receive a government payment (i.e. ARC or PLC), should that be treated as cooperative income or not. Hopefully, the final regulations will provide some further clarity on these issues.
The information in this article is the opinion of the author and is intended for educational purposes only. You are encouraged to consult professional tax or legal advice in regards to your facts and circumstances regarding the application of the general tax principles cited in this article.
Written by Barry Ward, Leader, Production Business Management & Director, OSU Income Tax Schools
Prevented Planting Crop Insurance Indemnity Payments
With unprecedented amounts of prevented planting insurance claims this year in Ohio and other parts of the Midwest, many producers will be considering different tax management strategies in dealing with this unusual income stream. In a normal year, producers have flexibility in how they generate and report income. In a year such as this when they will have a large amount of income from insurance indemnity payments the flexibility is greatly reduced. In a normal year a producer may sell a part of grain produced in the year of production and store the remainder until the following year to potentially take advantage of higher prices and/or stronger basis. For example, a producer harvests 200,000 bushels of corn in 2019, sells 100,000 bushels this year and the remainder in 2020. As most producers use the cash method of accounting and file taxes as a cash based filer, the production sold in the following year is reported as income in that year and not in the year of production. This allows for flexibility when dealing with the ups and downs of farm revenue.
Generally, crop insurance proceeds should be included in gross income in the year the payments are received, however Internal Revenue Code Section (IRC §) 451(f) provides a special provision that allows insurance proceeds to be deferred if they are received as a result of “destruction or damage to crops.”
As prevented planting insurance proceeds qualify under this definition, they can qualify for a 1 year deferral for inclusion in taxable income. These proceeds can qualify if the producer meets the following criteria:
- Taxpayer uses the cash method of accounting.
- Taxpayer receives the crop insurance proceeds in the same tax year the crops are damaged.
- Taxpayer shows that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred.
The third criteria is the sometimes the problem. Most can meet the criteria, although if producers want reasonable audit protection, they should have records showing the normal practice of deferring sales of grain produced and harvested in year 1 subsequently stored and sold in the following year. To safely “show that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred” the taxpayer should follow IRS Revenue Ruling 75-145 that requires that he or she would have reported more than 50 percent of the income from the damaged or destroyed crops in the year following the loss. A reasonable interpretation in meeting the 50% test is that a farmer may aggregate the historical sales for crops receiving insurance proceeds but tax practitioners differ on the interpretation of how this test may be met.
One big problem with these crop insurance proceeds is that a producer can’t divide it between years. It is either claimed in the year the damage occurred and the crop insurance proceeds were received or it is all deferred until the following year. The election to defer recognition of crop insurance proceeds that qualify is an all or nothing election for each trade or business IRS Revenue Ruling 74-145, 1971-1.
Tax planning options for producers depend a great deal on past income and future income prospects. Producers that have lower taxable income in the last 3 years (or tax brackets that weren’t completely filled) may want to consider claiming the prevented planting insurance proceeds this year and using Income Averaging to spread some of this year’s income into the prior 3 years. Producers that have had high income in the past 3 years and will experience high net income in 2019 may consider deferring these insurance proceeds to 2020 if they feel that this year may have lower farm net income.
Market Facilitation Payments
When the next round(s) of Market Facilitation Payments (MFPs) are issued, they will be treated the same as the previous rounds for income tax purposes. These payments must be taken as taxable income in the year they are received. As these payments are intended to replace income due to low prices stemming from trade disputes, these payments should be included in gross income in the year received. As these payments constitute earnings from the farmers’ trade or business they are subject to federal income tax and self-employment tax. Producers will almost certainly not have the option to defer these taxes until next year. Some producers waited until early 2019 to report production from 2018 and therefore will report this income from the first round of Market Facilitation Payments as taxable income in 2019.
Producers will likely not have the option of delaying their reporting and subsequent MFP payments due to the fact they are contingent upon planted acreage reporting of eligible crops and not yield reporting as the first round of MFP payments were.
Cost Share Payments
Increased prevented planting acres this year have many producers considering cover crops to better manage weeds and erosion and possibly qualify for a reduced MFP. There is also the possibility that producers will be eligible for cost-share payments via the Natural Resources Conservation Service for planting cover crops. Producers should be aware that these cost-share payments will be included on Form 1099-G that they will receive and the cost-share payments will need to be included as income.
You are advised to consult a tax professional for clarification of these issues as they relate to your circumstances.
This article is being reposted with the author's permission from the Ohio Ag Manager blog.
Tags: agricultural tax law, farm tax law, Tax Planning, prevented planting, market facilitation, cost-share
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The holiday season stands out as one of the most generous times of year as people give gifts to the people they love. What better way to get into the holiday spirit than to talk about the tax implications of your gifts? There are three shopping weekends left until December 25th, so here are three highlights about the federal gift tax that you should know:
1. The federal gift tax is assessed on the person who gives the gift, not the person who receives the gift.
An individual who gives a gift of cash or assets with a fair market value greater than $15,000 to any one person in a given year will have to report the gift(s) using IRS Form 709 when filing taxes for that year. These forms cannot be filed jointly, so if a married couple gives a gift that is worth more than $30,000 to any one person, both of them must file IRS Form 709 and report half of the value of the gift.
Form 709 requires a few pieces of information about the gift and who receives the gift. It asks for things like a description of the gift, the recipient’s name and address, when it was given, and its value. While documentation or receipts do not have to be submitted with Form 709, filers should keep records for themselves about the gift in case the IRS has questions.
The gift tax rates for 2018 range from 18 to 40 percent. The rates depend upon how much in excess of the $15,000 exclusion the gift is valued. For instance, a gift valued at $20,000 would have no taxes on the first $15,000, but the $5,000 over the $15,000 threshold would be subject to an 18 percent tax. The 40 percent rate applies to gifts valued at $1,015,000, or $1,000,000 over the $15,000 exclusion.
Fortunately for the recipient, the gift does not count as income to the recipient because the gift falls under the gift tax rules instead of the income tax rules.
2. Each individual may give up to $15,000 in gifts to any person per year free of federal gift taxes. Because this rule focuses on the individual giver, a married couple could give up to a combined $30,000 in gifts to any one person tax free.
To illustrate, if Bob and Betty Buckeye have a daughter, Bernice, both Bob and Betty can give Bernice $15,000 worth of gifts in 2018, for a total of $30,000, without having to pay taxes on the gift. If Bernice is married to Brutus, then Bob and Betty could also give a combined $30,000 gift to Brutus; however, that money is Brutus’s. The gift to Brutus cannot be used to hide a gift to Bernice.
Importantly, some gifts are excluded from the gift tax and do not count toward the $15,000 exclusion threshold. These include gifts to a spouse, gifts of tuition paid directly to the college or institution, gifts of medical expenses, gifts to certain exempt organizations like charities, and gifts to certain political organizations.
However, things like forgiving a debt, contributing to a 529 education plan, making an interest-free or below market rate loan, transferring the benefits of an insurance policy, or giving up an annuity in exchange for the creation of a survivor annuity do count as gifts. When these gifts exceed the $15,000 exclusion threshold, they are taxable.
The $15,000 threshold is new for 2018. In 2017, it was only $14,000. The IRS now revises the amount based upon inflation, but is expected only to do so periodically in $1,000 increments.
3. Under the new tax plan passed by Congress and signed by the President in 2017, the higher estate tax threshold has made gift giving less urgent as a tax planning strategy.
Many individuals used the gift exemption as a way to provide for the next generation while also lessening the risk or burden of federal estate taxes. However, the 2017 tax reform doubled the value of an individual estate that is exempt from the estate tax to $11,180,000. A couple may take advantage of that individual exemption, and, with proper planning, shield $22.4 million in assets from the federal estate tax. Unless an estate is likely to reach the applicable threshold, gifts may not be as important of an estate planning tool solely to avoid estate tax consequences.
Long-term planners may want to keep in mind that the new estate tax exemption is set to expire at the end of 2025. If the $11,180,000 exemption is not extended by the end of 2025, the law will revert back to what it was before the 2017 tax reform, thereby returning the estate tax exemption threshold to around $5.5 million.
Disclaimer: While the estate tax changes may have made gifts less relevant as an estate planning tool for some, this certainly does not mean that gifts should be cancelled this year. The OSU Extension Farm Office cannot take responsibility for that. It only means that more families can focus on giving for love, rather than taxes.
For more information on federal gift taxes, contact an accountant or attorney, or visit the Internal Revenue Service’s “Frequently Asked Questions on Gift Taxes” here. For more general information about how taxes affect agriculture, visit the OSU Extension Farm Office Tax Law Library here.
A landowner may present evidence regarding the value and acreage of his or her land, but the Board of Tax Appeals (BTA) is free to weigh that evidence as it wishes, according to the Ohio Supreme Court. All seven justices agreed that the BTA in the case of Johnson v. Clark County Board of Revision acted with appropriate discretion, although two justices did not sign onto the reasoning as to why the BTA acted appropriately. The case involved a property owner’s challenge of the Clark County Auditor’s determination of Current Agricultural Use Valuation (CAUV) for property tax purposes.
Continue reading for more information about what CAUV is, how CAUV determinations and tax assessments can be appealed, what happened in the Johnson v. Clark County Board of Revision case, and the main takeaways from the Supreme Court’s decision.
What is CAUV?
CAUV permits owners of land devoted exclusively to agricultural uses to request that the county auditor assess property for tax purposes based upon the value of the land’s current agricultural use, rather than its true market value. Since its inception, CAUV has generally provided landowners with qualifying property a lower tax bill than they otherwise would have using market value. Ohio most recently changed the formula for CAUV in 2017. If CAUV land is converted to a use that no longer qualifies for CAUV treatment, the land is again assessed based upon its fair market value and the landowner must pay to the county the difference between the CAUV value and the fair market value for the prior three years. To learn more about CAUV, visit the Ohio Department of Taxation’s CAUV webpage here.
How can a CAUV determination be appealed?
First, if a landowner believes that all or part of his or her parcel qualifies for CAUV, an application must be submitted to the county auditor where the land is located. County auditors are the “chief assessing officers of their respective counties” and have the authority, within the guidelines of the state tax commissioner, to make the initial CAUV determination under Ohio Revised Code § 5715.01(B). Landowners should contact their county auditors about filing instructions.
Second, the procedure to appeal whether land qualifies for CAUV is different than the procedure to appeal a tax valuation assessment. If a landowner does not agree with their county auditor’s determination as to whether or not land qualifies for CAUV, they have thirty days to file an appeal with their county court of common pleas under Ohio Revised Code § 929.02(A)(2). Decisions of courts of common pleas can be appealed to the state district court of appeals, and those decisions can be appealed to the Ohio Supreme Court.
If a landowner does not agree with their county auditor’s valuation assessment, the landowner may file a complaint with their county Board of Revision. The forms for these complaints are generally available at the county auditor’s office or website. If a Board of Revision believes that the county auditor made an error in applying the CAUV statute and rules, the board has the authority to revise tax assessments. If the landowner still does not agree with the Board of Revision’s decision, he or she may appeal to the Ohio Board of Tax Appeals within thirty days of the Board of Revision’s decision under Ohio Revised Code § 5717.01. More information is available on the BTA’s website here. Alternatively, under Ohio Revised Code § 5717.05, the landowner may appeal the Board of Revision’s decision to the appropriate county court of common pleas.
Decisions of the BTA can be appealed to the respective state district court of appeals where the land in question is located, and those decisions can be appealed to the Ohio Supreme Court. However, there are certain cases in which landowners can appeal decisions of the BTA directly to the Ohio Supreme Court under Ohio Revised Code § 5717.04. However, the types of appeals of a BTA decision eligible for direct appeal to the Ohio Supreme Court were reduced in September 2017 through House Bill 49.
What happened in Johnson v. Clark County Board of Revision?
Mr. Johnson challenged the Clark County Auditor’s 2013 tax assessment of his 154.61 acre farm. Neither party disagreed that the land qualified for CAUV, but Mr. Johnson disagreed with how much the Clark County Auditor said the farm was worth under the CAUV formula. For tax year 2013, the auditor assessed the property’s CAUV at $457,250.
Mr. Johnson appealed to the Clark County Board of Revision. He testified, and also elicited testimony from an employee of the Clark County Soil and Water Conservation District and an employee of the Clark County Auditor’s office. Further, Mr. Johnson presented photographs, official records from the tax commissioner and auditor, and a “self-prepared written statement purporting to convey [the SWCD employee’s] site-visit findings.” The Board of Revision rejected Mr. Johnson’s claims.
Mr. Johnson then appealed to the Ohio Board of Tax Appeals. Again, Mr. Johnson testified and produced a number of exhibits. At this appeal, he elicited testimony from an employee of the Ohio Department of Taxation. The BTA also rejected Mr. Johnson’s claims, finding that the Clark County Auditor had acted appropriately. Mr. Johnson then filed an appeal to the Ohio Supreme Court in 2016. Mr. Johnson represented himself pro se, or without an attorney.
What are the main takeaways, and why did the landowner not succeed?
First, the Ohio Supreme Court explained that a landowner challenging a Board of Revision or Auditor’s tax assessment must convince the BTA that his or her valuation assessment is correct and the one they are challenging is incorrect. This requirement to convince the Board of Tax Appeals is known as the burden of proof. The burden of proof determines which party must play an active role in proving his or her argument, while the opposing side will only have to present proof to counter if the board finds that the first party has carried its burden. Here, the court said that Mr. Johnson, as the landowner challenging the assessment, had the burden to convince the BTA. The court disagreed with Mr. Johnson’s argument that the county should have to rebut his evidence and prove the value that it assessed.
Second, even though the BTA properly said that Mr. Johnson had the burden of proof, this does not mean that the BTA should have presumed the Board of Revision’s decision to have been correct. Instead, the BTA must independently analyze the evidence presented to it, and not simply defer to and accept the Board of Revision’s decision. Here, the Ohio Supreme Court found that the BTA did conduct an independent assessment in confirming the Board of Revision’s determination.
Third, while an owner may present evidence as to the value of his or her land, a BTA has discretion to determine how much weight to give to that evidence. An owner’s opinion as to the value of his or her land is not determinative, but is merely a piece of evidence that the BTA may consider.
Fourth, instead of looking at the acreage, the focus of the assessment should be on boundaries and a property’s uses within those boundaries. The Ohio Supreme Court explained the distinction between calculating acres and delineating boundaries by using dictionary definitions, and the distinction is essentially that a bounded area is fixed in space, while acreage alone describes an area without a specific line of demarcation. To prove that a parcel or portion of a parcel qualify for CAUV treatment, the boundaries of the qualifying land must be determined. Acres can only be determined after the boundaries are established. Here, Mr. Johnson did not prove the boundaries of CAUV areas on his land to the BTA’s satisfaction, and the Ohio Supreme Court said that it was within the BTA’s discretion to reject Mr. Johnson’s evidence.
The Ohio Supreme Court’s full opinion, cited as 2018-Ohio-4390, is available here. Additional facts about the case can be found within the court’s opinion.
Tax preparers and farmers who file their own farm tax returns have an opportunity to participate in OSU Extension's Agriculture and Natural Resource Tax Issues Workshop on December 19, 2013. The day long webinar-based workshop features Professor Phil Harris of the University of Wisconsin, a leading expert in farm and natural resource tax law. Harris will address issues specific to farm tax returns and will be available for a live question and answer session during the workshop. Attendees can view the webinar from home or office or at one of nine facilitated host locations around the state, and can receive continuing education credit for the workshop. Visit this site for more information.
OSU Extension's Larry Gearhardt, field specialist in taxation, organizes the workshop in concert with the OSU Income Tax Schools, a multi-day continuing education program for those who prepare federal tax returns. More information and the tax school schedule for this fall are available at http://go.osu.edu/taxschools.
Tags: farm tax law, farm tax returns, natural resource tax law
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