IRS

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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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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As we settle into 2022 and regroup after a busy holiday season, one of things an agricultural employer should be thinking about is taxes, more specifically, have they met their obligations when it comes to federal and state employment taxes. In this two-part series, we discuss the federal and state taxes that an employer is required to withhold from employees’ wages and the tax obligations that an agricultural employer is solely responsible for. This series covers the taxes and obligations an employer has because of the wages paid to employees. This series does not cover the business income or personal income tax reporting obligations of agricultural employers.
The first part of this series focuses on federal taxes and an employer’s obligations when it comes to social security, Medicare, federal income, and federal unemployment taxes. We also discuss when to pay the taxes and how to pay them. The information contained within this series is not meant to be legal and/or tax advice. Agricultural employers should seek out the counsel and guidance of an attorney or other tax professional to help them ensure they are compliant with their obligations under federal tax law.
Social Security and Medicare Taxes. Generally speaking, an employer must withhold social security and Medicare taxes from the wages it pays its employees. However, there are special rules for agricultural employers. The $150 Test or the $2,500 Test will help determine if an agricultural employees’ wages are subject to social security and Medicare taxes along with federal income tax withholding requirements.
All cash wages that an employer pays to an employee during the year for farmwork is subject to social security, Medicare, and federal income tax withholding requirements if either of the following tests are met:
- The $150 Test. An employer pays cash wages to an employee of $150 or more in a year for farmwork.
- This includes all cash wages paid on a time, piecework, or other basis.
- The $2,500 Test. The total that an employer paid for farmwork (cash and non-cash wages) to all employees is $2,500 or more during the year.
Annual cash wages of less than $150 paid to a seasonal farmworker are not subject to social security and Medicare taxes, or federal income tax withholding, even if an employer pays all farmworkers $2,500 or more. However, these wages do count towards the $2,500 Test to determine whether other farmworkers’ wages are subject to social security and Medicare taxes.
Social Security Tax Rate. The social security tax is 6.2% for both the employee and the employer on the first $142,800 paid to each employee in 2021. This means that an employer must withhold 6.2% of the employee’s wages for social security and the employer must match the 6.2%.
Medicare Tax Rate. The Medicare tax rate is 1.45% for each employee, on all wages earned. An employer must withhold Medicare taxes from an employee’s wages and pay a matching amount.
Federal Income Tax Withholding. An agricultural employer must withhold federal income tax from the wages of farmworkers if the wages are subject to social security and Medicare taxes (i.e. is the $150 Test or $2,500 Test met?). The amount of federal income tax withheld is determined by the gross wages paid to an employee (before any taxes are taken out).
To know how much federal income tax to withhold from an employee’s wages, an employer should have a Form W-4 (“W-4) on file for each employee. The Internal Revenue Service (“IRS”) redesigned Form W-4 for 2020 and beyond. The new W-4 no longer asks employees to report the number of withholding allowances they are claiming. The IRS encourages employees to file an updated W-4, but it is not a requirement to help determine the employee’s federal income tax withholding.
How much does an employer withhold for federal income tax? The best answer a lawyer can give to this question is, it depends. Luckily, the IRS has provided a tool to help employers determine the amount of federal income tax to withhold from an employee’s wages. The Income Tax Withholding Assistant for Employers allows employers to enter an employee’s W-4 information to calculate the amount of federal income tax to withhold. Note: The Income Tax Withholding Assistant will not be available after 2022. The IRS suggests using the Income Tax Withholding Assistant to become familiar with how to use the worksheets and tables in Publication 15-T to be able to calculate the amount of federal income tax to withhold after 2022.
What if my employee claims he or she is exempt from federal income tax withholding? An employee may claim an exemption from federal income tax withholding because they had no federal income tax liability last year and they expect to have no income tax liability this year. However, the employee’s wages are still subject to social security and Medicare taxes.
To claim the exemption, an employee must indicate the exemption on their W-4. The exemption is not permanent and is only for that year. To continue to be exempt, an employee must provide their employer a new W-4 by February 15. If an employee does not provide a new W-4 by February 15, the employer is required to start withholding federal income tax as if the employee had checked the Single or Married filing separate box on their W-4. If an employee provides a new W-4 after the February 15 deadline, an employer may apply the exemption to future wages but should not refund any taxes withheld while the exempt status was not in place.
Notice to Employees About Earned Income Credit (“EIC”). An employer must notify employees who have had no federal income tax withheld that they may be eligible for a tax refund because of the EIC. One easy way an employer can meet this requirement is by having the EIC notice on the back of the Form W-2 issued to all employees.
Depositing Social Security, Medicare, and Federal Income Taxes. Employment taxes must be deposited by electronic fund transfer (“EFT”). Normally, an EFT is made to the federal government using the Electronic Federal Tax Payment System (“EFTPS”). EFTPS is a free service provided by the Department of Treasury. For more information on EFTPS visit EFTPS.gov or call 800-555-4477. If an employer does not want to use EFTPS, it can arrange for its tax professional, financial institution, payroll service, or other trusted third party to make electronic payments on its behalf.
When to Deposit Social Security, Medicare, and Federal Income Taxes. An agricultural employer’s deposit schedule is determined from the total tax liability reported on Form 943, line 13, for the lookback period. The lookback period is the second calendar year preceding the current calendar year. Since we are in 2022, the lookback period will be 2020. This means that an employer’s status as either a “monthly schedule depositor” or “semiweekly schedule depositor” will be determined by the amount on Form 943, line 13 from 2020.
The terms “monthly schedule depositor” or “semiweekly schedule depositor” are not based on how often an employer pays its employees or how often it will be required to make tax deposits. The terms simply identify which set of rules an employer must follow. As discussed above the deposit schedule an employer must follow is determined by the total tax liability reported on Form 943, line 13. For 2022, an employer is a:
- Monthly schedule depositor if it reported $50,000 or less in 2020.
- Semiweekly schedule depositor if it reported more than $50,000 in 2020.
Monthly Deposit Schedule. If an employer is a monthly schedule depositor, it must deposit employment taxes on wages paid during a calendar month by the 15th day of the following month. If an employer does not pay any wages in a calendar month, it has no deposit requirement for the following month.
Semiweekly Deposit Schedule. If payday falls on a Wednesday, Thursday, or Friday, then an employer must deposit taxes by the following Wednesday. If payday falls on a Saturday, Sunday, Monday, or Tuesday, then an employer must deposit taxes by the following Friday. This is a very simplified explanation and assumes an employer has one payday for all employees. If an employer has multiple paydays for different employees, it should speak with an attorney or other tax professional to help determine when taxes should be deposited.
Federal Unemployment Tax Act (“FUTA”). FUTA, in conjunction with state unemployment systems, provides unemployment compensation to workers who have lost their jobs. Most employers pay both federal and state unemployment taxes. Additionally, only the employer is responsible for the FUTA tax, nothing is withheld from an employee’s wages for FUTA.
Agricultural Employers and FUTA. An agricultural employer is required to file Form 940 and pay FUTA tax if it:
- Paid cash wages of $20,000 or more to farmworkers in any calendar quarter in 2021 or 2022, or
- Employed 10 or more farmworkers during at least some part of the day (whether or not at the same time) during any 20 or more different weeks in 2021 or 20 or more different weeks in 2022.
When determining whether an employer meets either test above, employers must count the wages paid to H-2A workers, even though the wages paid to H-2A workers are not subject to FUTA.
Form 940 Due Date. Form 940 is due by January 31. If an employer made deposits on time and in full, they may file Form 940 by February 10.
FUTA Tax Rate. The FUTA tax rate is 6% for 2021. The tax applies to the first $7,000 an employer pays to each employee. There is a tax credit that may be applied against the FUTA tax rate for any amounts paid into state unemployment funds. The maximum credit is 5.4%. An employer is entitled to the maximum credit if it paid state unemployment taxes in full, on time, and on all the same wages that are subject to FUTA. Visit the instructions for filing Form 940 for further FUTA tax credit guidance.
Depositing FUTA Tax. FUTA taxes are deposited by EFT and are generally deposited on a quarterly basis. To calculate an employer’s FUTA tax, it should multiple the amount of wages paid to employees by .6% during the quarter. This percentage may have to be adjusted depending on an employer’s entitlement to the FUTA tax credit for state unemployment contributions. When an employee’s wages reach $7,000 for the calendar year, an employer does not have to figure any additional FUTA tax for that employee.
Conclusion. The above information is a very general overview of an employer’s tax obligations when it comes to its employees. As you can see, federal tax law can be daunting. We barely scratched the surface when it comes to specific exemptions or additional obligations for an agricultural employer. For example, agricultural employers may not always employ farmworkers or employees “engaged in agriculture.” The requirements and obligations of an employer that employs both farmworkers and non-farmworkers be may different than what is discussed above. Therefore, we cannot stress enough, the importance of speaking with an attorney or other tax professional so they can help you navigate federal tax law and your obligations as an employer.
Look out for our next and final installment of “An Agricultural Employer’s 2021 Tax Obligations: A Series” where we will be discussing an agricultural employer’s requirements and obligations under Ohio tax law.
References and Resources:
Internal Revenue Service, Publication 15 - (Circular E), Employer's Tax Guide, https://www.irs.gov/pub/irs-pdf/p15.pdf
Internal Revenue Service, Publication 15-A - Employer's Supplemental Tax Guide, https://www.irs.gov/pub/irs-pdf/p15a.pdf
Internal Revenue Service, Draft Publication 51- (Circular A), Agricultural Employer's Tax Guide, https://www.irs.gov/pub/irs-dft/p51--dft.pdf
Internal Revenue Service, Publication 225 - Farmer's Tax Guide, https://www.irs.gov/pub/irs-pdf/p225.pdf
Tags: Employment Taxes, Agricultural Labor, Labor and Employment, IRS, Medicare, Social Security, Unemployment Tax, Income Tax Withholding
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Written by Barry Ward, Director, OSU Income Tax Schools
Significant tax related changes as a result of the new legislation passed in response to COVID-19 have created some questions and perhaps consternation over the past few months. Taxpayers and tax professionals alike are wrestling with how these changes may affect tax returns this year and beyond. OSU Income Tax Schools is offering a Summer Update to address these issues and other important information for tax professionals and taxpayers.
The OSU Income Tax Schools Summer Update: Federal Income Tax & Financial Update Webinar is scheduled for August 13, 2020 and will be presented as a webinar using the Zoom platform.
Webinar content
- New tax provisions implemented by the CARES Act and Families First Coronavirus Response Act and how to account for them such as the new net operating loss rules, the payroll tax credit, etc.
- Paycheck Protection Program Loan Issues: loan applications, forgiveness issues and the IRS ruling on loan expenditures that are forgiven under PPP are not tax deductible and how to account for them in preparing a return, etc.
- Dealing with the IRS in these difficult times. Also, what it means to the practitioner as to “dos” and don’ts” regarding the announcement that beginning this summer the IRS will allow the electronic filing of amended returns.
- The “Hot IRS Audit Issues – Pitfalls for S Corporations and Partnerships." Basis of entities as to the rules and related rulings, how to track basis in these entities, creation of basis where none had been computed in prior tax years, losses in excess of basis and when they are not allowed, definition of an excess distribution, taxation of excess distributions, distribution of appreciated property, conversion of C corporations to S corporations - do and don'ts, computation of the Built-In Gains Tax, inference and imputation of a reasonable wage for purposes of the computation of the qualified business income deduction, etc.
- Other rulings, developments, and cases.
Webinar personnel
- John Lawrence, CPA, John M. Lawrence & Associates: Instructor
- Barry Ward, Director, OSU Income Tax Schools: Co-Host & Question Wrangler
- Julie Strawser, Program Assistant, OSU Income Tax Schools: Co-Host and Webinar Manager
Details
- August 13th, 2020: 10 am – 3:30 pm (lunch break: noon – 12:50 pm)
- Cost: $150
- Registration information and link to the registration page is at https://farmoffice.osu.edu/osu-income-tax-schools
- This workshop is designed to be interactive with questions from the audience encouraged.
Continuing education offered
- Accountancy Board of Ohio (5 hours)
- IRS Office of Professional Responsibility (5 hours)
- Continuing Legal Education, Ohio Supreme Court (4.5 hours)
Tags: taxes, Tax School Summer Update, Tax School, federal income tax, COVID-19, CARES Act, IRS
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