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Legal Groundwork
By: Robert Moore, Wednesday, November 06th, 2024

Join experts David Marrison and Robert Moore at Ohio Maple Days for a hands-on workshop on farm transition planning. This engaging session is designed to guide farm families in making thoughtful plans for the future of their farm business. Discover how to have essential conversations about succession and explore practical strategies and tools for transferring ownership, management, and assets to the next generation.

The workshop will take place on December 6, from 10:00 a.m. to 3:00 p.m., at the Ashland University Convocation Center. Visit woodlandstewards.osu.edu for additional information. Can't attend? More farm transition workshops are scheduled in the coming months—find dates and locations under the Farm Transition section at farmoffice.osu.edu.

Legal Groundwork
By: Robert Moore, Thursday, October 31st, 2024

Written by AnnaMarie Poole, Law Fellow, National Agricultural Law Center 

Background Info

In 2017, the Tax Cuts and Jobs Act substantially raised the federal lifetime gift and estate tax exemptions, nearly doubling the previous limits.  As of 2024, individuals can transfer up to $13.61 million, and married couples up to $27.22 million, without facing federal estate tax.  This increased exemption has provided significant tax relief by allowing larger portions of estates to be passed on tax-free.  However, this benefit is temporary and is scheduled to end on December 31, 2025.  After this date, the exemption will revert to the 2017 level of $5.49 million, adjusted for inflation1, which would reduce the amount that can be transferred tax-free in one’s estate. 

The estate tax exemption was raised in hopes of reducing the financial burden on higher wealth families, many of whom argued that the previous exemption levels led to “double taxation” on already-taxed assets, which harmed family-owned businesses and farms.  Also, by reducing estate tax liability by raising the exemption, it was hoped that people benefitting from the higher exemption would invest more of their wealth rather than redirect it toward complicated estate planning or tax-avoidance strategies.  The argument was this would help stimulate the economy. 

Opinions vary widely on what will happen to the estate tax exemption after 2025.  Some believe that Congress will extend the current higher exemption limits, which would keep the thresholds at or near the 2024 levels to continue providing tax relief.  Others expect the exemption to revert to the pre-2017 level, adjusted for inflation, which would result in a significantly lower threshold that will subject more estates to federal taxes.  Some predict a compromise, with the exemption being set somewhere between the current amount and the original amount, which would allow for a middle-ground approach that would balance tax revenue needs with estate planning concerns.  Finally, some propose lowering the exemption even further than the 2017 level and increasing tax rates.  Let’s look at each of these scenarios.

Option #1: Extend the Current Limit 

One prevailing thought is to extend the estate tax exemption due to its minimal contribution to overall federal revenue and its limited impact on reducing deficits.  Over the past 50 years, the estate tax has consistently accounted for less than 3% of total federal revenues.  In 2020, it raised just $17.6 billion out of $3.5 trillion in federal revenue, enough to cover only about a day’s worth of federal spending.  Given its relatively small role in funding government operations, many argue that the economic benefits of preserving wealth, protecting family-owned farms and businesses, and encouraging investment outweigh the limited revenue gains from allowing the exemption to expire.  This perspective suggests that maintaining the higher exemption would continue to promote economic stability without significantly affecting the federal budget.

Option #2: Revert to Original Limit

Historically, the estate tax has been used as a tool to prevent the excessive concentration of wealth and political power.  However, due to recent changes, only about 0.2% of estates are currently taxed, and the average tax rate on inherited wealth is just 2%.  Proponents of a lower exemption argue that reverting to the original exemption level would restore the estate tax’s role in curbing wealth inequality and funding public services.  Additionally, with an estimated $80 trillion in wealth set to be transferred from baby boomers to their heirs in the next two decades, a lower exemption could ensure that a larger portion of these inheritances is taxed. 

Option #3: Middle Ground

Another potential solution for estate tax reform could involve finding a middle-ground exemption level that lies between the current higher threshold of $13.61 million per person and the previous lower amount of $5.49 million, adjusted for inflation.  This would allow for more moderate estates to pass on assets without facing significant tax burdens while allowing larger estates to still contribute to public revenues.  Adjusting the exemption this way could protect smaller inheritances while ensuring fair contributions from estates of higher value.

Another middle-ground option would be to maintain the current exemption of $13.61 million per person but introduce a slightly increased tax rate on any amount exceeding this threshold.  Currently, estates over the exemptions are taxed at a rate between 18% to 40%.  By raising the tax rate but keeping the exemption, there would still be protections for most estates but those exceeding the exemption contribute a bit more to the tax system.  By making this adjustment, the policy could protect inheritances and generate necessary government revenue.  

Option #4: Lower the Original Limit

Another option is to reduce the estate tax exemption to an amount lower than the 2017 level and/or increase the estate tax rates.  An example of this approach is found in the American Housing and Economic Mobility Act of 2024, introduced in the Senate by Elizabeth Warren (D-MA) and in the House by Emanuel Cleaver (D-MO).  The bill outlines various affordable housing initiatives aimed at lowering costs for renters and buyers, while proposing modifications to estate and gift taxes to fund these measures.  Some proposed modifications to estate and gift taxes include:

  • Lower the estate tax exemption to the 2009 amount of $3,500,000
  • Replace the current estate tax rate of 40% with progressive rates
    • Tax rate of 55% for estates valued between $3,500,000 and $13,000,000
    • Tax rate of 60% for estates valued between $13,000,000 and $93,000,000
    • Tax rate of 65% for estates over $93,00,000
    • Additional 10% tax for estates over $1 billion 
  • Reduce the annual gift tax exclusion from $18,000 to $10,000

While this type of legislation seems unlikely to pass Congress, there is a vocal minority that would like to see estate tax exemptions significantly reduced.

Who Can Make Federal Tax Law Changes?

The President does not have the authority to unilaterally change estate tax exemptions or make permanent adjustments to the tax system; those decisions are made by Congress. While the President can propose or advocate for specific tax policies, it is Congress that drafts, debates, and enacts tax legislation. As the federal estate tax provisions are set to expire in 2025, any adjustments to exemption levels or tax rates will require congressional approval. Lawmakers may choose to extend the current exemption, revert to previous thresholds, reach a compromise, or adopt a new approach. However, while the President can influence this process, direct control remains with Congress.

What This Means For You

As of now, it is impossible to know what will come on January 1, 2026.  However, it is not too late to utilize the current estate and gift tax limits.  In the upcoming year here are some things you should consider:

  1. Gifting: Gifting can be an effective way of reducing estate tax liability but there are many tax and estate planning implications.  For a detailed discussion of gifting, see the Gifting To Reduce Federal Estate Taxes bulletin available here.
  2. Consulting with an Estate Planning Attorney: An estate planning attorney can help set up the best plan for you and potentially utilize the current exemptions while they are still available. 
  3. Reviewing Your Current Plan: You should make sure your current estate plan reflects your goals and takes advantage of the current higher exemption before it potentially decreases.  
  4. Staying Informed: As the tax laws potentially change in the upcoming year, you should stay informed about issues that could impact your estate plan and your family’s finances. 

1 The adjusted for inflation exemption is expected to be between $7 million and $7.5 million.

Pore space illustration: Chevron Corporation
By: Peggy Kirk Hall, Tuesday, October 29th, 2024

Part 2 in our series on Carbon Capture and Storage

If you’re a landowner, you may hold a valuable property interest that is gaining attention across the country: pore space.  Pore space is the empty space between the particles of soil, sand, rock, and sediment beneath the surface of your land.  It’s a geological formation that, if large enough, can store gas, brine water, and similar substances. Why the recent interest in pore space? It’s a necessity for Carbon Capture and Storage (CCS)—a technology that removes carbon dioxide (CO2) from emission sources and stores it in pore space far beneath the land’s surface.

We began this series on CCS with an overview of the technology and why it’s gaining traction in Ohio.  See our first post on the Ohio Ag Law Blog.  This second post focuses on legal issues related to pore space. The capacity to store COin the pore space beneath the surface is a property interest that may have value to landowners—one that could be sold or leased to another party for CCS or other storage purposes.  But before pore space transactions occur in Ohio, the General Assembly must address a few legal issues:  clarification of pore space ownership, whether and how pore space interests can be severed and conveyed, and the relationship between a severed pore space interest and surface and mineral interests. Here’s why these are important legal needs.

  1. Ownership of pore space.   A golden rule of property law partly answers the issue of pore space ownership in Ohio:  the “ad coleum” doctrine.  The doctrine states that the owner of land owns the rights above and below the land, from the sky to the earth’s core. The assumption under this common law rule, then, is that a landowner owns all subsurface pore space.  But what if the pore space is created as a result of a particular activity, like mining?  While a few court cases in Ohio have followed the ad coleum doctrine and recognized pore space ownership as an attribute of surface ownership, there have been inconsistent court rulings on the question of ownership of pore space resulting from mining activities.  The rulings drive a need for the Ohio legislature to clarify pore space ownership issues, first by codifying the ad coleum doctrine and stating that a surface owner also owns the pore space beneath the surface.  Second, statutory law could state whether the surface or mineral owner holds the right to pore space resulting from mineral extraction.  If Ohio follows the general rule on mineral extraction adopted among other states, Ohio law would state that the surface owner retains the right to pore space after minerals are fully extracted.
  2. Severance, conveyance, and recording of pore space interests.  Can a surface owner sever the rights to pore space and convey the interest to another party, as Ohio law allows with mineral interests?  That’s another legal question in need of clarification in Ohio. The legislature could establish the right to sever pore space and adopt the same conveyancing and recording standards we utilize for tracking other property interests in Ohio.
  3. Conflicts with other property interests.  Can pore space owners interfere with mineral and surface ownership interests by taking actions such as establishing a CCS well on the surface to store CO2 in the pore space?  Which property interest has priority over the others if there is a conflict?  Our courts can address legal questions as they arise but the Ohio legislature has the power to clear up the relationship between these property interests through statutory law. In particular, Ohio law should establish the priority of rights between the surface, pore space, and mineral interests and answer which is dominant over another when there is a conflict.

Will the legislature tackle these pore space issues that arise with the potential of CCS in Ohio?  Possibly, but probably not until the next legislative session begins in January.  There are currently proposals in both chambers of the legislature that simply declare an “intent to regulate carbon capture and storage technologies and the geologic sequestration of carbon dioxide for long-term storage,” House Bill 358 and Senate Bill 200, but those bills do not yet contain any detailed language and they will die if not passed by year’s end.  With few days remaining in the legislative session this year, the bills are not likely to see any action.  There will likely be new versions of the bills introduced next year, however, if the interest in CCS in Ohio continues.  Hopefully, the proposals will answer our legal questions about pore space as a property interest of Ohio landowners.

Legal Groundwork
By: Robert Moore, Thursday, October 24th, 2024

While we never like to see the damage and destruction caused by natural disasters, such as the floods in North Carolina, it can be an opportunity to take stock of our own situation. Disasters remind us of the unpredictability of life and highlight the need to ensure our personal and financial affairs are in order. While you might think that large-scale disasters won’t affect your area, people in North Carolina and Tennessee likely felt the same until disaster struck. With that in mind, here are a few key aspects to consider when planning for unforeseen events:

  1. Estate Planning Documents.  Imagine being injured during a natural disaster, only to discover that your health care power of attorney has been destroyed in the chaos. Without it, your family might struggle to make critical decisions on your behalf. The same applies to financial powers of attorney, wills, and trusts. If those documents are lost or damaged, your loved ones could face significant legal and financial challenges.

To avoid these situations, you should have a copy of your documents in a safe, secure location.  One easy solution is to keep a digital copy with your attorney.  Most law firms keep their documents digitally on secure servers.  If your law firm does not already have a digital copy of your documents, consider asking them to add your documents to their server.  If you do not want to have digital copies of your documents, make a paper copy and leave with your attorney or another trusted person.

  1. Insurance.  Have you reviewed your insurance policy with your insurance agent to access how your policy would address a disaster such as fire, tornado or flood?  Some of those affected by the recent flooding never imagined they’d need flood insurance—until it was too late.  Be sure to have a discussion with your insurance agent as to what type of disasters are covered and, more importantly, what disasters are not.  If your policy lacks coverage for certain disasters, consider adding endorsements to extend your protection. Acting proactively ensures you're not left scrambling when a crisis arises.
  2. Business Succession.  What would happen to your farming operation if the primary manager were suddenly injured, incapacitated, or unavailable? Having a clear succession plan is essential to ensure the farm continues to operate smoothly in the face of such disruptions. Establish a plan that designates individuals—either from within the operation or externally—who can take over management duties if the primary leader becomes unavailable. Ensure that they are familiar with the day-to-day operations and responsibilities.

Also, Make sure that all essential business records are regularly backed up and that copies are stored securely, either digitally or at an offsite location. This is crucial in case the main office is destroyed or inaccessible.  Would you know what bills need to be paid in the next 30 days if the office is destroyed in a fire?

  1. Contact Information.  If your phone was lost or destroyed, would you have the contact information for important people—like family members, employees, advisors, or key vendors? With smartphones storing most of our contacts, many of us only have a few numbers memorized. While you could eventually track down phone numbers, the last thing you want to do during a disaster is scramble to find essential contacts. Create a list of contact information for those you may need to reach in an emergency. Store a copy of this list somewhere outside your home or office, or give it to someone whose number you have memorized. This ensures you can quickly access critical phone numbers and emails when needed most.

While most of us may never experience catastrophic damage from floods, fires, or tornadoes, some of us inevitably will. How prepared are you for the unexpected? Being unprepared only makes a disaster more difficult to manage. Take an hour or two now to develop an emergency plan—this small investment of time will help you respond more quickly and avoid making a challenging situation even worse.

 

Posted In: Business and Financial
Tags: farm disaster planning
Comments: 0
By: Peggy Kirk Hall, Tuesday, October 22nd, 2024

One thing we're not short on in agriculture today is the opportunity to engage in carbon sequestration programs. Many programs are available that offer to pay farmers and landowners for adopting practices that sequester carbon dioxide to keep the pollutant out of the atmosphere.  The practice aims to reduce greenhouse gas (GHG) emissions, as carbon dioxide is a significant contributor to GHG.  Farming practices that sequester carbon include using cover crops, adopting no-till, and planting trees. 

If you're considering a carbon sequestration or carbon credit program, what do you need to know about carbon sequestration?  An upcoming program offered by OSU Extension's Energy Outreach Program will offer insight into carbon sequestration. Join us on October 29, 2024 at 8 a.m. for a webinar on "Carbon Sequestration for the Farmer and Landowner" and hear from these three panelists:

  • Michael Estadt, Assistant Professor & Extension Educator, Pickaway County
  • Peggy Kirk Hall, Attorney & Director, Agricultural & Resource Law Program
  • John Porter, Outreach & Partnership Liaison,Truterra, LLC

The panel will highlight important issues and considerations for farmers and landowners interested in carbon sequestration. Pre-registration is not necessary; simply join the webinar through this link:  go.osu.edu/carbon2024.

Contact Dan Lima at lima.19@osu.edu or call the OSU Extension office in Belmont Co. (740) 695-1455 for more information. 

 

By: Peggy Kirk Hall, Thursday, October 17th, 2024

Co-authored by Tyler Zimpfer, Law Fellow, National Agricultural Law Center

Many in Ohio agriculture are familiar with the terms “carbon sequestration” and “carbon credits.” The terms relate to efforts to reduce carbon in the atmosphere by capturing or “sequestering” the carbon.   Ohio farmers have taken advantage of their ability to sequester carbon through practices like conservation tillage and cover crops, thus exchanging carbon sequestration practices or the generation of carbon credits for cash payments.

Now an additional form of carbon sequestration is emerging: Carbon Capture and Storage (“CCS”). CCS is a carbon sequestration technology that industries with large carbon dioxide (CO2) emissions are using to reduce their carbon “footprint.”  CCS technology captures CO2 from airborne emissions and injects it into geologic formations beneath the land surface. Because CCS requires land and can reduce the “carbon index” of products like ethanol, the technology has implications for Ohio agriculture.

In this first post on CCS, we’ll lay out the background of CCS and what’s driving interest in it.  Future posts will explain legal hurdles for bringing CCS to Ohio, how CCS relates to ethanol and the potential growth of the sustainable aviation fuels market, and how Ohio landowners could be affected by CCS.

What is Carbon Capture and Storage?

CCS is a process that captures carbon dioxide from an emitting source and permanently stores it underground in geologic formations referred to as “pore space.” Though some are hearing of CCS for the first time, CCS technology has existed for decades, as have many studies on its safety, sustainability, and the amount of carbon that can be stored in different formations and regions. The Environmental Protection Agency (“EPA”) finalized a rule regulating geologic sequestration in 2010 pursuant to the agency’s authority under the Safe Drinking Water Act.

CCS involves three separate steps – capture, transport, and storage. CO2 is captured and separated from other gases at industrial facilities or directly from the atmosphere. After captured, the CO2 is then compressed for transportation. The compression forces the CO2 to act like a liquid. CO2 is most commonly transported via pipelines but can also be moved by ship to offshore wells. Once the CO2 arrives at the intended destination, it is injected into rock formations, often a mile or more underground, where it spreads throughout the pore space of the formation in a plume. The CO2 is then permanently stored in the geological formation. CCS technology is also used for “enhanced oil recovery,” because CO2 injection can recover untapped oil reserves in a partially-depleted oil field.  When used for enhanced oil recovery and storage, the technology is referred to as “carbon capture utilization and storage” or CCUS. The image below illustrates different types of CCS.

A diagram of a well being

Description automatically generated

Source:  Congressional Budget Office

Regulation of CCS wells

CO2 injection wells are regulated under the federal Safe Drinking Water Act by the EPA through the Underground Injection Control (UIC) Program. The category of wells relevant to CO2 for geological storage is “Class VI” wells. The primary purpose of the Class VI regulations is to protect underground sources of drinking water and prevent leakage, explosions, and  contamination. Much attention is currently focused on CCS technology due to a recent  Archer Daniels Midland (ADM)  suspended the injection of CO2 at a site in Illinois after discovering a potential leak due to corrosion in a monitoring well. While there is no report of water contamination, the EPA found ADM violated federal safe drinking water rules by failing to follow an emergency response plan after detecting the leak.

Why so much interest in CCS?

CCS is expected to be an important strategy of industries that struggle with decarbonization or net-zero greenhouse gas emission goals. CCS can reduce CO2 emissions for hard-to-abate sectors that don’t have other methods for reducing their emissions, such as refineries and cement, steel, and chemical manufacturing

A more recent (and arguably more prominent) factor driving CCS is the current federal tax incentive. The 2022 Inflation Reduction Act (IRA) expanded the tax credit known as “Section 45Q,” first enacted in 2008 and extended in 2018. A company that captures and stores a certain threshold of CO2 every year is eligible for the tax credit. The IRA made several changes to the Section 45Q tax credit to further promote CCS and make it more lucrative and accessible, such as increasing the value of the credit by 70% to $85 per metric ton; lowering the annual capture amount required for eligibility by at least 50% for most facilities; and allowing transferability of the tax credit. With the significant changes in the IRA, researchers expect an increase in CCS projects across the United States.

Can we do CCS in Ohio?

No, not without legislation.  Two legal changes are necessary to enable CCS technology in Ohio.  (1) Ohio law must define and clarify property rights to the pore space in geological formations beneath land surfaces, and (2) the state must allow the establishment of CCS injection wells in Ohio. We'll explain these two requirements in our next post in this series on CCS.

For more background information on CCS and Section 45Q, see:

By: Peggy Kirk Hall, Monday, October 14th, 2024

Friday, October 18 is the next date for our Farm Office Live webinar, featuring agricultural law and farm management updates from our OSU Farm Office team of experts.  Join us at 10:00 a.m to hear from these speakers on our October topics:

  • Fall Crop Insurance Update​ - Eric Richer

  • Drought Assistance​ - David Marrison

  • Legal Update​ - Peggy Hall

  • A Tribute to Paul Wright​ - Peggy Hall and Robert Moore

  • Is H-2A a Viable Option for Your Farm?​ - Robert Moore and Jeff Lewis

  • 4th Quarterly Fertilizer Price Summary​ - Clint Schroeder and Amanda Bennett

  • Winter Program Update​ - David Marrison

It's necessary to register for the free webinar, but register once and receive access to all of our monthly Farm Office Live webinars.  Registration is at go.osu.edu/farmofficelive and a link to the webinar recordings is at the same location.

Posted In: Business and Financial
Tags: Farm Office Live
Comments: 0
Person's hands typing on a computer keyboard

Written by Tyler Zimpfer, NALC Law Fellow with the OSU Agricultural & Resource Law Program

The Corporate Transparency Act (“CTA”), enacted in 2021, requires “reporting companies” to file documents with the federal government indicating beneficial ownership information (BOI) for the business. Earlier this year, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) began accepting BOI filings from certain companies doing business in the United States. While reporting has begun, several legal disputes have sprung up around the country challenging the constitutionality and enforcement of the CTA. Despite the ongoing litigation, however, the initial filing deadline of January 1, 2025 remains in effect for businesses subject to the CTA.

Recent litigation challenging the CTA

On March 1, 2024, a U.S. District Court in Alabama ruled that the CTA exceeded Congress’ enumerated powers and therefore was unconstitutional. The court held that “the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated powers to be necessary or proper means of achieving Congress’ policy goals.” Specifically, the court concluded that Congress exceeded its foreign affairs, taxing, and commerce powers. Interestingly, the court did not decide on the arguments that the CTA also violates the First, Fourth, and Fifth Amendments to the U.S. Constitution.

The court prevented enforcement of the CTA against only the specific plaintiffs in the case – the National Small Business Association (NSBA) and one of its individual members. While NSBA members currently avoid any reporting requirements, CTA compliance is still required for all other companies. Therefore, the injunction imposed by the court lacks a significant, practical impact for all other businesses for the time being.  

The United States has appealed the case, but most experts are not expecting a decision from the federal Court of Appeals for the Eleventh Circuit before the January1, 2025 deadline. When a decision is released, the losing party will likely appeal to the United States Supreme Court, dragging a final determination out even further.

Six other lawsuits have been filed in other federal district courts around the country, each expecting to last longer than the upcoming filing deadline. Long story short, the legal saga of challenges to the CTA is likely to continue for the foreseeable future.

Click here to read the recent U.S. District Court opinion from Alabama.

What the CTA requires

Several key terms of the CTA explain which companies the law affects and what a company must report by January 1, 2025:  

  • “Reporting companies” subject to the CTA includes any domestic or foreign corporation, limited liability company, or any other entity that is formed or registered to do business in a U.S. state by filing a document with the secretary of state or other similar office. Several exceptions exist for those industries already subject to government oversight.
  • A “reporting company” must disclose certain information about the company and its “beneficial owners.” The reporting information includes the full legal name and the IRS taxpayer identification number of the company.  BOI includes full legal name, address, and either an image of a U.S. passport, driver’s license, or other identification document issued by a state, local government, or tribe of each "beneficial owner."
  • A “beneficial owner” is any individual who, directly or indirectly, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of a reporting company. There is no limit to how many beneficial owners a company may have.

To read specifics about the mechanics and submission guidelines of the CTA, please see our law bulletin, The Corporate Transparency Act:  Reporting Requirements, published earlier this year.

What does the CTA mean for farming entities in Ohio?

Many farming entities should be uniquely aware of the new BOI reporting obligations of the CTA. The CTA does not have specific industry exemptions for agriculture but takes a broad sweep at any entity that may be formed as a shell company. However, notable exceptions to the mandates of the CTA that affect farming entities include sole proprietorships and  general partnerships, which are exempt from CTA because they are not required  to register with Ohio’s Secretary of State.

Farming entities classified as "reporting companies," such as most farm limited liability companies (LLCs), are required to report relatively straightforward ownership information. However, gathering the necessary details, like driver's licenses or other forms of identification, can be time-consuming.  A scenario to take note of arises when an individual, despite owning only a small percentage of the company, is responsible for making many of the key short- and long-term decisions. This often occurs when management is passed to the next generation, while the older generation retains the majority of ownership. Under the Corporate Transparency Act (CTA), an individual who exercises significant management control must submit beneficial ownership information to FinCEN, even if their ownership stake is relatively small.

Additionally, any BOI updates such as a son or daughter being legally included in ownership of the farm’s assets or a beneficial owner's change of address must be reported within 30 days of the change. Forgetting to timely update the government may result in significant penalties for the company or a beneficial owner.

Moving forward

Farming entities that qualify as reporting companies should still expect to file information with FinCEN by January 1, 2025 as required by the CTA. Less than 10% of qualifying entities have filed with FinCEN so far, suggesting a delay in reporting or uncertainty regarding the District Court’s ruling in Alabama. Depending on current pending litigation, the CTA’s mandates may be adjusted or eliminated. Bills introduced in the U.S. House of Representatives and the U.S. Senate have also been proposed to modify or repeal the CTA, but no significant action has occurred on the proposals.

As litigation and legislation proceed, updates on the cases and bills will be forthcoming. In the meantime, farming entities should work with their attorneys, accountants, and other professionals knowledgeable of the new CTA obligations to meet the initial and future reporting requirements of the CTA.

Legal Groundwork
By: Robert Moore, Friday, October 04th, 2024

We are excited to announce that the Ohio Farm Resolution Services (OFRS) has been recertified by the USDA and will begin its second year of operation.  OFRS is part of the USDA’s certified mediation program which provides the opportunity for each state to establish an agricultural mediation service.  This program, established under the Agricultural Credit Act of 1987, provides a cost-effective, voluntary, and confidential alternative for resolving a wide range of issues affecting the agricultural community.

OFRS primarily offers three key services. First, we facilitate mediation between parties in disputes, with the goal of finding a resolution before the costly and time-consuming process of litigation. For example, we can help neighboring landowners resolve boundary disputes or assist business owners in negotiating a buyout for a departing partner.

Second, we provide mediation for farmers and landowners who may be appealing a USDA or ODA determination.  For instance, if a farmer is denied eligibility for a commodity support program, we can facilitate a face-to-face discussion between USDA/FSA and the farmer to provide them an opportunity to try to work through the issues in an attempt to reinstate eligibility.

Our third service, a more non-traditional but equally important offering, involves assisting farm families with farm transition planning. This service is especially helpful for families who need guidance to get started or have encountered obstacles in their planning process. We've sat down with many farm families at their kitchen tables to discuss and navigate their farm transition plans.

OFRS can address a wide range of issues, including:

  • Farm transition planning
  • Family communication and management succession
  • Business entities/ business practices
  • Energy leases
  • Farm leases
  • Zoning
  • Land Use
  • Farm labor issues
  • Neighbor issues
  • Lender/creditor
  • Property disputes
  • Farmland drainage
  • Crops/Agronomics
  • USDA/ODA appeals
  • Estate disputes

If you're interested in OFRS services, feel free to reach out via email at moore.301@osu.edu or call us at 614-247-8260. Thanks to USDA funding, we can offer our services at a minimal fee, typically just enough to cover travel and out-of-pocket expenses.

Legal Groundwork
By: Robert Moore, Tuesday, September 24th, 2024

In our last blog post, we explored how an LLC affects liability when owning machinery. However, liability isn’t the only consideration when evaluating the benefits of an LLC for your machinery. In this article, we'll focus on the tax implications of establishing a machinery LLC. As with most legal and tax strategies, there are both advantages and disadvantages to weigh before making a decision.

Section 179 Deductions

Farmers often use Section 179 to immediately expense the purchase of machinery rather than taking depreciation over a number of years.  If the machinery is used in the farming operation, Section 179 can be taken regardless of whether the machinery is owned individually or in a business entity.  However, Section 179 may not be available to retired farmers who still own machinery.

A common farm transition plan is for the retiring farmer to continue to own the machinery and lease it to the next generation farmer.  This leasing strategy avoids a sale of the machinery that would result in significant income taxes.  Leasing also helps the next generation’s cash flow.  However, a challenge with this strategy is that Section 179 expensing is not available for individuals who lease their machinery.  Consider the following example:

Mom and Dad decide to retire from farming and transition their operation to Daughter.  To avoid significant taxes on a sale and to help Daughter cash flow her farming operation, Mom and Dad continue to own the machinery and lease to Daughter.  If Mom and Dad purchase new machinery to add to their inventory, they will likely not be eligible for Section 179 expensing.

Using an LLC can allow for Section 179 eligibility because business entities who lease machinery are eligible for Section 179.  Let’s continue the example:

Mom and Dad set up an LLC and transfer their machinery to the LLC.  This new entity leases the machinery to Daughter.  If the LLC buys new machinery, the newly purchased machinery will likely be eligible for Section 179.

As the examples illustrate, using an LLC can be an effective strategy to maintain Section 179 eligibility for farmers who may have retired but maintained ownership of the farm machinery.

Reducing Self-Employment Tax

Leasing personal property, including farm machinery, generally results in self-employment tax, unless the machinery is leased along with real estate. One potential strategy to mitigate self-employment tax is to establish an LLC taxed as an S-Corporation and contribute the machinery to the LLC. In theory, some of the rental income is distributed to the owners without being subject to self-employment tax.  However, this strategy carries several risks.

The first major risk is the loss of a stepped-up tax basis upon the owner's death. When machinery is owned by an individual or by an entity taxed as a partnership, heirs may receive a stepped-up tax basis on the machinery, allowing them to re-depreciate or sell the equipment with little to no taxable gain. When machinery is held by a corporation, the stepped-up basis only applies to the ownership interest, not the machinery.  Let’s explain this concept by continuing the previous example:

Mom and Dad’s LLC holds $1,000,000 of machinery and is owned in equal shares.  They decide to tax their LLC as a partnership.   If Dad dies, his estate can either receive a $500,000 stepped-up basis on his ownership interest or the machinery in the LLC will receive a stepped-up basis of $500,000.  Mom, as the executor, elects to take the stepped-up basis on the machinery.  Mom now has $500,000 of additional tax basis in the LLC that can be depreciated offsetting $500,000 of income.

Conversely, Mom and Dad decided to tax their LLC as an S-Corporation.  Dad’s estate will only receive a stepped-up basis on his shares of stock.  Mom cannot depreciate the stock.  The stepped-up basis will only help Mom if she sells the stock, which is unlikely.

The stepped-up basis upon the death of an owner can be a huge financial windfall to the surviving spouse or heirs.  A loss of stepped-up basis on the inside assets of an entity taxed as a corporation should be taken into consideration when deciding upon the tax structure of a business entity that will hold machinery.

Another downside of holding leased machinery in an S-Corporation is the potential passive income tax. If more than 25% of the S-Corporation’s total income comes from passive activities, including machinery leasing, the corporation may face a tax on its net passive income. If this passive income exceeds 25% for three consecutive years, the S-Corporation risks losing its status and may be forced to convert to a C-Corporation, which could have more complex tax consequences.

Beware of Debt on the Machinery

Normally, contributing machinery to an LLC does not trigger any tax.  However, there is an exception when the debt on the machinery exceeds the tax basis.  In this circumstance, the IRS may treat the excess amount as a gain for the individual transferring the asset.  This gain is subject to income tax and can create an unexpected tax liability for the owner of the machinery.  Consider the following example:

Mom and Dad own a tractor that has a $20,000 tax basis.  They have $50,000 of debt on the tractor.  They contribute the tractor to their LLC.  When their accountant prepares their tax return the following year, the accountant informs Mom and Dad that they owe income tax on the $30,000 difference between the debt and tax basis.

Before contributing machinery to an LLC, be sure to consult with your tax advisor to be sure that there will be no unexpected tax liabilities.

Importance of a Written Lease

No matter which entity or tax structure you choose, it’s important to have a written lease for your machinery. A formal written agreement clearly outlines the responsibilities of both the lessor and lessee, helping to prevent misunderstandings or disputes down the road.  A written lease also reinforces the legitimacy of the arrangement as a formal business transaction. Without a proper lease, the IRS might scrutinize the leasing arrangement, potentially treating it as a disguised sale or disallowing certain tax benefits, such as Section 179 deductions. To avoid these issues, always use a comprehensive, well-drafted lease for machinery leasing arrangements.

Seek Legal and Tax Advice

Using an LLC to hold farm machinery can provide tax benefits but is also fraught with potential pitfalls.  Be sure to consult with your legal and tax advisor before establishing an LLC and transferring your machinery to the LLC.  A careful analysis of the advantages and disadvantages of an LLC and its tax structure must be done to determine the best strategy to pursue.

Posted In: Business and Financial
Tags: Machinery LLC
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