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Attorney Bill Bridgforth will present OSU's next webinar on "The 2014 Farm Bill:  Guiding a Client through the New Law" on Friday, January 9 at 1 pm EST.  Bridgforth is a senior partner in the Arkansas law firm of Ramsay, Bridgforth, Robinson & Raley, LLP who represents agricultural producers around the United States.  He will explain the election decisions producers and landowners must make under the new Farm Bill and will provide examples of decision making impacts. 

There is no registration or fee required for the webinar, which is accessible at https://carmenconnect.osu.edu.  A recording of the webinar and a listing of additional webinars is available at farmoffice.osu.edu.  

The Ohio Food, Agriculture & Environmental Law Webinar Series is an outreach project of OSU Extension's Agricultural & Resource Law Program.

By: Larry Gearhardt, OSU Extension Asst. Professor, Taxation

For the past several years, Ohio’s farmers have had the enviable task of planning for higher incomes because of historically high crop prices. Year-end tax planning became increasingly important with the passage of the 2012 Fiscal Cliff legislation (passed on January 1, 2013, but made retroactive to 2012). This legislation contained several provisions that penalized high income earners, such as a new 39.6% income tax rate, a 20% tax on capital gains for taxpayers in the 39.6% range, and a new 3.8% net investment income tax and a 0.9% Medicare tax.

Most farmers normally do not have income that exceeds the thresholds that trigger these higher taxes. However, the higher crop prices over the past several years have pushed more farmers into the category where year-end tax planning was critical. Perhaps 2014 will be different because of the plummeting crop prices, but on the flip side, farmers have lost two very important tax planning tools, at least for today. Furthermore, as is often the case, when one sector of agriculture loses, another sector gains. Livestock and poultry farmers are still receiving high prices for their products.

The most important step in year-end tax planning is to establish a date to determine income and expenses for the year. I suggest that around December 1 of this year, the farmer should determine, as close as possible, what his/her income and expenses are for the year. This leaves ample time for the farmer to take action to reduce income taxes, if possible. As soon as the ball drops on New Years Eve, the farmer has lost his opportunity to take action to reduce his taxes in 2014.

There were 55 tax benefits, credits, and exclusions that expired at the end of 2013 and have not been re-authorized. The two most critical tax benefits for farmers that either expired, or were reduced, were bonus depreciation and the section 179 expense deduction. Until the end of 2013, section 179 of the Internal Revenue Code allowed a farmer to deduct up to $500,000 of the cost of capital improvements as an expense in the year of purchase. This amount has been reduced to $25,000 in 2014. In addition to the $500,000 expense deduction, a farmer could take a 50% bonus depreciation in the year of purchase of a capital asset. There is no bonus depreciation for 2014.

There is keen interest in whether or not the section 179 expense deduction will be increased and the bonus depreciation returned. The word out of Washington is that nothing will happen until after the November election. Whether or not any changes happen between the election and the end of the year is anyone’s guess. However, historically, Congress has made the section 179 expense deduction and the bonus depreciation retroactive to the prior year if no action is taken. If a farmer bets on section 179 being increased and bonus depreciation returning, he should take action prior to the end of the year. If he waits until 2015 to purchase that new tractor, it is too late to adjust 2014 taxes.

Besides betting on the section 179 expense deduction and bonus depreciation, another useful tax planning tool is income averaging. Farmers enjoy the ability to look back at the prior three years and average their income over that period of time in the event that the farmer experiences a high income year. This may have limited benefit in light of the high crop prices over the last several years.

The most basic year-end tax planning is timing income and expenses, if possible, so that the income and expenses occur in the year that is most beneficial to the farmer. If 2014 is a high income year, the farmer should delay the receipt of revenue until 2015 and pay for 2015 expenses this year. This becomes especially important under the current circumstances where it appears as if 2015 income will be lower than previous years.

Even though the crop prices are plummeting, those farmers in the livestock and poultry sectors are still enjoying high profit margins. Until we know the future of the section 179 expense deduction and bonus depreciation, the options of livestock and poultry farmers are somewhat limited. The timing of income and expenses becomes more critical with more emphasis placed on deferring income and accelerating expenses. Even though it is not as inviting as in prior years, making capital expenditures and depreciating the cost by MACRS depreciation is still a useful tool.

Although long considered a natural fertilizer that can benefit our soils, manure has a history of increased regulation in recent years based on potential impacts to water quality.   The following explains how state and federal law regulates the production, storage and application of animal manure in Ohio.  

Livestock Environmental Permitting Program

The Ohio Department of Agriculture’s Division of Livestock Environmental Permitting (ODA) administers a permit program for Ohio’s largest confined livestock operations, or Concentrated Animal Feeding Facilities (CAFFs).  Ohio Revised Code Chapter 903 and Ohio Administrative Code 901:10 contain the program’s legal provisions.

An owner must obtain a “permit to install” and a “permit to operate” from ODA before operating a CAFF.  The permit requirement applies to a CAFF that houses any of the following, at a minimum:

• 700 mature dairy cows
• 2,500 hogs over 55 pounds
• 10,000 baby pigs under 55 pounds
• 82,000 laying hens
• 125,000 pullets or broilers
• 1,000 head of beef animals of any size
• 500 horses
• 10,000 sheep or lambs
• 55,000 turkeys

Related to manure, obtaining the “permit to install” requires a CAFF owner to submit information on:

• Maps indicating CAFF boundaries, manure storage facility dimensions, location and siting distances and locations of subsurface drains within 100 feet of manure storage.
• Geological study results with information on soil; groundwater sampling and analysis; hydrology; geology and topography of land used for manure storage.
• Listing of the type, amount and nutrient content of manure from the facility.

For the permit to operate, the CAFF must submit a Manure Management Plan that outlines the Best Management Practices the CAFF will implement to minimize water impacts from the storage and use of manure.  The Manure Management Plan must include:

• A nutrient budget.
• Manure and soil characterizations.
• Manure distribution and utilization methods
• Methods for minimizing odor.
• Inspection, maintenance and monitoring practices.
• Land application methods.

Land Application of Manure for Permitted CAFFs

Land application of manure by a permitted CAFF or by a Certified Livestock Manager working with the CAFF must be in accordance with ODA regulations, which include requirements for:

• Soil and manure tests.
• Crop yields and rotations to determine nutrient needs.
• Setbacks from streams, neighbors and wells
• Limitations on amounts of nitrogen, phosphorus and liquid applied.
• Weather predictions.
• Examination of soil condition for cracks, earthworm burrows and plant root pathways to tile or tile blowouts in the field.
• Monitoring of tile outlets during and after application.
• Restrictions against runoff or ponding of manure.
• Recordkeeping requirements.
• Inspection requirements.

If a local farmer uses manure from a permitted CAFF for application on another farm, the CAFF must provide the farmer with the ODA’s application requirements and a current manure test.  The farmer must certify when and how much manure was taken from the CAFF.  The farmer’s land application of manure then falls under the Agricultural Pollution Abatement Program, described below.

National Pollutant Discharge Elimination System (NPDES) Permits

The federal Clean Water Act requires livestock operations defined as “Confined Animal Feeding Operations” (CAFOs) to obtain a federal NPDES permit if they discharge or propose to discharge a pollutant to surface waters, even if the operation has obtained a permit from ODA. The Ohio EPA administers the NPDES permit process, which requires operators to control spills and runoff from their facilities and from the land application of manure.   To obtain a permit, a CAFO must develop and implement a Manure Management Plan that addresses:

• Practices to ensure adequate manure storage capacity and proper maintenance and operation of storage facilities.
• Practices to divert clean storm water away from production areas.
• Practices to ensure that animals and manure in the production area do not come into direct contact with waters of the State.
• A land application plan that includes:

• A nutrient budget.
• Manure and soil characterizations.
• Application methods and timing.
• Agronomic application rates.

CAFO owners must also meet ongoing monitoring, recordkeeping and reporting requirements and are subject to enforcement actions for violations.

Certified Livestock Manager Certification

Ohio law requires Ohio’s largest CAFFs and every manure broker or manure applicator who handles more than 4,500 dry tons or 25 million liquid gallons of manure per year to obtain the Certified Livestock Manager (CLM) certification from ODA.  The applicant must complete core classes on nutrient management standards, manure storage and handling and Ohio manure regulations and must also complete three elective classes on water quality, soil testing, stockpiling, emergency action plans, spill reporting, value of manure nutrients, recordkeeping, biosecurity, liability or applying manure to growing crops. CLMs must complete ten hours of continuing education every three years to maintain their certification.

Ohio Agricultural Pollution Abatement Program

Ohio’s Agricultural Pollution Abatement Program (APAP) applies to agricultural operations that are not subject to the above state and federal permit programs for CAFFs and CAFOs.   As stated in Ohio Revised Code 1511 and Ohio Administrative Code 1501:15-5, APAP provides state standards for management and conservation practices that aim to abate water pollution resulting from animal manure.   The Ohio Department of Natural Resources Division of Soil and Water Resources (ODNR) administers APAP in cooperation with local Soil and Water Conservation Districts (SWCD).

Ohio’s APAP regulations establish Best Management Practices (BMPs) for livestock operators.  The standards encourage operators to:

• Operate and maintain animal manure collection, storage or treatment facilities to prevent seepage, overflow or discharge of animal manure into waters of the state.
• Prevent the discharge of manure-contaminated runoff from animal feedlots and animal manure management facilities.
• Prevent pollution caused by flooding; construct animal feeding operations so that animal manure will not be inundated by a 25 year frequency flood.
• Minimize pollution from land application of manure by adopting manure application practices that consider the characteristics of the animal manure, available land, topography, cropping system, method of application, weather, time of the year, condition of the soil, other nutrients applied and nutrient status of the soil.

Technical expertise and cost-share assistance is available through APAP to help operators install and implement BMPs and develop Operation and Management Plans.   The law provides a complaint-driven process for suspected pollution incidents that can result in an investigation by ODNR or SWCD.   Farms that cause pollution and fail to adopt the recommended BMPs to address pollution abatement must develop and implement modifications to their facilities as approved by ODNR or SWCD, or face enforcement actions.

Watershed in Distress Regulations

The Ohio APAP regulations also contain rules that apply to certain producers of manure within areas designated as “watersheds in distress,” located in Ohio Administrative Code 1501:15-5-19 to 20.   The chief of ODNR’s Division of Soil and Water Resources, with approval of the Ohio Soil and Water Conservation Commission, may designate a watershed to be in distress when aquatic life and health is impaired by nutrients or sediment from agricultural land uses and where there is a threat to public health, drinking water supplies, recreation, or public safety and welfare.  Within the boundaries of a designated watershed in distress, these additional regulations apply to animal facility owners and operators and manure applicators:

• No land application of manure may occur between December 15 and March 1 without prior approval from the agency; before and after these dates, applications of manure on frozen ground or ground covered in more than one inch of snow may occur only if injected into the ground or incorporated within 24 hours of surface application.
• No land application of manure if the local weather forecast shows more than a 50% chance that precipitation would exceed one-half inch of rain in the 24 hours after the proposed application.
• Restrictions on the application of snowpack manure.
• An operation must ensure a minimum of 120 days of manure storage as of December 1 of each year and keep records of manure storage volumes.
• Anyone who produces, applies or receives more than 350 tons or 150,000 gallons of manure per year must have an approved Nutrient Management Plan that addresses the methods, amount, form, placement, cropping system and timing of all nutrient applications, unless the farm is already operating under a permit from ODA’s DLEP or an NPDES permit from OEPA.

For more information on the regulation of animal manure in Ohio, refer to these resources:

ODA Livestock Environmental Permitting and Certified Livestock Manager Programs - www.agri.ohio.gov/divs/DLEP/dlep.aspx

Ohio EPA Confined Animal Feeding Operations - www.epa.ohio.gov/dsw/cafo/index

Ohio DNR Agricultural Pollution Abatement  - www2.ohiodnr.com/soilwater/water-conservation/agricultural-pollution-abatement

Ohio Revised Code - http://codes.ohio.gov/orc

Ohio Administrative Code - http://codes.ohio.gov/oac

In response to the recent drinking water ban in Toledo, three senators from Ohio's Lake Erie counties have introduced SB 356 to expand and accelerate fertilizer certification legislation passed earlier this year.  Senators Brown, Cafaro and Turner's proposal would add "manure" to the definition of "fertilizer" for purposes of the fertilizer certification program enacted this May in SB 150.   Whether or not manure applications should fall under the fertilzer certification requirement was a point of much debate in committee hearings for SB 150, with the legislature ultimately deciding to exclude manure applications from the new certification program.

SB 356 would also significantly change the deadline for fertilizer applicators to become certified--from September 30, 2017 to December 31, 2014.  This change of deadline, which appears impracticable if not impossible, would require the Ohio Department of Agriculture (ODA) to establish the regulations for the fertilizer certification program and offer certification training so that any persons desiring to apply fertilizers after December 31, 2014 could become certified through the new program.  Currently, SB 150 gives ODA and fertiler applicators three years to establish the new fertilizer certification program and complete certification training.

S.B. 356 is the first of several legislative proposals we expect to see in response to Toledo's water concern.  The bills will likely present different approaches to address phosphorous runoff, which many point to as the cause of the algae problem.  Representative Sheehy has announced his intent to introduce legislation soon that would limit applications of manure on frozen or snow-covered ground and would expand manure storage requirements for livestock operations. 

A statewide Ohio Lake Erie Phosphorous Task Force formed in 2009 issued its second report and recommendations for addressing phosphorous in Ohio waterways last October.