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The word taxes laying in grain.
By: Jeffrey K. Lewis, Esq., Tuesday, May 02nd, 2023

What are “Taxable Gross Receipts” Under Ohio’s Commercial Activity Tax?
By: Jeffrey K. Lewis, Esq., Attorney and Program Coordinator, OSU Income Tax Schools and Barry Ward, Leader, Production Business Management; Director, OSU Income Tax Schools

The privilege of doing business in Ohio comes at a cost. Since July 1, 2005, Ohio has imposed an annual Commercial Activity Tax (“CAT”) on taxpayers doing business in Ohio. The CAT is measured by a taxpayer’s “taxable gross receipts” during the tax period, which for most taxpayers will be the calendar year. 

As a general rule, any individual or business entity that is required to register or pay tax under Ohio law is subject to paying Ohio’s Commercial Activity Tax. There are certain “excluded taxpayers” including any taxpayer with $150,000 or less of “taxable gross receipts”, non-profit organizations, governmental entities, and others.

The focus of this article will be on what is and is not a “taxable gross receipt” under the CAT. To determine what is a “taxable gross receipt” a taxpayer must undergo a three-step analysis that starts with determining what is a “gross receipt” under Ohio law. Then a taxpayer must situs (or source) those gross receipts to Ohio in order to calculate their total “taxable gross receipts.” A taxpayer’s total taxable gross receipts will then determine their remaining obligations under the CAT. 

Step 1. Determine total “gross receipts.”

“Gross receipts” are broadly defined in Section 5751.01(F) of the Ohio Revised Code as “the total amount realized by a person, without deduction for the cost of goods sold or expenses incurred, that contributes to the production of gross income of the person, including the fair market value of any property and any services received, and any debt transferred or forgiven as consideration.” In other words, a gross receipt is anything that contributes to a taxpayer’s gross income which includes proceeds from the sale of goods or services and income generated from rentals and leases. 

However, Ohio law excludes numerous items from the definition of gross receipt and therefore those items are excluded from being subject to the CAT. A full list of items excluded from the definition of gross receipts can be found in Ohio Revised Code Section 5751.01(F)(2). Below, Chart 1 provides a list of those exclusions, and the bolded exclusions will be discussed in further detail below. 

It is important to remember a taxpayer’s viewpoint when reading the list of exclusions. A taxpayer must ask themselves: “Did I receive proceeds from the sale or transfer of property, goods, or services, and if so, do those proceeds fall into one of the following categories?” If the receipt of any proceeds falls into one of the categories below, the taxpayer does not have to count those proceeds as gross receipts. 

Chart 1: Proceeds Excluded from “Gross Receipts” 

  • Interest income.
  • Dividends and distributions; distributive or proportionate shares.
  • Receipts from the sale or transfer of capital assets (I.R.C. § 1221) or assets used in the trade or business (I.R.C. § 1231). 
  • Proceeds from the repayment, maturity, or redemption of an intangible.
  • Receipts from a repurchase agreement or loan.
  • Contributions received by a trust, plan, or other arrangement.
  • Compensation.
  • Stock issuance.
  • Life insurance proceeds. 
  • Gifts or charitable contributions.
  • Money awarded from litigation.
  • Agent’s commission, fee, or other remuneration.
  • Returns and allowances.
  • Receipts from worthless or uncollectible debts (“bad debts”).
  • The sale of an account receivable.
  • Qualified uranium receipts.
  • Certain gross casino revenue.
  • Receipts realized from the sale of agricultural commodities by an agricultural commodity handler.
  • Qualifying integrated supply chain receipts.
  • Certain dyed diesel fuel purchases by railroad companies.
  • Certain receipts related to the sale of tangible personal property and capital equipment in megaprojects.
  • Certain sports gaming receipts.
  • Any receipts for which the tax imposed by the CAT is prohibited by law.   
  • Tax refunds. 
  • Pension reversion.
  • Contributions to capital.
  • Sales or use tax collected. 
  • Receipts of an employer from payroll deductions relating to the reimbursement of the employer for advancing money to an unrelated third party on an employee’s behalf. 
  • Cash discounts allowed and taken.
  • Excise taxes collected.
  • Sale or transfer of a motor vehicle as customer preference (car dealers only).
  • Receipts from a financial institution for services provided to the financial institution in connection with the issuance, processing, servicing, or managing loans or credit accounts.
  • Funds received or used by mortgage brokers.
  • Property, money, and other amounts received by Professional Employer Organizations (“PEOs”) from client employers. 
  • Amounts retained as a commission by persons holding permits to conduct horse-racing meetings.
  • Qualifying distribution center receipts.
  • Receipts realized by an out-of-state disaster business from disaster work conducted in Ohio during a disaster response.
  • Receipts from the sale or transfer of a mortgage-backed security or a mortgage loan by a mortgage lender.
  • Amounts of excess surplus of the state insurance fund received by the taxpayer from the Ohio Bureau of Workers’ Compensation.

 

A Closer Look . . . 
As can be seen from Chart 1, there are numerous exclusions from the definition of “gross receipts.” Below we discuss a few of those exclusions in further detail. 

  1. Interest Income.  Interest income, except for the interest earned from a credit sale, is excluded from gross receipts. For example, if a taxpayer earns interest on a savings account, that interest is excluded from the taxpayer’s gross receipts. However, a taxpayer must include any monthly interest earned on an installment contract in their gross receipts. 

Example: A farmer agrees to sell land to a neighbor under a land installment contract. Under the land installment contract, the farmer agrees to convey title to the land to the neighbor and the neighbor agrees to pay the purchase price of the land, plus interest, in monthly payments (the installment payments). The farmer retains title to the land until the neighbor’s installment payment obligations have been fulfilled. In this scenario, the farmer must include the monthly interest earned in their gross receipts. However, the amount earned by the farmer that is applied to the purchase price of the land is not included in the farmer’s gross receipts. 

  1. Dividends and distributions; distributive or proportionate shares.  If a taxpayer is a shareholder or member of a corporation, S corporation, or other similar entity, the dividends or distributions paid to the taxpayer from the corporation are expressly excluded from the definition of gross receipts and thus not subject to the CAT. This is also true for the value of any distributive shares or proportionate shares received by the taxpayer by virtue of being a member or partner of a pass-through entity or partnership. 

Example: The “patronage dividends” earned by a farmer or farming business that are members of a cooperative are not included in gross receipts. Cooperatives are formed under Ohio’s corporation statute, and these “patronage dividends” are treated the same as a traditional dividend given to a shareholder of any other corporation.  

  1. Sale or transfer of capital assets and assets used in the trade or business of the taxpayer.  Ohio law excludes the receipts from the sale or transfer of an asset, described in either Section 1221 or 1231 of the Internal Revenue Code, from the definition of gross receipt, regardless of the length of time the asset is held, and regardless of any gain or loss realized on the transfer of the asset. 

When it comes to the Commercial Activity Tax, Ohio is only concerned about the types of assets described within Sections 1221 and 1231. Section 1221 describes those assets held for personal or investment purposes (i.e. capital assets) and Section 1231 describes assets used in the trade or business of the taxpayer. 

Interaction between Section 1221 assets and Section 1231 assets. For Ohio CAT purposes, if an asset meets the description in Section 1221’s definition of capital assets or in Section 1231’s description of business assets then the proceeds from the sale of that asset do not need to be included in a taxpayer’s gross receipts. Below is a more detailed explanation of the assets described in Sections 1221 and 1231 of the Internal Revenue Code. 

Section 1221 Property: Assets held for personal use and investment.  Generally, these assets include property held by a taxpayer, whether or not connected with their trade or business, and used for personal or investment purposes. The proceeds earned by a taxpayer from the sale or transfer of these capital assets are not subject to the CAT. 

Section 1231 Property: Assets used in the trade or business of the taxpayer. If an asset is included in the definition of these business assets in Section 1231, then the proceeds from the sale or transfer of the business asset do not need to be included in the taxpayer’s gross receipts. According to Section 1231, property used in the trade or business includes: 

      1. Depreciable property including, farm machinery, equipment, etc.(so long as it is not considered “inventory”). The entire gross receipt from the sale or transfer of the depreciable asset is exempt from the CAT, regardless of whether a taxpayer recognizes a gain or loss from the sale, including IRC Section 1245 or 1250 recapture income. 
      2. Real property used in the taxpayer’s trade or business (so long as it is not considered “inventory”); 
      3. Timber, coal, and iron ore that are still in the ground (once the mineral is removed from the ground, however, it is no longer an asset used in the trade or business and instead becomes inventory and thus subject to the CAT); 
      4. Livestock held by the taxpayer for draft, breeding, dairy, or sporting purposes. (Livestock is uniquely defined in the Code of Federal Regulations to include cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Livestock does not include poultry, chickens, turkeys, pigeons, geese, other birds, fish, frogs, reptiles, etc.); and
      5. Unharvested crop on land, which is sold simultaneously to the same person is considered “property used in the trade or business.”

Therefore, if an asset that is sold/transferred is included in the above definition, then the proceeds from that sale/transfer do not need to be included in a taxpayer’s gross receipts.

Examples: The Ohio Department of Taxation has provided some of the following examples to help demonstrate “property used in the trade or business” of a taxpayer and whether the receipts from the sale or transfer of those assets should be included in gross receipts: 

  1. A farmer trades in a tractor with a FMV of $50,000 and an adjusted tax basis of $0. The farmer would have $50,000 in recapture income recognized. However, under the CAT, this recaptured income is not included in the farmer’s gross receipts.
  2. A farmer selling land, including the crops grown on the land, can exclude receipts from the sale if both the crops and land are simultaneously sold to the same person. Once the purchaser harvests the crop, it becomes part of the purchaser’s inventory, and the purchaser must report the receipt from the sale of that crop in their gross receipts. 
  3. A farmer who harvests corn for sale must include the proceeds from the sale of the corn in their gross receipts. 
  4. Proceeds from the sale of livestock that are used for draft, breeding, dairy, or sporting purposes are excluded from gross receipts. 
  5. Cattle raised for slaughter are not considered Section 1231 property, instead they are viewed as inventory. Therefore, a farmer or other taxpayer who finishes steers in a feed lot for slaughter must include those proceeds earned in gross receipts. 
  6. A taxpayer who sells acreage including standing timber can exclude the receipts from this sale from CAT. 
  7. A taxpayer who cuts timber for the purpose of selling it in the taxpayer’s trade or business cannot exclude receipts from this transaction from their gross receipts. The opposite is true for a landowner who is not in the business of cutting and selling timber. A landowner that sells timber on their property is selling Section 1221 property. Generally, the landowner is selling title of the timber to another party. The purchaser of the timber will have to include the receipts from the sale of the timber in their gross receipts, but the landowner does not.  
  8. There are some special considerations for the sale of a business. For a business that is selling its stock and assets to another entity/taxpayer, the receipts from this sale are excluded from CAT as Section 1221 property. However, those receipts from any outstanding accounts receivable or inventory held by the business at the time of the sale must be included in the business’s gross receipts and thus subject to CAT. 

 

Chart 2 below, provided by the Ohio Department of Taxation, contains a list of different types of assets and whether the receipts from the sale or transfer of these assets are subject to CAT: 

      Chart 2: Examples of Assets Subject to the CAT

Sale or transfer of . . . 

Subject to CAT? 

Personal residence

NO

Office building sold by investor

NO

Personal car (used for pleasure)

NO

Delivery truck not part of inventory

NO

Stocks and bonds (personal investment)

NO

Accounts receivable

YES

Supplies used in taxpayer’s business

YES

Fishing pole sold at yard sale

NO

Fishing pole sold by a retailer

YES

Jewelry not sold by retailer/wholesaler

NO

Hedging transactions

NO

Personal sailboat (used for pleasure)

NO

Copy machine used for business purposes

NO

Inventory

YES

Golf clubs sold at yard sale

NO

Golf clubs sold by a professional player

NO

Unextracted oil sold with land

NO

Extracted mineral

YES

Cattle (livestock) – non-inventory

NO

Poultry

YES

Farmland with growing crops

NO

Harvested crops

YES

Copyright

YES

Stock certificates

NO

Accounts receivable

YES

Business equipment

NO

 

Step 2. Determine “taxable gross receipts.”

After a taxpayer has calculated their gross receipts, the taxpayer must then determine their “taxable gross receipts.” A “taxable gross receipt” is a gross receipt that is sitused (or sourced) to the state of Ohio. Generally, gross receipts are sourced based on the benefit to the purchaser. Section 5751.033 of the Ohio Revised Code sets forth the rules for determining how to source gross receipts to Ohio. Gross receipts are sitused to Ohio as follows:  

Chart 3: Sourcing Gross Receipts to Ohio

Real Property:

  • Gross rents and royalties
  • Sale or transfer
  • If the property is located in Ohio, those receipts are sourced to Ohio. Receipts from real property not located in Ohio are not taxable gross receipts. 

Tangible Personal Property: 

  • Gross rents and royalties 
  • Sale or transfer 
  • For gross rents and royalties, if the tangible personal property is located or used in Ohio, it is a taxable gross receipt. 
  • For the sale or transfer of tangible personal property, the property is sourced based on where the property is ultimately received after all transportation has been completed. Therefore, only tangible personal property that is ultimately received in Ohio is a taxable gross receipt.

Other Services

  • The general rule is that the service is sourced based on the benefit to the purchaser. Receipts stemming from services performed in Ohio are taxable gross receipts. Receipts from services performed outside the state of Ohio are not taxable gross receipts. 

 

Step 3. Only include those taxable gross receipts for the current tax year. 

Ohio law provides that a “taxpayer’s method of accounting for gross receipts for a tax period shall be the same as the taxpayer’s method of accounting for federal income tax purposes . . .” The taxpayer’s method of accounting will be either the cash method or accrual method of accounting. Under the cash method, a taxpayer reports income in the tax year the income is received. Under the accrual method, a taxpayer reports income in the tax year it is earned, regardless of when payment is received. Therefore, for a taxpayer that uses the cash method of accounting, gross receipts are only included in the tax year that the receipt is received. Take, for example, a grain farmer that enters into a deferred payment contract with the local grain elevator. If the farmer uses the cash method of accounting, the receipt from the sale of the farmer’s grain is included in the year when payment is received. If the farmer uses the accrual method of accounting, the receipt from the sale of the farmer’s grain must be included in the year the farmer entered into the deferred payment contract because that would be the year when the farmer earned the income. 

 

Conclusion. 

In summary, a taxpayer’s obligation under Ohio’s Commercial Activity Tax is largely determined by the amount of “taxable gross receipts” the taxpayer has for the current tax period. A taxpayer must engage in the daunting process of determining what is and is not a “gross receipt” and then must situs (or source) those gross receipts to Ohio in order to calculate their “taxable gross receipts.” However, determining a taxpayer’s obligations under the CAT does not stop there. There are additional requirements such as registration, minimum tax imposed, and filing frequency. For more information about a taxpayer’s obligations under the CAT, please visit the Ohio Department of Taxation’s Commercial Activity Tax (CAT) – General Information website

Sources

26 U.S. Code § 1221 – Capital Asset Defined

26 U.S. Code § 1231 – Property Used in the Trade of Business and Involuntary Conversions

26 C.F.R. §1.1231-2 – Livestock held for draft, breeding, dairy, or sporting purposes

Ohio Administrative Code Chapter 5703-29: Commercial Activity Tax

Ohio Department of Taxation – Commercial Activity Tax (CAT) - FAQs

Ohio Department of Taxation – Commercial Activity Tax (CAT) – General Information

Ohio Department of Taxation – CAT 2005-08: Commercial Activity Tax; I.R.C. Section 1221 and 1231 Assets Excluded from “Gross Receipts”

Ohio Department of Taxation – CAT 2005-17:“Taxable gross receipt,” defined

Ohio Department of Taxation – CAT 2006-04: Commercial Activity Tax: Cash Discounts, Defined

Ohio Revised Code Chapter 5751: Commercial Activity Tax

 

By: Robert Moore, Thursday, April 27th, 2023

Legal Groundwork

Under Ohio law, a spouse cannot be disinherited by a will. Through a concept known as elective share, the surviving spouse may elect to receive what is provided for in the deceased spouse’s will or receive what is provided by law.  How much the surviving spouse receives from the elective share depends on the family status of the deceased spouse.  The following is the elective share for spouses as provided by the Ohio Revised Code:

  • If the decedent (deceased spouse) died with a spouse but no descendants, the surviving spouse inherits the entire probate estate.
  • If the decedent died with a spouse, and their only descendants were also descendants of the surviving spouse, the surviving spouse inherits the entire probate estate.
  • If the decedent died with a spouse and one child who is not the child of the surviving spouse, the surviving spouse inherits the first $20,000 of the probate estate, plus half of the remaining estate. The child takes the rest.
  • If the decedent died with a spouse and multiple children who were not children of the surviving spouse, and at least one child together with the surviving spouse, the surviving spouse inherits the first $60,000 of the estate and one-third of the balance, with the descendants who were unrelated to the surviving spouse taking the rest.
  • If the decedent died with a spouse and multiple children who were not children of the surviving spouse, and no children together with the surviving spouse, the surviving spouse inherits the first $20,000 of the probate estate and one-third of the balance, with the descendants who were unrelated to the surviving spouse taking the rest.

Consider the following example as to how the elective share is applied:

Mark and Mindy each have two children from previous marriages.  Mark has farmed his entire life and built a large farming operation prior to marrying Mindy.  Mindy is not involved in the farming operation.  Mark’s two children plan to take over the farming operation.  Mark executes a Will that leaves all his assets to his children.  Mark believes the Will causes all his assets to go to his children at death.  After Mark’s death, Mindy decides to take her elective share.  Because there are multiple children from a previous marriage, Mindy will receive $20,000 plus one-third of Mark’s assets.

As the above example illustrates, Mark could not disinherit Mindy using his will.  Under Ohio law, Mindy had the right to receive assets from Mark’s estate even though he had left nothing in his will for Mindy.  The same would apply if Mark had no will at all which is called intestacy.  In intestate estates, the elective share also applies.

It should be noted that the elective share only applies to probate assets.  Assets that are disposed of through a trust[1] or a transfer/payable on death beneficiary are not subject to the elective share.  If Mark had all his assets in a trust and left nothing for Mindy, Mindy could not elect against the trust assets because they were not subject to probate jurisdiction.  Also, if Mark had his children as payable on death beneficiaries of all his financial accounts, Mindy could not make an elective share against those financial accounts either.

Due to the ability to avoid the elective share, trusts can be valuable tools in farm succession planning involving second marriages.  In the next installment, we will continue our discussion of planning with second marriages by explaining how trusts can be used to provide for the surviving spouse while ensuring the assets end up with the deceased spouse’s children.

[1] To avoid probate, assets must be titled to the trust or be titled payable/transfer on death to the trust.  Assets that must go through a “pour over” will before being transferred to the trust are subject to probate.

 

 

Entrance to OSU Agricultural Administration building
By: Peggy Kirk Hall, Tuesday, April 25th, 2023

Sixty-six undergraduate students just completed our Agribusiness Law class in the College of Food, Agricultural, and Environmental Sciences at OSU yesterday.  It’s always a challenge to teach students all I want them to know about agricultural law in the short time I have with them. And it always generates excitement and relief when I can see that they have learned.

In one assignment this semester, students had to consider the property laws we studied and devise three “real life” questions about the laws.  Next, they had to write the answers to the questions they drafted.  The legal accuracy of their answers is important, of course, and illustrates their comprehension of the laws we studied.  But selecting and writing the questions is equally important, as students must predict when and how the law would apply in a “real world” situation they might encounter.

Many of the student works showed that learning had certainly taken place this semester.  And some of their questions were so insightful and relevant that they should also be useful in the “real world.”  Below are excellent questions and answers from four students.  They illustrate what the students learned, but they will likely be helpful for our readers, too.  Take a look at what our students  are asking and answering about agricultural property laws!

Question 1 comes from Katie Anderholm, a senior from Medina, Ohio majoring in Agribusiness and Applied Economics.

Q:   Am I at risk to be sued from my new neighbors who keep complaining about my cows?
A:  A farmer is not as risk to be sued, or at least rightfully sued, by their new neighbors because of the Ohio Revised Code 929.04 and 3767.13. Both codes, the Right to Farm defense to civil action for nuisance and Ohio’s “Statutory Nuisance” Law, protect farmers and their operations from complaints regarding farming. The farmer’s neighbors who have been complaining about his cows do not have a strong argument for legal action because the agricultural activities were established before they moved adjacent to the farm. If the farmer is following proper animal care and manure handling and the neighbors moved after the farming began, then the neighbors will not have merit for a civil action. I would advise the farmer to have a conversation with the neighbors to ease tensions and explain that they knowingly moved next to a cattle operation and that there are certain things that come with that. I have learned that people who are not involved in agriculture in their everyday life to not understand the fundamentals, and sometimes education and consideration can go a long way.

Question 2 is from Cori Lee, a senior from Marysville, Ohio, graduating this May with a major in Sustainable Plant Systems Agronomy and a minor in Agribusiness.

Q:  Two siblings own ground that was passed on to them by their parents, where one farms, and the other one has no interest in farming. Can one sibling sell the land, even if the other one does not want to? What can be done to prevent losing the ground?
Yes, as co-owners, one sibling can sell their share of the land, even if the other sibling disagrees and is actively using the land for income and farming. This would force the other sibling to either also sell their share of the land or buy the other sibling out. This is explained in Section 5307.01 of the Ohio Revised Code, the partition law. Whether it is considered a “Tenancy in Common” or “Survivorship Tenancy”, they are both subject to partition. The partition process is also explained in Chapter 5307, and is often lengthy and can ultimately result in both owners being forced to sell the land. However, placing the land in an LLC can prevent this situation, as it would remove partition rights completely and the LLC would be treated as the sole owner of the land. This also provides other opportunities to have more control over how the land could be sold and allow terms to be set to buy out other LLC members. In order to avoid a scenario like this, landowners should carefully plan the transition of  their estate to avoid any costly mistakes for the next generation. 

Question 3 is by Kole Vollrath, a senior from South Charleston, Ohio majoring in Construction Systems Management.

Q:  I own a field and the state has contacted me seeking eminent domain for a roadway that they are planning to build cutting directly through my field. I am new to this sort of action and I am wondering what the proper actions will be in this case?
A:  Ohio Revised Code Chapter 163 is the eminent domain law that contains the four required procedures the taking entity (the state in this situation) must provide to the landowner. The first is the notice which you have already received, followed by a “just compensation” offer for the land in question, then appraisal of the property, and then finally a hearing in court to decide on or stop the taking if you don't agree to the offer. In the situation of a road as in this case, it is hard to stop the taking, so the fourth option will likely be more about getting fair money out of the deal rather than stopping construction completely. The reason that it will be hard to stop a road construction is because of Ohio Constitution Article 1 Section 19. This explains that eminent domain is allowed to happen when it is for a valid public use of the property, and since this is a road, it will be hard to argue that is not valid. However, it can still be beneficial to the landowner to hold strong in steps 2 and 3 and get an appraisal, then go to court and try to extract fair money for yourself out of the situation.

Question 4 is from Lyndie Williams, a senior from Bucyrus, Ohio majoring in Agribusiness and Applied Economics.

Q:  Can I be held accountable for damage to a neighbor’s property that they claim is due to water drainage from my property?
A:  In short, yes it is possible to be held accountable for damage to a neighbor’s property if it was caused by water drainage from your property, but not always. While every property owner has the right to reasonably use their land, including water flow and drainage, there can be consequences of this if harm is caused to others. First, determining what is “reasonable” for water drainage when evaluating harm to another is necessary. Courts will look at four factors when determining reasonable drainage: utility of the use, gravity of the harm, practicality of avoiding the harm, and justice. If your purpose for drainage is valid, the harm caused by drainage use is not overly detrimental to others, it is impractical to use an alternative form of drainage, and it is not unfair to require other landowners to bear losses caused by your drainage, then you would not likely be held accountable for damage to their property due to water drainage from your property. However, if some or all of these “reasonable”  requirements are not met, then you would need to look into drainage problem resolutions, as you could be accountable for their damages. Drainage problem resolutions include voluntary fix, drainage improvement projects, drainage easements, and litigation. For example, one drainage problem resolution is a drainage easement which is in writing, recorded, and involves an attorney. In a drainage easement you would pay the neighboring landowner for the right to drain your water onto their property for the damages they will incur as a result. Drainage easements are usually perpetual but can be termed and include access and maintenance rights and responsibilities for the easement holder.

By: Robert Moore, Tuesday, April 11th, 2023

Legal Groundwork

Estate tax laws have seen favorable changes over the last 20 years.  In 2000, the federal estate tax exemption was $675,000 and Ohio estate taxes were due for estates exceeding $338,000.  Today, the federal estate tax exemption is $12.92 million and Ohio no longer has estate taxes as they were repealed in 2013.  Therefore, no estate taxes are owed if an individual’s net worth is less than $12.92 million or a married couple’s net worth is less than $25.84 million.  According to data from the USDA, only 0.2% of farm estates, or about 71 estates, were required to pay estate taxes in 2021.  As this data shows, very few farm estate have had to pay estate taxes in the last few years.

On January 1, 2026, the federal estate tax exemption is scheduled to be reduced by 50%.  This tax sunset is a result of the 2018 tax legislation passed by Congress that doubled the federal estate tax exemption for seven years.  The exemption is indexed for inflation each year so there is no way to know exactly what the exemption will be in 2026 but best guesses are that it will be at least $7 million per person.  While a $7 million estate tax exemption will still protect the vast majority of farm estates from having estate tax liability, the number of farm estates subject to estate taxes will increase significantly beginning in 2026.  This increased threat of estate taxes is the result of the 2026 sunset and the significant increase in farmland values in the last few years.  There is no doubt that if things hold as expected, the percentage of farm estates having estate tax liability will be considerably more than 0.2%.

Congress can act and pass legislation to extend the current exemption beyond 2026 or make the current exemption permanent (with inflation adjustments).  If Congress will address the estate tax exemption is anyone’s guess.  Congress will be lobbied by farm groups and small business groups to extend or make permanent the current exemption amounts, but the effect of such efforts is purely speculative at this point.  Perhaps we will have a better idea of Congress’ intentions after the 2024 elections.

In the next post, we will discuss strategies to help reduce the risk of estate taxes for farms should the federal estate tax exemption sunset in 2026.

Posted In: Estate and Transition Planning
Tags: tax exemption
Comments: 0
Farmer working on machinery with Farm On  Farm Financial Management title overlay
By: Peggy Kirk Hall, Friday, April 07th, 2023

We're excited to announce that our new farm financial management online course is now available.  Named "Farm On," the self-paced, on-demand farm financial management course was created by our Farm Office team under the leadership of new Farm Management Field Specialist Eric Richer.  It is offered through OSU Extension’s new Farm Financial Management and Policy Institute.

We created the Farm On course to address the needs of Ohio’s new and beginning farmers who want to better prepare themselves to operate a commercial farm in Ohio and do that with a high level of economic stability while remaining profitable and responsible along the way.  What’s unique about the Farm On course is that, not only does it comply with the regulations of the new Ohio House Bill 95 Beginning Farmer Tax Credit program, it also meets the borrower training requirements for the U.S. Department of Agriculture Farm Service Agency’s Beginning Farmer and Rancher Loan Program.

The 10-module Farm On course includes video lessons, quizzes, and opportunities to apply knowledge gained through graded course exercises. Students can engage with the lead course instructor  through virtual office hours and scheduled appointments. The course covers the following topics:

  • Farm Business Planning
  • Balance Sheets
  • Income Statements
  • Cash Flow Projections
  • Calculating Cost of Production
  • Farm Record Keeping
  • Farm Taxes
  • Farm Financing
  • Risk Management
  • Farm Business Analysis

The Farm On course allows CFAES to serve the needs of all farmers through OSU Extension and our Farm Financial Management and Policy Institute, said Cathann A. Kress, Ohio State vice president for agricultural administration and dean of CFAES. 

“We are excited to partner with ODA and USDA-FSA to address the farm financial training that is required for running a farm business,” Kress said. “Currently, we are the only educational institution in Ohio with a course like ‘Farm On’ that qualifies for ODA’s Beginning Farmer Tax Credit Program and FSA’s Borrower Training Requirements.

“As part of our Land-Grant mission, CFAES educates not just college students but over two million individuals across the lifespan.”

The Ohio House Bill 95 Beginning Farmer Tax Credit program went into effect in July 2022 and grants a 3.99% tax credit to landowners who sell or lease assets to a certified Ohio beginning farmer. The new law also allows an Ohio tax credit to the certified beginning farmer equal to the cost of the financial management course completed. The Farm On course costs $300 per person.

“OSU’s Farm On course is a great way to help Ohio farmers qualify for Ohio Department of Agriculture’s (ODA) new Beginning Farmer Tax Credit program, which is an important tool to help current beginning farmers and potential future farmers do what they do best,” said ODA Director Brian Baldridge. “We are thankful for this partnership that is helping to keep Ohio’s hard-working farmers at the forefront.”

According to Darren Metzger, Ohio Farm Service Agency Loan Chief, “The course is in-depth financial management training that can assist our borrowers to obtain and/or improve their knowledge in this critical area of farm management. OSU’s Farm On course is now 1 of 5 approved vendors for our borrowers in Ohio.”

CFAES’ new Farm Financial Management and Policy Institute was created last year with the goal of sharing resource-based knowledge and best practices to help Ohio farmers manage their businesses as the agricultural industry changes and evolves. Housed within OSU Extension, the goal of FFMPI is for the integration, translation, and communication of CFAES’ farm management and ag policy presence that addresses critical farm management and policy issues affecting Ohioans.

“Farm On is meeting a need of today’s modern crop farmers and it’s packaged in a way that respects the busy schedules of family farmers.  It’s this type of tangible benefit that earns the support of Ohio’s corn and small grains checkoff funds.  We are proud to partner with OSU Extension on this important new institute,” said Tadd Nicholson, executive Director of Ohio Corn and Wheat.

Farm On isn’t just for new and beginning farmers. The course provides an opportunity for any farmer in Ohio, whether you’re a new farmer, a seasoned farmer, a small farmer, or a large farmer.  For a long time, we’ve needed to have this course in Ohio because farm management is so critical to ensuring the future of our farms.

To learn more, view our video and to sign up for Farm On, go to go.osu.edu/farmon. 

 

By: Peggy Kirk Hall, Wednesday, April 05th, 2023

The United States Supreme Court began its new term last October with the now famous wetlands case of Sackett v. U.S. EPAThe case is one in a long line of legal battles over how to define which waters are “waters of the United States” (“WOTUS”) that are subject to federal jurisdiction under the Clean Water Act.  We expected quiet waters for WOTUS as we awaited the Sackett decision. But we were wrong.

New EPA rule.  The U.S. EPA made a big splash on January 18, when the agency published a new WOTUS rule to define which waters are WOTUS.  Although the rule had been under consideration since the beginning of the Biden administration, many expected the EPA to hold off on finalizing the rule until after the Supreme Court’s Sackett ruling because that decision could affect the rule.  The EPA chose not to wait, and the new rule became effective on March 20, 2023. 

New litigation begins.  Not surprisingly, the new WOTUS rule set off a new wave of litigation.  A string of four federal lawsuits were filed in January and February of 2023 by many states and interest groups.  The cases contest the validity of the rule and ask for preliminary injunctions preventing implementation of the rule while the cases are pending.

Two cases, two different outcomes.  The Southern District of Texas made the first decision on the new litigation in Texas v. U.S. EPA, granting an injunction on March 19 for two of the lawsuits filed by Texas, Idaho, and the American Farm Bureau and other interest groups.  The injunction prevents the rule from going into effect in Texas and Idaho. The federal district court determined the plaintiffs would expend significant resources complying with the rule although the rule was unlikely to withstand judicial scrutiny, creating potential irreparable harm and justifying an injunction against the rule. The Kentucky district court recent an opposite decision on March 31 in the case filed by the State of Kentucky.  The Eastern District court in Kentucky v. U.S. EPA declined to issue Kentucky’s request for a preliminary injunction, concluding that because the EPA has not begun enforcing the rule in Kentucky, there is no impending injury that warrants an injunction.  In both the Kentucky and Texas cases, the courts declined to issue a nationwide injunction against the new WOTUS rule.

Another injunction decision to come. Twenty four states joined together to file West Virginia v. EPA, the fourth federal lawsuit against the new WOTUS rule.  Ohio is not one of the plaintiff states in the case, which challenges the rule and seeks injunctions in the states as well as a nationwide injunction.  We should see a decision on the injunction request soon from the federal district court in North Dakota.

There are waves in Congress, too.  Not satisfied to sit back and watch the battles over the new WOTUS rule,  Congress recently took action to void the rule.  Congress used its authority under the Congressional Review Act, a little-used federal law that allows Congress to invalidate an agency action.  The House passed a resolution to void the rule on March 9 by a margin of 227 to 198, and the Senate voted on March 29 with 53 for and 43 against nullifying the WOTUS rule.  President Biden has the power to veto the legislation, however.  Neither the House nor the Senate appear to hold the two-thirds majority necessary to override a Biden veto.  (UPDATE:  President Biden vetoed the resolution on April 6, 2023).

Back to SCOTUS.  And still, we circle back to the Sackett case and await the Supreme Court’s analysis of the proper test to use to define a “waters of the United States.”  How will the ruling affect the new WOTUS rule and its litigation?  Will Congress act on the Supreme Court’s ruling to establish a statutory definition for WOTUS that would preempt the EPA’s rule?  As we have learned, there are more WOTUS waves yet to come.  

 

Eminent domain bill page of Ohio General Assembly website
By: Peggy Kirk Hall, Thursday, March 30th, 2023

An eminent domain revisions bill appears to be on hold after its removal from the committee agenda that would have provided the bill a third hearing. House Bill 64 was introduced by sponsors Rep. Darrell Kick (R-Loudonville) and Rep. Rodney Creech (R-W. Alexandria) on February 21.  The bill had two hearings before the House Civil Justice Committee on March 7 and 14, but was removed from the committee’s March 21 meeting agenda. 

House Bill 64 proposes quite a few major changes to Ohio eminent domain law:

  • Voids an appropriation of property if the agency does not follow statutory procedures for the appropriation, such as procedures for appraisal of value, good faith offers of compensation, and negotiation with the landowner.  Under the proposal, a landowner could bring a claim against the agency for violating any of these procedures and the appropriation would be invalid. The proposal is the opposite of current law, which states that procedural violations do not affect the validity of an appropriation of property.
  • Increases an agency’s burden of proof in showing that a taking is for a public use and is necessary, that the agency has authority to appropriate the property, and that the parties are unable to agree on a voluntary purchase of the property. The agency would have to meet the “clear and convincing evidence” burden of proof rather than the “preponderance of evidence” standard stated in current law.
  • Removes two presumptions the law currently makes in favor of an agency.  The first is that an appropriation is necessary if the agency adopts a resolution or ordinance declaring its necessity and the second is that an appropriation for a public utility or common carrier is necessary upon the offering of evidence supporting the necessity.  Removing these presumptions also affects the burden of proof the agency must meet regarding the necessity of a taking.
  • Revises an irrebuttable presumption in current law that an appropriation is necessary if the agency is a common carrier or public utility and a state or federal regulatory authority has approved the appropriation.   The proposal would allow a landowner to rebut this presumption and would limit the presumption only to the specific interests reviewed by the regulatory authority.
  • Prohibits an agency from reducing or revoking the compensation made in an initial offer to a landowner or from later arguing or presenting evidence for a lower amount.  Current law allows an agency to revise an offer if they discover new conditions after making an initial offer.
  • Expands attorney fee, cost, and expense awards for landowners. Current law allows attorney fee and cost awards if an agency challenges a landowner’s appraisal and the final compensation awarded is less than 125% of the agency’s first offer.  The bill would require reasonable attorney fees, expenses, and costs if an agency appeals and does not prevail, in whole or in part.  It also removes a provision requiring a landowner to pay court costs if the landowner denies an agency’s offer and is later awarded less than the offer amount.
  • Awards “coercive damages” to landowners who prove by a preponderance of evidence that an agency used coercive actions during the appropriation process.  Coercive actions include, but are not limited to, advancing the time of a taking, deferring negotiations, deferring the deposit of funds with the court, and attempting to force an agreement on the compensation award.
  • Provides landowners the right to an “inverse condemnation” action, which is a claim that an agency has taken property without filing a court proceeding.  In that case, a landowner may file an inverse condemnation lawsuit in the court of common pleas.  If the landowner proves by a preponderance of evidence that the agency has taken the property, the court can award the landowner compensation and damages for the taking as well as attorney fees, costs, and expenses.  Currently, a landowner must file a “mandamus” action asking the court to order the agency to initiate an eminent domain proceeding and must offer clear and convincing evidence to the court that the agency has taken the property.
  • Extends case timelines.  The bill increases the minimum number of days for the court to set hearing dates.  If a landowner files an answer denying an agency’s authority, the necessity of the taking, or that the parties were unable to agree, the hearing date on those issues would extend from 15 to 30 days after the answer was filed and the compensation hearing date, if the court settles in favor of the agency, would change from at least 60 to at least 90 days after the court settles the issue.  If a landowner could have but failed to file an answer to an eminent domain action, the compensation hearing date would be at least 90 days rather than 20 days from the date the answer was due.  If an owner appeals a court’s determination on authority, necessity, or inability to agree on an appropriation, the bill prohibits the court from setting a compensation hearing until the appeal is final.
  • Removes recreational trails from eminent domain authority.  The proposal states that the use of property for a recreational trail is not a valid “public use” for eminent domain purposes.  Recreational trails, according to the proposal, are trails used for hiking, bicycling, horseback riding, ski touring, canoeing, or other nonmotorized forms of recreational travel. The proposal also excludes the making or repairing of or access management to shared-use paths, bike paths, or recreational trails from the use of eminent domain for making and repairing roads.

In the March 14 committee hearing, the Ohio Farm Bureau Federation testified in support of the bill. Committee members raised questions about the bill’s recreational trail prohibition, initial offer minimum, coercive action awards, and attorney fee awards.  Although the committee chair suggested that a third hearing for opponent testimony would take place in the following week, the bill was later removed from that committee hearing agenda.

Read and follow House Bill 64 on the Ohio General Assembly’s webpage for the bill.

Written by Will Robinson, Graduate Assistant, OSU Agricultural & Resource Law Program

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The Ohio State University’s Farm Office is encouraging participation in a farm legal needs survey. The less than 10-minute survey will help OSU’s Agricultural & Resource Law Program  better shape legal content to target what’s most impactful to agricultural professionals around Ohio.

The OSU Farm Office produces countless bulletins, webinars, and other content meant to help inform farmers and agricultural entrepreneurs on key agricultural and food legal issues. To help us better understand the legal needs of your operation, please take a few moments to fill out this survey: https://osu.az1.qualtrics.com/jfe/form/SV_a3IgngyA52jlt1c

Thank you for your participation!

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By: Robert Moore, Thursday, March 23rd, 2023

Legal Groundwork

In the final installment of the farm insurance series, we look at unique activities and/or assets that may not be covered by a typical farm policy.  Most farm policies will automatically cover traditional farming activities and assets related to crop and livestock production.  However, many farming operations include assets or activities that may be non-traditional and thus not covered by the farm policy.

Below is a list of farm activities and farm assets that may not be covered by standard farm policies. Each of these activities and assets are a source of liability exposure. Farmers can review this list and identify any asset or activity that may apply to their farming operation.  Then, the list can be provided to their insurance agent to ensure that the farm has full liability protection.  Almost any asset or activity can be covered with the addition of an endorsement to the farm policy. 

  • Agritourism
  • Aircraft application of pesticide/fertilizer (own or custom)
  • Aircraft for personal use
  • ATV/side x side/recreational vehicle
  • Barns and structures that are not currently being used
  • Confined animals
  • Custom application of pesticides or fertilizer
  • Custom farm operations such as planting or harvesting
  • Drones – scouting
  • Drones – application of pesticides/seed
  • Embryos stored or in recipient animal
  • Exotic or non-domesticated animals
  • Farm Markets
  • FFA/4-H Projects
  • Hauling crops, goods or cargo for others
  • Holding products for customers after payment (seed, hay, inputs)
  • Horse boarding, riding or training services
  • Hunting leases or other paid recreational uses
  • Leasing buildings or structures to others
  • Non-owned livestock
  • Off-premises use of ATV/recreational vehicles
  • Oil/gas wells
  • Ponds with docks, diving boards
  • Pick-Your-Own
  • Portable buildings or structures
  • Pulling tractor/truck
  • Purchased feed/seed/inputs purchased but not picked up/delivered
  • Radio or TV Antennas
  • Rental property
  • Rental of grain bins
  • Sale or production of food or other consumable goods
  • Solar panels
  • Swimming pool
  • Tractor shows/parades
  • Tours (paid or unpaid)
  • Using borrowed equipment
  • Using rented equipment
  • Unoccupied houses
  • Valuable refrigerated or frozen products
  • Valuable or important information on computers
  • Watercraft
  • Wind turbines
  • Website or online presence that collects money or stores customer information.
  • Other____________________
  • Other____________________
  • Other____________________
Posted In: Business and Financial
Tags: farm insurance
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Ohio Agritourism Conference title with photo of farm market building and greenhouse
By: Peggy Kirk Hall, Friday, March 17th, 2023

OSU Extension's Ohio Agritourism Conference on April 1 is not an April Fool's Day joke, but it does promise to be fun learning!  If you're thinking about adding or expanding agritourism activities on your farm operation, consider joining us as we learn more about what makes a successful agritourism operation.  We'll visit two popular agritourism operations in southwest Ohio-- Blooms & Berries Farm Market and The Marmalade Lily -- with touring and talks planned at both locations.

Here's the full agenda for the day:

9 a.m. – Registration at Blooms & Berries.

  • Blooms & Berries, an Inside Look.  Jeff and Emily Probst - Owners. Meet the team and take a closer look at how we serve about 100,000 guests a year by staying authentically true to our brand and our team!

Morning breakout sessions, featuring Blooms and Berries Farm Market personnel:

  • Love Your Staff.  Erica Clayton - Retail and Events Personnel Manager.  Learn how Blooms & Berries uses culture to create buy-in and develop an amazing guest experience while easing the burnout.
  • Ag and Operations Show and Tell.  Ben Autry - Ag Production Manager and Derek Rice - Operations Manager. This Q&A session explores the equipment barn, workshop and organizational systems, and specialized equipment.
  • The Market Barn - Shopping is an Attraction Too Emily Probst - Owner.   Emily shares top sellers and guest favorites!
  • The Pie Dough $.  Marie Graves - head baker and Cathy Probst - Owner.  Hear how the team makes and sells 5,000 pies from scratch each year, plus cookies and much more.  

Noon – Lunch at The Marmalade Lily Event Venue and Floral Farm, with an operation overview from owner Laura Fisher.

Afternoon general session

  •  Pouring a New Revenue Stream for Your Operation:  Adding Alcohol to Agritourism – Peggy Hall, OSU Agricultural & Resource Law Program and Jeff Probst, Blooms & Berries Farm Market
  •  Pre-sale Ticketing Trends – Shadi Hayek, Ticket Spice
  •  Minding Your P’s and Q’s – Trademark/Copyright Concerns in Marketing Your Business – Hannah Scott, CFAES Center for Cooperatives
  • Employee Hiring, Training, and Empowerment: People Make Your Business – Rob Leeds, OSU Extension Delaware County
  • Ask Us Anything – Ask that burning question of our experts and your peers

Registration for the conference is $50 and is now open at: https://go.osu.edu/agritourism.

 

 

Posted In: Business and Financial
Tags: agritourism
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