Helpful Tax Information for Farms

If you own a farm, preparing your taxes can pose unique challenges, depending upon the events of the taxable year. For purposes of the Internal Revenue Service (IRS), a farm includes ranches, ranges, and orchards and will report income on IRS Form 1040, Schedule F. Assuming the farm is run for a profit and does not fall into the “hobby” farm loss rules, the following information will help in your tax preparation.

First, farm income includes all proceeds from cultivating a farm, operating a farm, or managing a farm. This includes gain on selling farm products, including those raised for sale or purchased for resale. Farm income also includes any insurance payments from crop damage and should be reported in the year that this income was incurred.

Second, when farms deduct ordinary and necessary business expenses, the expense must be a common and accepted expense for that type of business. If the expense is not one commonly taken for that type of farm activity, the deduction may not qualify. Similarly, deductions taken for interest paid on a loan are allowed, but it must be a loan to the business, not a personal loan.

Third, for years that expenses exceed income and a loss is taken, that loss can be carried forward to reduce taxes in future years. On the other hand, if income exceeds expenses, the farm income can be averaged over the preceding three years, potentially mitigating the taxes for that year if income from the preceding three years was substantially less.

For a farm, this information is a starting point for reducing taxes and properly meeting federal tax requirements. Further information can be obtained by contacting Vandenack Williams LLC and speaking to a tax expert.

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Beginning Farmer Tax Credit Application Due Oct. 1

The deadline to apply for the Iowa Agricultural Asset Transfer Tax Credit, otherwise known as the Beginning Farmer Tax Credit, is October 1, 2015. For landowners leasing agricultural assets to a beginning farmer and wishing to take advantage of the tax credit,  an application must be submitted to the Iowa Agricultural Development Division by the deadline to be considered for the 2015 tax year.

The Beginning Farmer Tax Credit was passed by the Iowa legislature in 2006 and became operative for the 2007 tax year. The goal of the Iowa legislature was to ensure that agricultural land remained active and continued to produce agricultural products.  The tax credit has specific guidelines, including limitations and qualifications on the asset that can be leased. For example, a qualifying asset is agricultural land, buildings, and depreciable property located in Iowa and used for farming purposes. Depending upon the underlying asset and lease agreement, the specific value of the tax credit will vary. For those applying, the application fee and other requirements will vary based upon similar factors.

A joint application must be submitted by the beginning farmer and the asset owner. Additional financial information and other documents may be required. The application form can be download at the Iowa Finance Authority website: http://iowafinanceauthority.gov/File/DownloadFile/5260.

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Eighth Circuit Determines CRP Payments Are Not Subject to SE Tax for Non-Farmers

By Joshua A. Diveley.

The U.S. Court of Appeals for the Eighth Circuit has reversed a prior decision of the U.S. Tax Court and found that Conservation Reserve Program (CRP) payments made to non-farmers constitute rentals from real estate for purposes of §1402(a)(1) and are excluded from the self-employment tax.

The Tax Court previously ruled in favor of the IRS and found that a non-farmer who inherited rental farm ground, signed a CRP agreement with the federal government and engaged agents to perform the landowner’s requirements under the agreement was in the trade or business of farming and was therefore subject to self-employment tax on the CRP payments.

The Eighth Circuit reversed the decision and determined that prior IRS guidance and court cases have found that a non-farmer should be distinguished from an farmer active in the farming operation and applied that distinction to the present facts.

See Rollin Morehouse v. Commissioner of the IRS available at: http://media.ca8.uscourts.gov/opndir/14/10/133110P.pdf

© 2014 Parsonage Vandenack Williams LLC

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University of Nebraska Extension Releases Land Value Survey

The University of Nebraska-Lincoln Extension has issued its 2013/2014 Nebraska land value survey report. The state average value for farmland increased 5% to an average of $3,195 per acre with regional per acre averages ranging from $770 per acre in the Nebraska panhandle to $7,215 per acre in East-Central Nebraska. A table summarizing the regional values is provided below:

 

A full copy of the report, can be obtained at: http://goo.gl/bdvgqq.

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What Are the Tax Benefits of Investing in Real Estate?

There are a variety of tax benefits to investing in real estate. One of the significant tax benefits is that you will get capital gains treatment in a lot of cases for the sale of real estate. That is particularly true if it is investment real estate. For example, if you invest in a parcel of farmland and that land appreciates and you then sell it, you are going to get a tax rate that is lower than the ordinary tax rate.

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IRS Provides Penalty Relief for Farmers

The IRS recently announced that it will give farmers additional time to pay their taxes this year. Because of the fiscal cliff fix, the filing season for 2013 does not start until January 30^th. This delay was a cause for concern for many farmers. Farmers generally must file returns and pay tax by March 1^st. As a result, the filing season delay would cause a time crunch for many farmers. To address this issue, the IRS will allow farmers to file and pay their taxes by April 15^th.

The penalty relief may provide tax opportunities for farmers because of its broad applicability. The relief applies to all farmers, as defined by the IRS, not just those who would be unable to file in time. It will give farmers more time to pay their taxes and more time to review their returns. As a result, farmers who meet the IRS’s requirements and make the proper election may benefit from this time extension.

© 2013 Parsonage Vandenack Williams LLC

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