2006 Archived Agribusiness Planning Tips:

December, 2006

Most individuals know that if a person applies for social security before reaching full retirement age, wages or self-employment income can reduce current benefits. Many farmers have "carryover" grain from the prior year and careful planning is necessary to avoid reduction of your social security benefits for those under full retirement age.

Grain sales that are made during the calendar year of a farmer’s retirement will generally cause a reduction in social security benefits for the year of retirement.

The sale of carryover grain after the farmer has retired is generally considered a special payment that does not count against the annual earnings limit, and does not reduce current social security benefits.

Planning for retirement can mean "real" dollars in your pocket. Contact Lynn Lambert for more information at 1-888-363-7147.

November, 2006

What is this thing called Tenancy-in-Common?

Some farmers would prefer a passive real estate ownership to being active operating landlords. Some individuals may also want to diversify risk into more than one property without the “ugly” tax bite associated with selling property.

Many times like-kind exchanges are used to avoid the “unwanted tax bill”. There are restrictions to like-kind exchange transfers of property. A retiring farm owner cannot exchange property for ownership interest in real estate partnerships, REITS, or mutual funds. However, the IRS allows the exchange of property for an investment in a tenancy-in-common. This tenancy-in-common investment cannot be classified as a separate business entity in order to qualify for the like-kind tax treatment.

These types of investments are very sophisticated in nature so each investor must proceed with care and use professional advice before entering into this type of investment. Particular concern should center around the following items:

• The underlying property value
• The level of support of a private letter ruling or legal opinion
• The underlying lease terms
• The credit worthiness of the lessee
• The reputation of the sponsor
• The anticipated investment return
• The termination strategy

If you need further information, please contact Lynn Lambert at 1-888-363-7147.

The information in this communication may contain tax advice covered by Treasury Department Circular No. 230. Any advice contained herein was not intended to be used, and may not be used for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.

October, 2006

Words of Wisdom if You Are Considering Renting Your Farm To A Related Entity . . .

There is still an on-going saga of whether rental payments for farmland paid to a landowner who is materially participating in the farm operation is subject to self-employment tax. Taxpayers in the 8th Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) have some options since, under limited circumstances, the Court allows the opportunity to exclude some rental payments from self-employment taxes.

If you farm in the states represented by the 8th Circuit Court, you should consider the following points:

1. Rents paid by the entity for more than fair market value are likely to be subject to self-employment taxes.
2. The IRS focuses on material participation, so there is some belief that cash rents are more acceptable because share leases depend upon a level of participation.
3. Be ready to show that there would have been rental income in the absence of the taxpayer's services to the farming entity.

For those who farm outside the 8th Circuit Court, there are very few options available to exclude rental income from self-employment taxes. However, if your non-farming spouse inherits or independently purchases farmland and rents it at fair market value to the farming spouse, this rental income should not be subject to self-employment taxes.

Just a Reminder: If the land is owned by a trust (not a revocable living trust), the beneficiaries are not subject to self-employment taxes on the rent even if they materially participate in the farming business. Also, rent on buildings is not subject to self-employment taxes even if the material participation requirements are met.

If you have any questions or need further clarification, please contact Lynn Lambert toll-free at 888-363-7147.

The information in this communication may contain tax advice covered by Treasury Department Circular No. 230. Any advice contained herein was not intended to be used, and may not be used for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.

September, 2006

Generally the IRS does not allow a deduction for the cost of demolishing buildings, and any realized loss is not deductible as a current expense. Instead, the cost of demolition and the realized loss are added to the basis of the land.

If you purchase a farm with the intent to demolish the old farmstead and did not use the buildings in the farming business, all of the purchase cost must be allocated to the land. Any demolition costs must be added to the basis of the land.

If you purchase a farm and use the buildings in the farming business for a few years before demolishing the old farmstead, then the remaining basis (purchase cost less depreciation) in the building is added to cost of the land.

If you have any questions or need clarification of the rules regarding this topic, please contact Lynn Lambert toll-free at 888-363-7147.

The information in this communication may contain tax advice covered by Treasury Department Circular No. 230. Any advice contained herein was not intended to be used, and may not be used for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.

August, 2006

Do you understand the difference between a repair and a capital improvement? 

As equipment costs soar, significant dollars can be spent “repairing” a well-used piece of machinery; however, are those expenses truly repairs or are those expenses capital improvements? 

Taxpayers and the IRS have been at odds over this issue for some time. Generally, capital improvements must do one or more of the following:

1. Add value to the property

2. Substantially prolong the useful life of the property

3. Adapt the property to a “new” or “different” use.

As you can see there is much room for interpretation here. The Ninth Circuit has summarized the difference as:

• “If the improvements were made to put the particular capital asset in efficient operating condition, then the expenses are a capital improvement”.

• If however, the expenses were incurred to “keep the asset in an efficient operating condition”, then these expenses are repairs and are deductible in the current year. 

Planning tip: If there is a chance that some repair expenses may be re-characterized as a capital asset when examined by the IRS, you may want to elect Section 179 (direct write-off method) instead of repairs. Section 179 is an election that must be made on an original tax return. It cannot be claimed on an amended tax return. Just a reminder, if your farm operation is subject to local property taxes, extra consideration should be used when selecting among your available options.

For assistance, please contact Lynn Lambert toll-free at 888-363-7147.

The information in this communication may contain tax advice covered by Treasury Department Circular No. 230. Any advice contained herein was not intended to be used, and may not be used for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.

July 2006

IRS offers Guidance on Methods of Calculation of W-2 Wages for the Production Deduction

Most agricultural businesses were eligible for the Section 199 production deduction in 2005. Last month, IRS provided three acceptable methods for calculating W-2 wages used in the production deduction computation. 

1.    Unmodified box method: total wage amounts reported in Box 1 of all Forms W-2 filed with the Social Security Administration or total amounts reported in Box 5 of all Forms W-2 filed. 

2.    Modified Box 1 method: total wage amounts reported in Box 1 of all Forms W-2 filed with the Social Security Administration then subtract amounts in Box 1 that are not treated as wages for income tax purposes and add amounts that are reported in Box 12 of Forms W-2 that are properly coded as D, E, F, G, and S. 

3.    Tracking method: requires taxpayer to actually track total wages subject to federal income tax withholding and make appropriate modifications as listed in Rev. Proc. 2006-22.  

June 2006

LET’S NOT GET INTO A HURRY HERE . . .

Are you thinking of passing your property to you heirs by means of a beneficiary deed? Some states allow property to be passed using a beneficiary deed, which is a deed that conveys an interest in real property, including debts secured by a lien, to a beneficiary designated by the owner. The deed becomes effective on the death of the owner.

If estate taxes are due, the IRS has an option to file a Section 6324 lien against the beneficiary (beneficiaries) for the remaining estate tax assessed.

Now here is the real story . . .

Before his death, Dad executed a "beneficiary deed" for a real estate parcel, naming his Son as beneficiary. After Dad’s death, the property passed to the Son who became the owner of the property. Son then obtained a loan using the property as collateral. At the time of the loan, there was an assessed balance of estate tax due from Dad’s estate.

Son subsequently defaulted on the loan. It was held that the lender had a secured interest in the property regardless of the IRS’s lien, which gave the lender priority in recovering the loan balance. The IRS noted that the Son remained personally liable for any unpaid estate tax liability.

Moral of the story . . .

Even simple ideas can become complicated if one does not fully understand the implications of a transaction. This is where a team of professional advisors (attorneys, CPAs, certified financial planners, etc) can step in and make a difference.