Additional Information

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1 Charles Brown 2015 Farm Income Tax Webinar Field Specialist - Farm Management crbrown@iastate.edu Additional Information Tax Summary Social Security Wage Base Entity Comparison Chart Deferring Crop Insurance Depreciation Recovery Periods Employee or Contract Labor Succession Planning With Sub S Corp Medicare Tax Increase 1

2 Additional Information Oral Lease Agreement Iowa Anti-Corporate Farming Laws Mid-2015 Tax Policy Update Syngenta Claims Case Pension Contribution Limits Retirement Plan Comparison Chart Tax Calendar Additional Information Iowa Capital Gain Deduction Health Reimbursement Plans Marginal Tax Bracket Workers Compensation & Exemptions 2

3 Federal Depreciation 2015 Section 179 Expense election $25,000 maximum New & used equipment Tax years beginning in 2015 Only on cash boot paid 15 yr. property or less Only business assets(>50%), not rental Offsets business income & Section 1231 gain Can t be used on inherited assets or related party assets except between siblings Federal Depreciation 2015 Section 179 Expense election Phaseout starts at $200,000 of qualifying assets - $1 for $1 $500,000 extended for 2015(?) 3

4 Federal Depreciation % bonus depreciation Gone for 2015 unless Congress changes law Only available on new assets placed in service by 12/31/15 20 yr. life property or less Includes shops, machine sheds, pole barns Available for business and rental assets Cash boot and traded basis qualifies Can depreciate 50% of cash paid plus traded basis in first year Must elect out by class if not used Federal Depreciation % bonus depreciation Not available for business assets purchased from related parties Not available for qualified leasehold assets to related parties if 80% ownership test is met New grain bins or machine sheds leased to a related party would qualify Can create net operating loss (NOL) 4

5 Iowa Coupling 2015 In previous years Iowa Coupled with Federal Sec. 179 Did not couple with Federal bonus depreciation Tax Implications of Leasing Operating Lease Immediate deduction of lease payments What is not an Operating Lease Lease payment is applied to equity position A portion of the lease payment is designated as interest or equivalent of interest Lessee acquires ownership, or title of the equipment upon specified number of lease payments 5

6 Tax Implications of Leasing What is not an Operating Lease Over a short time the equipment is used, the total amount a lessee pays is an exceedingly large portion of the total sum required to buy the equipment outright Equipment payments exceed the current fair rental value At the time any purchase option may be excerised, the title to the equipment can be acquired for an exceedingly small purchase option price in relation to the actual value of the equipment. Tax Implications of Leasing Unanticipated Consequences Operating Lease Equipment traded and trade-in value applied to lease Trade-in value considered same as sold Gain is taxable Trade-in value must be amortized over length of lease No immediate deduction as a lease payment 6

7 Deferring Crop Insurance Proceeds Can only defer income related to yield loss Must normally sell more than 50% of crop the year following harvest Revenue insurance is calculated on both price and yield Must allocate income between yield loss and price Crop Insurance Allocation Deferral Table If Harvest Price Is: Lower Than Base Price If Actual Yield Is: Lower Than Guaranteed Yield How much can be deferred? Partial Lower Than Base Price Greater Than Guaranteed Yield None Greater Than Base Price Greater Than Base Price Greater Than Guaranteed Yield Lower Than Guaranteed Yield None-There is no crop insurance claim in this situation All 7

8 Crop Insurance Allocation Beginning Farmer Tax Credit Programs Provides Iowa income tax credits to landowners Landowner can receive an annual state tax credit for leasing land or custom hiring a beginning farmer 7% of gross income for a cash rent lease cannot include the bonus portion of Flexible Cash Lease 17% of gross income for crop share lease 7% of custom hire labor (less than 12 months) Requires a minimum of a 2-year lease term Additional tax credit if the beginning farmer is a veteran. 8

9 Beginning Farmer Tax Credit Procedures Application/Approval 4-page application (due October 1) IowaFinanceAuthority.gov/IADD Signed by landowner and beginning farmer Beginning farmer s financial statement Less than 30 days old when submitted to IADD Completed by lender with witness signature Net worth less than $703,844 Beginning farmer s background letter Submit application and appropriate fee $250 application fee plus: $50 service fee for each year of cash lease $100 service fee for each year of crop share lease. 9

10 Example Crop Share 160 Acres allocated ½ to corn, ½ to soybeans 80 acres corn at 167 bu x 50% x $3.83 x 17% = $4, Total corn crop = 13,360 bu. Owner s share = 6,680 bu. 80 acres soybeans at 48 bu x 50% x $8.91 x 17% = $ Total soybean crop = 3,840 bu. Owner s share = 1,920 bu. Total share lease tax credit = $

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13 Unemployment Tax FUTA & SUTA Non-Agriculture Employees Paid wages of $1,500 or more in any calendar quarter or had one or more employees for some portion of at least one day during each of 20 different weeks. Agriculture Employees Cash wages of $20,000 or more paid in any calendar quarter or had 10 or more ag employees during some portion of a day (need not be at same time) at least 1 day during any 20 different weeks. Paying with Commodities Saves SE tax Doesn t count as wages for FUTA Report as income and wage expense on Schedule F Issue W2 Employee reports wage income and additional gain or loss from sale of commodity Employee must have control and dominion over commodity before it is sold Follow the rules! 13

14 Wages Paid In Kind Documentation on employment relationship, compensation practices and transfer of commodities. Marketing of commodity must be done by employee, not employer. Employee must stand the risk of gain of loss Use quantity, or % of production Spouse must have separate checking acct. Wages Paid In Kind Employee holding period must be as long as possible Cost of ownership must be born by employee Identify noncash payment, use documents to show quantity, quality, grade, etc. 14

15 Wages Paid in Kind Cash advances will be counted as cash wages Immediate conversion will be counted as cash wages Sole source of income will add to the question of immediate conversion. A farmer receiving PIK and then selling the commodity could generate earned income on the additional income earned. Divergent Incomes for 2015 Low to no taxable income for 2015 Use up government deductions if at all possible Standard deduction MFJ = $12,600 Personal exemption = $4,000 Married family of 4 $28,600 of Federal tax free income That is about 8,000 bu. of corn or 3,500 bu. of soybeans If net operating loss (NOL) is unavoidable Can elect to carry it back either 2 or 5 years or carry forward 15

16 Divergent Incomes for 2015 High income year Lock in grain price, but use deferred payment contract Prepay expenses Can prepay rent, up to 12 months Not between related parties Pay up accrued interest Sec. 179 Expense Election $25,000, maybe more? Bonus depreciation, 50%? Double up on itemized deductions Fund retirement plans Deferred Payment Contracts Have multiple contracts Cash basis taxpayers can use for tax planning Can elect to pull back a contract into current year Has to be full contract 16

17 Charitable Remainder Trusts Two types Annuity trust Unitrust Both allow tax-free sale of assets, with income stream back to the donor during his/her lifetime and the remainder of trusts assets paid to named charity upon trust termination Charitable deduction limited to 30% of AGI Unused deduction can only be carried ahead 5 yrs. Charitable remainder value must equal at least 10% of the net fair market value of the property as of the date of contribution Charitable Remainder Trusts Annuity trust Payment each year back to the donor as either a fixed amount, or a percentage of the initial value of the trust Life of donor/beneficiary or term certain that can not exceed 20 yrs. Can not add additional assets at later time Can distribute principle back to donor 17

18 Charitable Remainder Trusts Unitrust Payment back to donor is computed as percentage of an annual revaluation of the market value of the trust assets May accept additional contributions of assets Can only distribute earned interest and dividends back to donor Capital gains will added to trust assets unless specified otherwise in trust document Charitable Remainder Trusts Sequences and tax results of CRT 1. Donor creates irrevocable CRT, terms of trust require an annual income stream back to donor with the remainder passing to a charitable organization at the death of the donor or after specified term of years 2. Donor transfers appreciated long-term capital gain asset to trust, claims a charitable deduction for market value of asset, but reduced by retained income interest. Zero basis assets give no charitable deduction 18

19 Charitable Remainder Trusts Sequences and tax results of CRT 3. After trust receives asset, asset in normally sold, but reports no taxable gain due to its charitable status 4. The CRT invests the sale proceeds to provide source of income to allow specified payment to donor 5. At the death of the donor, the property within the trust passes to the charity, the trust property is not part of the taxable estate of the donor Charitable Remainder Trusts Example 1 Market value of farm land is $331,500 Percentage payback to donor is 9.79% Term selected is 13 yrs. Donor will receive a charitable deduction of approximately $50,000 Donor will receive income stream of approximately $32,500 per year Income stream is taxable income to donor based on capital gain rates 19

20 Charitable Remainder Trusts Example 2 Grain worth $200,000 transferred to CRT Trust sells grain, pays no tax $0 basis in grain, no charitable deduction Trust specifies 6% income stream to donor $12,000/yr. income stream to donor Ordinary income tax paid by donor on income stream, no social security tax paid Thank you! 20