2017 Agricultural Tax Issues. Greg Bouchard for The Ohio State University

Transcription

1 2017 Agricultural Tax Issues Greg Bouchard for The Ohio State University

2 A. Income and Deductions p Ag. Income and Expenses 2. NOLs 3. Rental Property 4. Demolition of Structures 5. Marijuana and Hemp 6. Depreciation 7. DPAD

3 A. Income and Deductions p Prepaid farm expenses 9. Prepaid Change of Plans 10.Promissory Note to Supplier 11.Deducting interest on Loans Secured by Residence

4 A. Income and Deductions p Lease vs. Purchase of Equipment 13. Improvements installed by Lessee 14.Deducting Cost of Growing Crops Purchased with Land

5 B. Transfer of Farm Assets p Buying and Selling Farmland 2. Disposition of Converted Wetlands 3. Form Livestock Transactions 5. Net Investment Income Tax 6. Inherited Property

6 B. Transfer of Farm Assets p Farm Casualty Gains and Losses 8. Casualty Repair Costs 9. Going Out of Business

7 C. Farm Employees p Employee vs. Independent Contractor 2. Payment of Wages with Commodities 3. Employer-Provided Meals and Lodging 4. H-2A Agricultural Workers

8 D. SE Tax and SS Benefits p Interaction of SE Tax and SS Benefits 2. Farm Optional Method for SE Tax 3. Land rented to an entity

9 E. Miscellaneous Ag Tax Issues p Form 1099-MISC 2. Revoking a CCC Loan Election 3. Marketing Gain on CCC Loans

10 E. Miscellaneous Ag Tax Issues p Children of Farmers and the Kiddie tax 5. 4-H and FFA Members

11 INCOME AND DEDUCTIONS

12 Issue 1: Ag Income and Expenses p.1-16 General Definition Sch F Compliance Audits Tax Rules for Farmers Farm Income Farm Expenses

13 General Definition of Farming p. 1 Individuals, Partnerships or Corporations that cultivate, operate or manage farms for profit, either as owners or operators are farmers. IRC has various definitions of farming.

14 Cultivate, Operate or Manage p. 1 The owner or tenant must Participate to a significant degree in the farming process Bear substantial risk of loss in the process, Duggar v. Comm. Examples 1 and 2

15 For Gain or Profit p. 2 To qualify as a farmer there must be a profit motive. Hobby Farming Example 3. Mitchell v. Commissioner

16 Schedule F (1040) Compliance Audits p. 3 IRS initiated a new pilot program to target Schedule F business in returns April 1, 2017 to April 1, 2018 Review of 6 general items Practitioner Note: Audit Risk

17 Tax Rules for Farmers pp 3-4 List of 26 items where special rules for farmers are found in the code: citations provided

18 Farm Income pp. 4-5 Sale of farm products Raised sales: Line 2, Sch F Purchased for resale: Lines 1a, b & c. Weather related sales may be deferred, 1033(e), 451(e)

19 Farm Income p. 5 Coop Distributions Reported on lines 3(a) & (b) Schedule F Example 4: Adjusting basis

20 Farm Income p. 5 Agricultural Program Payments USDA and State agencies Reported on Line 4(a) & (b) Cost-Sharing may be excluded per IRC 126

21 Farm Income p. 5 Conservation Reserve Program Reported as Gov t Payment on Lines 4(a) & (b) on Schedule F Farmers receiving SS or disability may exclude on Sch SE, line 1(b)

22 Farm Income p. 6 Commodity Credit Corp. Loans Typically loans are not income IRC 77 allows farmers to elect to treat CCC loans as income, reporting on line 5(a) of Schedule F. May revoke using Form 3115

23 Farm Income p. 6 Crop Insurance/Disaster Payments Most cases these payments reported in year received Can elect to postpone Must meet 3 conditions Must attach a statement

24 Farm Income p. 6 Custom Hire (Machine Work) Generally reported on line 7, Schedule F. This is for an incidental amount If more than incidental report on Schedule C (Form 1040)

25 Farm Income p. 7 Other Income, e.g., Line 8, Sch F Bartering Cancellation of debt Breeding fees State and Federal Fuel tax refunds Others

26 Farm Income p. 7 Disposition of Farm Assets Generally gains and losses of depreciable farm assets: machinery, equipment and buildings are reported on Form 4797, Disposition of Business Property. See Figure 1.

27 Income Averaging p. 8 Farmers and fishers may average income using the 3 prior year s unused brackets. Electable Income Sch F, and some 4797 $ Wages from S-corporation but not C-corporation

28 Farm Expenses p. 9 Car and Truck Expenses Actual cost SMR, 53.5 / mi, 25 is dep. Limited to 4 vehicles Example 5.

29 Farm Expenses p. 9 Car and Truck Expenses Personal and Biz Use Farmers have a 75% safe harbor rule [Temp. Treas. Reg T(b)]

30 Farm Expenses p. 10 Conservation Expenses Farmers may elect to deduct up to 25% of gross farm income under IRC 175 Unused $$ carry forward If farmer dies, deduction dies See list of 4 qualifying items Example 6.

31 Farm Expenses p. 11 Depreciation and Cost Recovery 150% DB, ½ year convention 179, $510,000 (2017) Bonus 50% (2017) Farm Recovery Periods, Figure 2

32 Farm Expenses p. 13 Fertilizer and Lime IRC 180 election to expense, made by deducting on Sch F Annual election (IRS consent to revoke needed) Sale of farmland with fert applied triggers a recapture

33 Farm Expenses p. 13 Interest payments Mortgages and other farm-related loans deduct on Sch F, line 21 Cash basis farmers required to capitalize prepaid interest. [IRC 461(g)(1)]

34 Farm Expenses p. 13 Rent or Lease Payments Land and equipment leases are deductible on Sch F, line 24 (a) & (b). Rules apply to prepaid rents

35 Farm Expenses p. 13 Supplies, Repairs and Maintenance Generally deductible as ordinary and necessary De Minimis rule allows for election of up to $2,500.

36 Farm Expenses p. 14 Seeds and Plants Generally allowed to deduct on Sch F, line 26. Does not apply to pre-productive expenses > 2 years

37 Farm Expenses p. 14 Taxes: Schedule F, line 29 RE and personal prop tax on farm assets FICA (farm employees, biz 1/2) Unemployment on farm employees Use tax on highway motor vehicles

38 Farm Expenses p. 14 Prepaid Expenses Deductions may be limited 50% rule Broad rules Payment not a deposit Biz purpose (not tax avoidance) Deduction doesn t distort income

39 Farm Expenses p. 15 Prepaid Expenses Deduction doesn t distort income 1. Customary biz practice 2. Expense relative to past $$ 3. Time of year of purchase 4. Expense relative to income for yr Example 7 & Practitioner Note

40 Issue 2: Net Operating Losses pp Issue discusses NOL issues for farmers and fishers Income averaging Carryback periods Allocation between spouses

41 Income Averaging p. 16 NOL carried to a base year is allowed in full to compute the tax for the base year, even if it creates negative income. However, tax benefit in another tax year requires NOL part to be added back to calculate subsequent base years income averaging calculations.

42 Carry Back Periods p. 17 Casualty, Theft and Small Business Disaster Losses 3 years Eligible casualty or theft loss Small Biz NOL in federally declared disasters Practitioner Note: Farming Losses

43 Casualty & Theft pp Casualty and Theft examples Example 1 Loss not claimed Example 2 Loss claimed

44 Small Biz Disaster p. 19 Allocations of Losses 1. Allocate to 3-year carryback 2. Allocate NOL to 2-year carryback if not affected by disaster 3. Allocate NOL on pro rata basis using first two methods

45 Small Biz Disaster pp Allocations of Losses Example 3. Priority in Carryback and Carryforward years Example 4. Election to Waive the Carryback

46 Farming Loss pp Carry back is 5 years Carryforward is 20 years Allocation of NOL including a farm loss NOL computed using income and expenses of farming The total NOL Example 5. Allocation of Farm Loss

47 Farming Loss p. 22 Farm Loss excluded from 3-year carryback Election to waive 5-year carryback Reverts to 2-year carryback Example 6.

48 Specified Liability Losses pp Carryback is 10 years Not common regarding agriculture Reclaiming land Remediating environmental contamination These two from the list of 5 make a measure of sense.

49 Making election to Waive p. 23 Taxpayers may elect to forgo the carryback period Make the election on an original timely filed return (includes extension) Election is irrevocable

50 Failure to Claim NOL p. 23 If a NOL is not claimed, it is absorbed by the carryback years, similar to allowable depreciation Example 7: Failure to Claim

51 Timing of NOL p. 24 Taxpayers and practitioners need to have an understanding of when the best time is to take advantage of an NOL Capital Losses Investment Tax Credit Sufficient Income to use

52 Allocation of NOL Between MFJ and MFS pp Allocation of NOLs from MFJ Example 8 Example 9 Allocated NOL dies with decedent s allocation

53 Allocation of NOL Between MFJ and MFS p. 26 Allocation of Income and Deductions If there is a change in filing status due to death, allocation must be calculated Example 10.

54 Allocation of NOL Between MFJ and MFS pp Separate Returns may Reduce Tax Liability If one spouse has an NOL and joint income is less than historic average; a MFS may be best. Example 11 = Planning Op.

55 Issue 3. Rental Property pp Leasing Real Property Leasing Personal Property Self Rentals

56 Leasing Real Property p. 27 Cash Rent Lease SE Tax (generally no) IRC 1402(a)(1) Practitioner Note

57 Leasing Real Property p. 28 Cash Rent Lease Non-Farming Income, therefore not in the biz of farming. Do not qualify for listed items under the IRC.

58 Leasing Real Property p. 28 Cash Rent Lease Passive Loss Rules From rental activities Biz activities without material participation Treas. Reg T(f)(3): income-active; losses-passive

59 Leasing Real Property pp Cash Rent Lease Example 1: Loss Limitations Net Investment Income Tax Cash Rent Tenant 12 months of benefit End of tax year following payment

60 Leasing Real Property p. 29 Crop Share Lease An exchange of the tenant s production as rental income If landlord materially participates income from the lease is SE taxable See list of 4 items defining MP

61 Leasing Real Property p. 30 Crop Share Lease Share Income may allow some eligible tax provisions Section 179 Soil and Water Conservation Farm Income Averaging

62 Leasing Real Property p. 31 Crop Share Lease Passive Loss Rules Non participating landlords are subject to PLR Practitioner Note: $25K allowance

63 Leasing Real Property p Crop Share Lease Non participating landlord subject to NIIT Crop Share tenants do not deduct rental payments Flex Lease with cash plus a bonus based on production mostly treated as a cash rent.

64 Leasing Personal Property p. 32 Self-Employment Tax If equipment and machinery rented separate from RE, and If rental is a trade or business Example 2

65 Leasing Personal Property p. 33 Lease versus Purchase Operating Lease Capital Lease = Conditional Sales Contract if any of 6 items apply: See list

66 Leasing Personal Property p. 33 Lease versus Purchase Trade-in is typically treated as a sale by the farmer if an operating lease. Example 4. Defer gain if Capital Lease Example 3

67 Self Rentals p. 34 Under the passive loss rules, rental income is generally passive. The self-rental rule recharacterizes net rental income as nonpassive. Use Code 7 on Schedule E, line 1b Examples 5, 6 and 7

68 Issue 4: Demolition of Structures pp I.R.C. 280B disallows deduction for cost of demolishing buildings Cost and loss added to land basis Example 1: Intent to Demolish

69 Demolishing a Farmstead p. 36 If there is an intent to use the buildings, they can be depreciated for the period of use.

70 Example 2 p. 36 Barn No basis Shed $10,000 Depreciation (2,669) Adjusted basis $ 7,331 Demolition cost 4,000 Added to basis $11,331

71 Rev. Proc pp Provides safe harbor for certain structural modifications to building that will not be treated as a demolition for purposes of section 280B. See list Example 3

72 Removal Costs pp If taxpayer disposes of a component of a unit of property, but the disposal is not a disposition, the taxpayer may deduct or capitalize the cost of removing the component. Examples 4 and 5

73 Practitioner Note p. 38 Tangible property regulations do not override section 280B, which does not allow a deduction for the costs of demolishing a structure. Demolition costs are added to the basis of the land.

74 Abandonment p. 38 Abandonment is a disposition [Treas. Reg (a)-8(a)(4)] Treated as a sale for $0 Ordinary loss on Form 4797

75 Example 6 p. 38 Cost of shed $10,000 Depreciation (7,769) Loss $ 2,231

76 Demolition after abandonment p. 39 Cost of demolition is added to basis of land

77 Example 7 p. 39 Demolished abandoned building Basis of building $ 0 Demolition cost 20,000 Added to basis of land $20,000

78 Soil and Water Conservation p. 39 If demolition costs include expenses for conserving soil or water, those expenses may qualify as deductible under section 175 soil and water conservation expenses. Example 8

79 Break Time Unless you have questions Back to work in 10 minutes