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Extension > Agricultural Business Management News > December 2015

Wednesday, December 30, 2015

Ag Tax Update Available

By Gary Hachfeld, Extension Educator

“Ag Tax Update for Farm Families” is now available on the University of Minnesota Agricultural Business Management website at www.extension.umn.edu/agriculture/business under Farm Tax and Legal Issues in the center of the web page.

The document includes descriptions of several ag tax issues of importance to farm families. Of particular note are the tax laws that were signed into law by President Obama on Friday, December 18, 2015. Most notable of those are the changes in depreciation which extends numerous provisions. The tax act permanently sets Code Section 179 depreciation expensing limit at $500,000 with a $2 million dollar overall investment limit before phase out. Both amounts will be indexed for inflation beginning in 2016. The amounts apply to the 2015 tax year. In addition, bonus depreciation for new or first use equipment has been reinstated under a phase down schedule. This first year depreciation schedule is 50% for 2015 through 2017, 40% in 2018 and 30% in 2019. 

Key to the depreciation deduction is that Minnesota does not fully allow the same deduction as the federal law. Minnesota tax payers will be affected by this for the next four years. If producers do not have enough income on the Minnesota return to offset the depreciation rolling to the current year return, the prior year depreciation will be lost. Check with your tax preparer on this issue.

Other important issues included in the tax update relate to the complicated tangible property repair rules and regulations, new guidelines for the 1099 and associated penalties, gross sales reported on the 1099-PATR, changes to the federal and Minnesota estate and gift tax exclusions and information about the affordable care act.

The last five pages of the update make up the appendix with several tables and charts listing 2014, 2015 and 2016 tax data. Items included are the 2015 and 2016 federal and state tax tables, 1040 individual tax standard deductions, alternative minimum tax exemption amounts, social security data and much more.

The tax update is free to the public simply by going to the U of M Ag Business Management website as described above. In addition to the ag tax update, the website includes information on land economics and land rent, legal issues, farm transition and estate planning, business planning, commodity marketing, farm financial and risk management, human resource management and more.

Monday, December 21, 2015

Thoughts and Updates on Year-End Tax Planning

Written by Rob Holcomb, EA
Extension Educator, Ag. Business Management
University of Minnesota Extension

There is a great deal of late-breaking tax information for 2015.  This post addresses the following topics:

Avoiding a Net Operating Loss (NOL)
Carry-over Section 179 and bonus depreciation on the State of Minnesota Return
Deferred Tax Liability
Passage of Extender’s Bill
Changes to the Repair Regulations
Prepaid expenses

NOTE: This information piece offers educational information only and is not intended to be tax, legal or financial advice. For questions specific to your farm business or individual situation, please consult with your tax professional.

Tax planning for farmers in 2015 is going to be a bit of a challenge.  Commodity prices combined with the current cost structure is going to raise the potential for the producer having a net operating loss (NOL) for 2015.  On the other side of the coin, some producers may have a great deal of deferred income rolling into 2015 from the previous year. Producers want to make sure that they examine where they are at from a tax planning standpoint. The author strongly recommends that farmers meet with their tax professionals prior to year end.

Avoiding a Net Operating Loss (NOL)

A net operating loss is something that producers really want to avoid. While having a net operating loss usually results in a zero tax liability, there are a number of hidden costs involved. When you have a net operating loss, you lose your standard deduction and all or your exemptions…….and you never get them back. Once you have a net operating loss the taxpayer must pay self-employment tax on all the money that is required pay off the net operating loss.  A sound tax management strategy is to avoid a net operating loss if at all possible. Avoiding a net operating loss oftentimes can be done by either accelerating sales or postponing expenses.

Carry-over Section 179 and bonus depreciation on the State of Minnesota Return

One very important point to make for 2015 tax planning is the carryover of section 179 and bonus depreciation for the state of Minnesota tax return.  In previous years (and currently), the state of Minnesota only recognizes section 179 expenses up to $25,000. Any Federal Section 179 expense exceeding $25,000 was spread out over a five year time period. Additionally, ALL bonus depreciation (also known as additional first-year depreciation) was also spread over a five-year period of time. The technical term Minnesota Department of Revenue uses for this practice is, “The 80% Add Back Rule.” This 80% Add Back Rule for the state of Minnesota, in effect, pushes accelerated depreciation into future years (only on the State tax return).  Producers that have taken accelerated depreciation in prior years will have a certain amount of depreciation coming in as a current year depreciation expense for the 2015 Minnesota tax return (this amount will not show on the Federal return).  If the producer does not have enough income on the Minnesota return to off-set the depreciation rolling to the current-year return, the prior-year depreciation will be lost.  Under current State law, taxpayers cannot carry this expense forward to future years.
This is another reason why you do not want to have a net operating loss.  Producers in this situation should consider accelerating some sales so that you can use the additional depreciation expense on the Minnesota return.

Deferred Tax Liability

One additional topic to consider is deferred tax liabilities. A deferred tax liability can simply be defined as the amount of tax that the producer would owe if you were to have a farm liquidation today. As I look back over balance sheet information as reported in the University of Minnesota FINBIN database; in 2000, the average deferred tax liability for Minnesota farmers reporting in FINBIN was $87,000. In 2014 that deferred tax liability had swelled to over $283,000.  This growth is a result of a number of factors including; increased land prices, increased levels of prepaid expenses and deferred commodity sales.

Due to 2015 commodity prices, many producers may be looking at lower incomes. As a result of this situation, producers should consider planning to either accelerate sales or postpone expenses in order to fill up the lowest income tax brackets on the tax return. If you don’t have enough income to use up your standard deduction and exemptions, those deductions are lost forever.

Passage of Extender’s Bill

On Friday, December 18, 2015 the President signed into law the “Protecting Americans from Tax Hikes (PATH) Act” which extends numerous tax provisions. Some important tax provisions have been made permanent, while others were extended through 2016 or 2019. The bill, in final version was over 2,000 pages.  The most notable provisions for agricultural producers include modifications to Section 179 and Bonus (additional first year) depreciation.

Pre-act, the dollar limit for code section 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The act permanently sets the code section 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016).

The act also extends bonus depreciation (additional first-year depreciation) under a phase down schedule through 2019:
at 50% for 2015 through 2017;
at 40% in 2018; and
at 30% in 2019.

Changes to the Repair Regulations

On November 24, 2015 The Internal Revenue Service announced a simplification of the paperwork and record-keeping requirements for small businesses by raising the safe harbor threshold for deducting certain capital items from $500 to $2,500. The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.  The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.  The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016. For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000 [www.irs.gov].

Prepaid expenses

If your tax management plan includes increasing expenses, one of the more common techniques is to prepaid expenses.  Cash basis tax filers are able to pre-pay expenses for the following year. Prepayments normally consist of fertilizer, chemicals and seed.  Prepayments need to actually be purchased. Going to the co-op and putting money on account does not qualify as a prepaid expense.  There also needs to be a business reason for doing the prepaid expense. The typical reasons for prepaid expenses are to either lock in price or lock-in supply. Cash basis farmers are able to prepay up to 50% of the total schedule F expenses including depreciation.


NOTE: this information pieces offers educational information only and is not intended to be, tax, legal or financial advice. For questions specific to your farm business or individual situation, consult with your tax professional.

Resources:

Internal Revenue Service.  www.irs.gov

National Association of Tax Professionals.  www.natptax.com

Wolters Kluwer.  CCH Tax Briefing.  www.cchgroup.com/news-and-insights/federal-tax-legislation

2015 National Income Tax Workbook.  Land Grant University Tax Education Foundation. Inc.

Tuesday, December 15, 2015

Intensive Marketing Workshop Scheduled for Grain Producers

By Gary Hachfeld, Extension Educator

The Minnesota Master Marketer Program, six days of intensive marketing training for grain producers, is returning to Mankato in January, February and March of 2016.

The years 2007-2014 were an extended period of prosperity for many grain and soybean producers. This golden era has passed and with prices below production costs, the time is right for an educational program that gets back to the fundamentals of price risk management. The Master Marketer Program focuses on the basics of marketing plan development and profitable pricing decisions.

Sponsored by MN Soybean, the program is spread over three, two-day segments; January 13 & 14, February 10 & 11, and March 9 & 10, 2016. Sessions will be held at Country Inn & Suites Hotel & Conference Center, 1900 Premier Drive, Mankato, MN. Registered producers who cannot attend all six days can send a family member or business partner in their place.

An outstanding line-up of guest presenters promise to make this a valuable program. They include:
  • Edward Usset, Grain Marketing Economist , University of Minnesota
  • Dr. Elwynn Taylor, Professor & Iowa State University Extension Climatologist
  • Dr. Chad Hart, Professor & Crop Market Extension Economist, Iowa State University
  • Alan Brugler, President, Brugler Marketing & Management
  • Dr. Mark Seeley, Professor, University of Minnesota
  • Scott Cordes, President, CHS Hedging
  • Dr. Lee Schulz, Professor and Livestock Economist, Iowa State University
  • Bob Craven, Extension Economist, University of Minnesota
To view the Minnesota Master Marketer Program agenda or to register on-line, go to the registration page at http://www.cffm.umn.edu/events/MasterMarketer.aspx . Pre-registration is required to attend the program and producers can register by mail or online. The cost by mail is $395 or producers can save $10 by registering on-line. If you have any questions about the Master Marketer Program please direct them to Edward Usset at (612) 625-7014.

Thursday, December 10, 2015

Making the Difficult Rent Decisions

By: Pauline Van Nurden, Extension Educator

Farmers have begun pushing the pencil on profitability expectations for the upcoming year. And the outlook is challenging – especially on rented acres. Expenses look to be the same and revenue is down considerably (26% or more for corn, soybeans, and wheat). There will be no easy answer when planning for the 2016 crop year.

As producers make crop input decisions and work on land rent negotiations for the coming year, many options may come to mind to help their bottom line. A natural goal is to decrease expenses. But, these expense cuts cannot jeopardize the yield potential of the crop. Therefore, it is likely difficult to trim much off of seed, fertilizer, or chemical expenses.

The other major crop expense is land rent. According to the FINBIN Database, land rent has been increasing at an average rate of 9% per year over the last 10 years on both corn and soybean acres across all of Minnesota. This may be an area where expenses can be reduced. Producers will need to have a frank discussion with their landlord about the current farm economy. This open conversation may help negotiate a lower rent cost for the coming year. But remember, landlords have also experienced rapidly increasing costs. Real estate taxes, one of their major costs, have risen at an average of 10% per year over the last 10 years as well.

What if no solution is available and a farmer is facing a large loss on rented acres for the 2016 year? Farmer’s may wonder if it is time to walk away from rented acres. This is truly a difficult decision. As this decision is contemplated a few items to consider include:
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