Agricultural & Natural Resource Issues

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Agricultural & Natural

Resource IssuesChapter 10 pp. 321-368

2016 National IncomeTax Workbook™

1. Tangible Property Regulations De

Minimus Safe Harbor

2. Contribution of Food Inventory

3. Bonus Depreciation on Vines and Trees

4. Cost Recovery for Hoop Structures

5. Conservation Reserve Program Payments

Agricultural & Natural Resource Issues p. 321

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Agricultural & Natural Resource Issues p. 321

6. Easements

7. Valuation of Unharvested Crops

8. CCC Loan with Commodity Sale on

Form 1099-PATR

9. 4-H Club and FFA Projects

10. Multiple Entities

11/10/2016 Barry Ward, OSU Extension

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Example 10.2

Accounting procedure: exp. ≤ $1,000

Paid $600 for heifers

Elect safe harbor → expense heifers

Sold for $1,000: $1,000 gain ordinary

W/out safe harbor election, sale gain

is § 1245 recapture and § 1231 gain

Issue 1: De Minimis Safe Harbor p. 323

Self-Employment Tax?

Gain on sale of items expensed is

ordinary income

Reported on Form 4797

Does not flow through Sch C or F

Issue 1: De Minimis Safe Harbor p. 323

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Issue 2: Contributions of Food Inventory p. 324

PATH Act reinstates enhanced deduction

for contributions of food inventory &

made permanent

Inventory basis for contribution

Actual cost

If inventory not required, elect basis =

25% FMV

Example 10.3 Cash Basis

Net farm income was $7,150

Broccoli would have sold for $280

Basis: $70 ($280 x 25%)

Deduction is lesser of:

$70 + (½ × $210) = $175 or

2 × $70 = $140

Limited to 15% × $7,150 = $1,073

Issue 2: Contributions of Food Inventory p. 324

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UNICAP Rules (IRC § 263A)

Capitalize costs of preproductive period

if preproductive period > 2 years

Most farmers can elect out

o Elect out by not applying on 1st return

UNICAP would be required

o Farmer & related must use ADS on

property used predominantly in farming

Issue 3: Bonus Depreciation-Vines &Trees p. 326

Preproductive Period CostsCosts of cultivating, maintaining, or

developing the plant during the period after

plants are planted and before they are placed

in service

Includes management, irrigation, fertilizing,

tax depreciation, & repairs on buildings and

equipment


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Preparatory Costs

Costs incurred so that the plant’s

growing process may begin

Must be capitalized regardless of

UNICAP rules


PATH Act adds a new option

Election to deduct 50% of adjusted basis

in year plants are planted or grafted

Must be tree or vine that bears fruits or

nuts or

Any other fruit or nut plant with

preproductive period > 2 years

Issue 3: Bonus Depreciation-Vines &Trees pp. 325-326

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Benefits of the New Legislation

1. Farmer that elected out of UNICAP

can claim bonus depreciation for the

preparatory costs

2. Bonus depreciation can be deducted

in an earlier year


PATH Act adds a new option

Basis of plant must be reduced by bonus

depreciation

Cannot claim bonus depreciation for

plant in year it is placed in service


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Differences New and General Rules

New election applies to any tree or vine

that bears fruits or nuts regardless of its

preproductive period

UNICAP applies only to plants that have a

nationwide weighted average

preproduction period of > 2 years


New vs General Bonus Depreciation

Property does not have to qualify for the

general bonus depreciation to be eligible

for the special elective bonus depreciation

for plants that bear fruit or nuts.


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New vs General Bonus Depreciation

Property does not have to meet the

following requirements:

1. Recovery period < 20 years

2. Original use commences with TP

Property that must be depreciated

under the ADS is eligible property.


Example 10.4 Elect out of UNICAP

ADS for depreciable assets

Figure 10.1

Example 10.4 Elective Bonus Dep

2016: Bonus $23,500, $7,000 maint.

2017: $12,000 maintenance, § 179

2018: § 179, ADS dep., Deduct $12K

Issue 3: Bonus Depreciation-Vines &Trees pp. 327-328

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Issue 4: Cost Recovery - Hoop Structures

pp. 330-332


pp. 330-332

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pp. 330-332

Figure 10.5: Farm recovery periods

Hoop structures likely to be treated as

farm buildings (20-year property)

Building per Regulations:

o Appearance test – structure enclosing a

space w/walls and usually a roof

o Functional test – same purpose as in reg.

examples

Hoop not a single-purposes structure

Does not meet the “specifically

designed, constructed, and used”

oCan be used for many purposes

Issue 4: Cost Recovery - Hoop Structures p. 332

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Example 10.6: 3 identical hoop structures

1. To store grain: argue grain bin (7 yr)?

2. To house dairy goats: argue single-

purposes (10 yr)?

3. To store farm equipment: 20 year –

general purposes farm building


pp. 332-333

Section 179 Expense Deduction

Must be §1245 property which includes:

1. Real property (not a building)

a. an integral part of production or

b. bulk storage facility or

2. Single purpose livestock and horticultural

structures

Hoop structure, as a building, not eligible


pp. 334-335

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Bonus Depreciation – 50% AFYD

Specific type of property including

o Tangible property depreciated under

MACRS with recovery period ≤ 20 years

Original use begins with taxpayer

Not an excepted property (list – p. 336)

Hoop structure, Example 10.6, qualifies


Conventions

Cost of the hoop structure is included in

the 40% rule for the mid-quarter

convention

Hoop structure will be depreciated

under the half-year or mid-quarter

convention


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Order of cost recovery:

1. Section 179

2. Bonus depreciation

3. MACRS depreciation

As hoop structure unlikely to qualify for

section 179 - bonus depreciation, then

MACRS.


Example 10.11 Hoop Depreciation

Purchase price $125,000

Bonus depreciation $62,500

MACRS depreciation $2,344

Total depreciation $64,844


pp. 337-338

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Intermission

Issue 5: Conservation Reserve Program (CRP)

Payment p. 338

Notice 2006-108: Participation in a CRP contract is a trade or businessFarmer is subject to SE tax

Non-farmer is subject to SE tax

Proposed revenue ruling has not been issued

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Issue 5: CRP Payments p. 340

2008 Farm Bill:

Excludes CRP payments from the

definition of net earnings from self-

employment if owner is receiving:

Old age or survivor’s benefits

Disability benefits

Morehouse v Commissioner

Tax Court followed IRS reasoning and

held CRP payments subject to SE tax

8th Circuit reversed and held that CRP

payments are rent

oNot subject to SE tax because

taxpayer did not materially participate


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CRP - NIIT & Additional Medicare Tax

NIIT applies to income reported as rent –

CRP on Sched E

Additional Medicare tax applies to self-

employment income – CRP on Sched F

Neither if TP collecting social security

as CRP not in SE income & not rents


Issue 7: Valuation of Unharvested Crops pp. 350-351

FMV of unharvested crop needed for

1. Transfer by sale, gift, or inheritance

2. To make IRC § 754 adjustment

3. To make IRC § 336(e) election

4. To calculate potential built-in gains

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Sale of Unharvested Crop with Land

Unharvested crop is § 1231 asset if:

1. On land held for > 1 year

2. Sold at same time and to same buyer

as sale of land

§ 268 denies deduction of cost of raising

the crop (including prior year)

Issue 7: Valuation of Unharvested Crops p. 351

Valuation of Annual Crops

1. Appraisal by a qualified appraiser

2. Discount FMV of crops at harvest


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Appraisal of Growing Crop

Example 10.21

Crop Cost Growth FMV

Wheat $200 60% $320

Soybeans $335 15% $385

Corn $560 15% $644


Discounting Harvested Crops

Example 10.22

FMV of harvested wheat $100,000

Weather risk - 12,000

Fire risk - 2,000

Discounted value $ 86,000

Issue 7: Valuation of Unharvested Crops pp. 351-352

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Non-Materially Participating Landlord

If decedent did not materially participate,

share rent is IRD (no date of death FMV

basis)

Must determine FMV on date of death to

allocate rent before and after death


Issue 8: CCC Loan/Commodity Sale Form 1099-PATR

p. 353

§ 77 election: treat CCC loan as income if

commodity used as collateral

Basis in commodity = loan amount

Repay loan & sell commodity → report sale on Sch

F line 1, basis on line 1b.

Sell thru Coop & Coop reports as PURPIM → on

line 3a, 3b - basis deducted in “other expenses”

on SchF Ln 32 as “CCC loan repayment”

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Example 10.17

Loan $150,000

PURPIM $262,000

Interest $ 1,200


p. 353

Example 10.24: Sch F - Figure 10.12

Lines 3a and 3b 262,000

Line 5a 150,000

Line 21b 1,200

Line 32a 150,000


p. 354

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4-H or FFA Member: Do They File?

All dependent children who earn more

than $6,300 in income must file a

personal income tax return and may

owe tax

oconducted

Issue 9: 4-H Clubs & FFA Projects p. 355

Issue 9: 4H Clubs & FFA Projects p. 355

4H or FFA Member: Trade or

Business (T or B) or not?

Not T or B (& not SE income) → if for

educational purposes, not for profit,

follow organization rules/restrictions

oReport on line 21 (show expenses in

line 21 or attach statement)

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Reporting Income from 4-H/FFA Projects

Line 21 of Form 1040 Attach form with gross income & the expenses

May not be subject to self employment tax if the project is

primarily for educational purposes & not for profit.

Schedule F Income or loss reported for Self-Employment

If member has other farming activities in addition to the

project than it most likely goes here.

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4-H or FFA Member: Tor B or not?

T or B (& SE income) → Sch F if:

oRegular & recurring activity

oNot primarily for educational purpose

o Intends to make a profit and/or

oOther farming activities conducted


Kiddie Tax

Earned income if T or B treatment

§ 911(d)(2): Personal service & capital

material income producing factors,

reas. allow. for comp not > 30% of net

Line 21 – not earned income?

Sch F – 30% as earned income


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Buyers at a Fair Auction

Often purchase at > FMV, sell at loss

Done for promotional purposes

oDeduct as ordinary and necessary

business advertising expense

Example 10.32

If donates: lesser of FMV or basis


Form 1099 Reporting p. 363

Question: Does the fair or livestock buyer

need to issue a 1099 to the 4-H Member if

they sell the animal in the Market Livestock

Auction sells for $600 or more?

Answer: No, the 1099 requirement does not

extend to payments for farm commodities.

[Treas. Reg. § 1.6041-3(c)]

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Benefits of using multiple entities:Separate legal liability

Increase section 179 deduction

Reduce self-employment tax

Facilitate transferring business

Maintain a retirement income stream for the

older generation

Issue 10: Multiple Entities p.363

Section 179 Deduction

Example 10.34

One LLC: one $500,000 limit

one $2010,000 limit

Two LLC’s: two $500,000 limits

two $2010,000 limits

Issue 10: Multiple Entities p.363-364

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Example 10.35 Additional Entities

Expenditures exceed $2,010,000 limit

A third LLC solves the expenditure

problem

But, each owner has $500,000 limit

o Each loses $250,000 of § 179 expense

o Asset basis & basis in LLC still reduced


Example 10.36 Reducing SE tax

Net earnings $500,000

SE earnings for each

($250,000 × 0.9235) or $230,875

SE tax for each $21,389


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Example 10.36: Form real estate LLC

Pay $200,000 rent per year

Net earnings $300,000

SE earnings for each

($150,000 × 0.9235) $138,525

SE tax for each $18,711

(self-rental – not subject to NII tax)


Asset Ownership and Operations

Example 10.37

oSeparate LLCs for limiting liability also

increases section 179 deduction

Example 10.38

oRent equipment to operating LLC


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Facilitate Transfers

Example 10.39

Real estate $2,500,000

Operating assets $1,000,000

oDon and Doris sell 50% of operating

LLC to Johnny for $350,000


Example 10.40: Split Entity & SE tax

Sole proprietorship

Employer’s FICA $ 5,738

Johnny’s FICA 5,738

Don’s SE tax 23,398

Total OASDI/Medicare $34,874


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Example 10.40

Two LLCs

Don’s SE tax $ 5,298

Johnny’s SE tax 16,723

Total OASDI/Medicare $22,701



Example 10.42: Split Entity & NIIT

Self-rental rule exempts rent from

both Don’s and Doris’ NIIT

If Don does not materially

participate, rent is net investment

income

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Barry Ward

(614) 688-3959

[email protected]

11/10/2016 Barry Ward, OSU Extension

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Agricultural & Natural Resource Issues