agricultural & natural resource issues
TRANSCRIPT
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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
Issue 3: Bonus Depreciation-Vines &Trees p. 325
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Preparatory Costs
Costs incurred so that the plant’s
growing process may begin
Must be capitalized regardless of
UNICAP rules
Issue 3: Bonus Depreciation-Vines &Trees p. 325
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
Issue 3: Bonus Depreciation-Vines &Trees p. 327
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
Issue 3: Bonus Depreciation-Vines &Trees p. 327
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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
Issue 3: Bonus Depreciation-Vines &Trees p. 327
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.
Issue 3: Bonus Depreciation-Vines &Trees p. 327
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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.
Issue 3: Bonus Depreciation-Vines &Trees p. 327
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
Issue 4: Cost Recovery - Hoop Structures
pp. 330-332
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Issue 4: Cost Recovery - Hoop Structures
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
Issue 4: Cost Recovery - Hoop Structures
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
Issue 4: Cost Recovery - Hoop Structures
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
Issue 4: Cost Recovery - Hoop Structures p. 336
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
Issue 4: Cost Recovery - Hoop Structures p. 337
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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.
Issue 4: Cost Recovery - Hoop Structures p. 337
Example 10.11 Hoop Depreciation
Purchase price $125,000
Bonus depreciation $62,500
MACRS depreciation $2,344
Total depreciation $64,844
Issue 4: Cost Recovery - Hoop Structures
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
Issue 5: CRP Payments p. 341
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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 5: CRP Payments p. 342
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
Issue 7: Valuation of Unharvested Crops p. 351
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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
Issue 7: Valuation of Unharvested Crops p. 351
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 7: Valuation of Unharvested Crops p. 352
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
Issue 8: CCC Loan/Commodity Sale Form 1099-PATR
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
Issue 8: CCC Loan/Commodity Sale Form 1099-PATR
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
Issue 9: 4-H Clubs & FFA Projects p. 355
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
Issue 9: 4-H Clubs & FFA Projects p. 358
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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
Issue 9: 4-H Clubs & FFA Projects p. 362
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
Issue 10: Multiple Entities p.364
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
Issue 10: Multiple Entities p.365
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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)
Issue 10: Multiple Entities p.365
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
Issue 10: Multiple Entities p.365-366
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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
Issue 10: Multiple Entities p.367
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
Issue 10: Multiple Entities p.367-68
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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
Issue 10: Multiple Entities p.367-68
Issue 10: Multiple Entities p.368
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