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2017 Farm Income

Tax Webinar

Charles BrownField Specialist - Farm Management

crbrown@iastate.edu

641-673-5841

515-240-9214

• Tax Bracket Tables

• Standard Deduction

• Social Security Wage Base

• Deferring Crop Insurance

• Depreciation Recovery Periods

• Pension Contribution Limits

• Tax Calendar

• W2 & 1099 Filing Dates

• Chapter 12 Bankruptcy Law

• Farm Expense Deduction

• Fence Law

• Health Insurance

• Iowa Anti-Corporation Farm Law

• Machinery Leases and Trades

• Renting Land to an S Corp

• Small Partnerships

• Tax Treatment of Water Quality Projects

• New Tax Bill Proposal

Additional Information

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New Tax Example-MFJ

Family of 4

Husband & Wife and 2 children under 17 years of age

Salary of $75,000

Current Proposed

Salary $75,000 $75,000

Standard deduction -$12,700 -$24,400

Exemptions -$16,200 $0

Taxable income $46,100 $50,600

Income tax owed $5,983 $6,072

Child tax credit -$2,000 -$3,800

$3,983 $2,272

Tax savings $1,711

S Corp ExampleS Corp

$100,000 profit after paying wages

$40,000 wages paid

Current Proposed SE Tax

Wages $40,000 $40,000 $40,000

Sub S profits $100,000 $100,000 $100,000

Standard deduction -$12,700 -$24,400 $140,000

Exemptions -$16,200 -$1,200 0.7

Sub total $111,100 $114,400 $98,000

SE tax deduction -$4,437 -$40,000

Taxable income $111,100 $109,963 $58,000

0.153

Income tax owed $19,317 $15,790 $8,874

SE tax owed $8,874

Total tax owed $19,317 $24,664

Additional tax owed $5,347

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• Business Miles - $.53.5

• Charitable Miles - $.14

– Iowa - $.39

• Medical Miles - $.17

Mileage Deductions Per Mile

Section 179

• PATH Act indexed expense deduction for inflation & made it permanent.– 2017: $510,000 deduction ceiling for cost of

qualifying property

• $2,030,000 threshold (dollar-by-dollar reduction for amount of qualifying property placed in service exceeding $2,030,000)

– Made Permanent rule allowing revocation of election or specification of property expensed without IRS consent

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Federal Depreciation 2017

• Section 179 Expense election– New & used equipment

– Tax years beginning in 2017

– 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

Maximum of $25,000

Definition of an Sport Utility Vehicle (SUV) -An SUV is defined as a four-wheeled vehicle with a gross vehicle weight rating (GVWR) of more than 6,000 pounds but not more than 14,000 pounds. Consequently, in addition to SUVs, an SUV may include heavy pickup trucks, vans, and small buses.

However, the term “SUV” does NOT include any of the following vehicles:-A vehicle designed to have a seating capacity of more than nine persons behind the driver’s seat,-A vehicle equipped with a cargo area of at least six feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or-A vehicle with an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

Section 179 for SUV

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Federal Depreciation 2017

• 50% bonus depreciation– Only available on new assets placed in service by

12/31/17

– 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 2017

– 50% 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)

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Bonus Depreciation

• Additional First-year Depreciation (AFYD)

– Extended through 2019 & modified

Bonus Depreciation

• §280F Passenger Auto – $8,000 increase to 1st year depreciation limit

• Reduced beginning in 2018: $6,400, 2019: $4,800

• Passenger automobiles:

– Depreciation limit under Sec. 280F(d)(7) is $11,160 for the first year

• Trucks and Vans:

– $11,560 for first year

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• Section 179 is $25,000

– Phaseout starts at $200,000

• No bonus depreciation

Iowa Depreciation 2017

Various Depreciation Stratagies

Federal Macrs Iowa Federal Macrs Iowa Federal Macrs Iowa Federal MSL Iowa

Cost & Sec 179 Depreciation & Bonus Depreciation Depreciation Depreciation Depreciation Depreciation

Combine $400,000 $400,000 $42,800 $221,400 $42,800 $42,800 $42,800 $28,560 $28,560

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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

• Accrual taxpayers cannot elect to pull back contract

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

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Crop Insurance AllocationDeferral Table

If Harvest Price Is: If Actual Yield Is:How much can be

deferred?

Lower Than Base

Price

Lower Than

Guaranteed YieldPartial

Lower Than Base

Price

Greater Than

Guaranteed YieldNone

Greater Than Base

Price

Greater Than

Guaranteed Yield

None-There is no

crop insurance claim

in this situation

Greater Than Base

Price

Lower Than

Guaranteed YieldAll

Crop Insurance ExampleCorn Soybeans

Yield loss Spring Price

Approved yield (bushels per acre) 190 60 Corn $ 3.96

Production to count (bushels per acre) (-) 175 55 Soybeans $ 10.19

Damage loss (bushels per acre) 15 5

Harvest price (x) $3.49 $9.75 Harvest Price

Acres covered by insurance (x) 100 100 Corn $ 3.49

Revenue loss from damage $5,235 $4,875 Soybeans $ 9.75

Price loss

Greater of base price or harvest price $3.96 $10.19 Coverage Level

Harvest price (-) $3.49 $9.75 Corn 85%

Price loss $0.47 $0.44 Soybeans 85%

Production to count (bushels per acre) (x) 175 55

Acres covered by insurance (x) 100 100 Guarantee

Revenue loss from reduced price (+) $8,225 $2,420 Corn $63,954

Total Revenue Loss $13,460 $7,295 Soybeans $51,969

Insurance proceeds $2,879 $0 Harvest $ Counted

% allocable to yield loss corn $5,235 / $13,460 38.89% Corn $61,075

% allocable to yield loss beans $4,875 / $7,295 66.83% Soybeans $53,625

Amount eligible for deferment $1,120 $0

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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

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.

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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

• Value of trade-in equals $100,000

– Original purchase price equaled $200,000

– Basis is now $0

– 5 year lease on new tractor

• Considered sold for $100,000

– Taxable ordinary gain of $100,000 (Not subject to SE tax)

• Have to amortize the $100,000 over the length of the lease

– $20,000 lease payment per year

Lease Example with Trade-In

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Soil & Water Conservation Expenses

• Earthen improvements and land improvements such as building a pond must be added to basis of land

– Exception - Sec. 175 provides for taxpayers that are in the business of farming to deduct these expenses

• Deductible soil & water conservation expenses include:

– Treatment or movement of earth, such as leveling, conditioning, grading, terracing and contour furrowing

– Construction, control and protection of diversion channels, drainage ditches, irrigation ditches, earthen dams, water courses, outlets and ponds

– Eradication of brush

– Planting of windbreaks

Soil & Water Conservation Expenses

• Must conform to an NRCS plan or applicable state or local agency plan

• The deduction can’t exceed 25% of gross farm income

– Any excess can be carried over to the succeeding tax year

• Ineligible expenses

– Improvements to land not previously used in farming

– Land clearing expenses which prepare land for farming

– Expenses incurred by cash rent landlords

– Expenses in connection with draining or filling of wetlands

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Soil & Water Conservation Expenses

• Expenses claimed on line 12 of Schedule F

• If taxpayer chooses not to deduct, expenses must be capitalized usually as nondepreciable land costs

• Recapture of expenses applies if farmland on which the expense has been taken is sold within 10 years of farmland acquisition

– Recapture is 100% if land is disposed of within 5 years

– Reduced by 20% for each additional year land is held

• Recapture is from date of land acquisition not from date of expense

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Program Purpose• Created in 2009 to encourage

agricultural asset owners to lease to qualifying beginning farmers.

• Provides asset owner with credit on Iowa income taxes.

• Beginning Farmer must have low – moderate net worth. For 2017 – the cap is $645,284.

• Financial statement required with application.

For this Iowa program, the

Beginning Farmer must . . . • Have education, training and/or

experience for the type of farming required for the lease.

• Make all operational & managerial decisions

• Perform labor necessary to fulfill lease conditions.

• Have access to working capital, farm equipment, machinery and/or livestock to fulfill the lease.

• Be responsible for all financial expenses necessary to lease and manage the property.

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Basic Provisions: Tax Credit

Calculations for 2017• Cash lease – 7%

• Cash/flex lease – 7% on base rent amount (but not the bonus)

• Crop Share –17% of asset owner’s share of the crop

• 1% bonus for military veterans

• Examples on the website.

Example: Calculating Cash

Rent Tax Credit for 2017

• 160 acres cash rented

• $250 per acre

• $40,000 gross lease income

• $40,000 x 7% = $2800 Iowa income tax credit

• Can be used for flexible & crop-share leases too.

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What about 2018?—Changes

down the road . . . . .� 2017 Iowa Legislature failed to act.

�Unless 2018 Legislature acts, big program changes.

� Cash lease credit – � to 5%

� Crop Share – � to 15% of asset owner’s share of crop

� NO 1% bonus for military veterans

� Custom Farming Contract Tax Credit program created in 2013 will expire in 2018. (Taxpayer hiring Beginning

Farmer to complete agricultural contract work for production of crops or livestock may qualify for a tax credit of 7% of the custom contract amount (8% for veterans)).

For More Information and to Apply:• See 3-page application and

instructions at:

• IowaFinanceAuthority.gov

• For 2017 Crop Year: applications accepted until the limit of $6 million in tax credits is reached –or– September 1, 2017 (whichever occurs first).

• Beginning farmer’s financial statement

• Beginning farmer’s background letter

• Fees = start at $300 and depend on the length of the lease

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Thank You!