I haven’t been able to write for the blog recently given my heavy travel and speaking schedule, and other duties that I have. But that doesn’t mean that all has been quiet on the ag law and tax front. It hasn’t.
Today, I write about several items that I have been addressing recently as I criss-cross the country talking ag law and tax.
What if TCJA Isn’t Extended?
Tax legislation that went into effect in 2018 is set to expire at the end of 2025. For many, this could have a significant impact starting in 2026. Do you have a plan in place if the tax law changes dramatically at that time?
If Congress allows the 2017 tax law to expire, how might it impact you? For starters, tax rates will increase, and those currently in the 12 percent federal bracket will see a 25 percent increase in their tax rate. Currently, the 12 percent bracket for married persons filing joints applies to taxable incomes from $22,000-$89,450. So, for instance, a married couple with $75,000 of taxable income would see their tax bill raise from $8,560 to approximately $10,350.
In addition, the standard deduction will be reduced (essentially cut in one-half), but personal exemptions will be restored. Also, the child tax credit will be reduced from $2,000 per qualifying child to $1,000, refundability will be reduced and the credit will be eliminated entirely for some families. For homeowners, the current limit on the mortgage interest deduction will be removed.
The 2017 law removed the penalty for not getting government health insurance, but that will be restored starting in 2026, as will the deduction for state and local taxes. In addition, the lower limit on charitable deductions will be reinstated. For businesses that aren’t corporations, the 20 percent deduction on business income will go away.
The estate tax exemption will be essentially cut in half, (from about $14 million in 2025 to about $7 million in 2026). For larger estates, making gifts now might make some sense.
It might be time to start thinking about the changes that could occur starting in 2026 and putting a good plan in place to handle what could happen. If you operate a business, think of higher taxes as an additional cost that needs to be managed.
Buying Farmland with a Growing Crop
Buying farmland with a growing crop presents unique tax issues. It has to do with allocating the purchase price and the timing of deductions.
When you buy farmland with a growing crop on it the tax Code requires that you allocate the purchase price between crops and land based on their relative fair market values. You can’t deduct the cost of the portion of the land purchase allocated to the growing crop. While the IRS has not been clear on the issue, the costs should be capitalized into the crop and deducted when the income from the crop is reported or fed to livestock, which may be in a year other than the year in which the crop is sold.
If you buy summer fallow ground, you can’t deduct or separately capitalize for later deduction the value of costs incurred before the purchase. Additional costs incurred before harvest such as for hauling are deductible if you’re on the cash method.
One approach to consider that could lead to a better tax result might be to lease the land before the purchase. That way you incur the planting costs and can deduct them rather than the landlord that will sell the farmland to you.
If your considering buying farmland with a growing crop talk with your farm tax adviser so you get the best tax result possible for your particular situation.
What is Livestock?
The definition of “livestock” can come up in various settings. For example, sometimes the tax code says that bees are livestock for one purpose but are not for other purposes. The issue of what is livestock can also arise in ag lending situations, ag contracts as well as zoning law and ordinances.
What is “livestock”? The definition of “livestock” for purposes of determining whether an asset is used in a farming business includes “cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals and other mammals.” It does not include “poultry, chickens, turkeys, pigeons, geese, other birds, fish, frogs, and reptiles.” While that definition normally does not include bees and other insects as livestock, the IRS has ruled that honeybees destroyed due to nearby pesticide use qualify for involuntary conversion treatment.
When pledging livestock as collateral for an ag loan, it should be clear whether unborn young count as “livestock” subject to the security agreement. From a contract standpoint, semen is not livestock unless defined as such.
For zoning laws and ordinances, clarity is the key. Is a potbellied pig “livestock” or a pet”? Will an ordinance that bans livestock prohibit the keeping of bees in hives? It probably won’t unless it specifically defines bees as “livestock.”
Partition of Farmland
If your estate plan is to simply “let the children figure it out,” it’s likely instead that a judge will. Indeed, one of those situations where a judge gets involved is when the parents have left farmland in co-equal ownership to multiple children after the last of the parents to die. That often leads to a partition and sale with the proceeds being split among the children.
Partition and sale of land is a legal remedy available if the co-owners cannot agree on whether to buy out one or more of them or sell the property and split the proceeds. It’s often the result of a poorly planned estate where the surviving parent leaves the land equally to all of the children and not all of them want to farm or they simply can’t get along. Because they each own an undivided interest in the entire property, they each have the right of partition to parcel out their interest. But that rarely is the result because they aren’t able to establish that the tract can be split exactly equally between them in terms of soil type and slope, productivity, timber, road access, water and the like. So, a court will order the entire property sold and the sale proceeds split equally. That result can devastate an estate plan where the intent was to keep the farm in the family for future generations.
A little bit of estate planning can produce a much better result.
Crop Insurance Proposal
For many farmers, crop insurance is a key element of an effective risk management strategy. Private companies sell and service the policies, but taxpayers subsidize the premiums. That means the public policy of crop insurance is a component of Farm Bill discussions. There’s a current reform proposal on the table.
A crop insurance reform proposal has been introduced in the U.S. House. Its purpose is to help smaller farming operations get additional crop insurance coverage. But its means for doing so is to eliminate premium subsidies for large farmers without providing additional coverage for smaller producers.
The bill caps annual premium subsidies at $125,000 per farmer and eliminates them for farmers with more than $250,000 in adjusted gross income. The bill also reduces the subsidies to crop insurance companies which is projected to reduce their profit from 14 percent to about 9 percent.
In addition, the bill eliminates subsidies for Harvest Price Option and requires the USDA to disclose who gets subsidies and the amount. It also restricts crop insurance to active farmers.
The bill represents a dramatic change to the crop insurance program. There’s not really anything in the bill to help smaller farming operations, and if the bill passes all farmers would see an increase in crop insurance premiums.
Veterinarian’s Lien
A lien gives the lienholder an enforceable right against certain property that can be used to pay a debt or obligations of the property’s owner. Most states have laws that give particular persons a lien by statute in specific circumstances. These statutory liens generally have priority over prior perfected security interests.
The rationale behind statutory liens is that certain parties who have contributed inputs or services to another should have a first claim for payment. But you have to be able to prove entitlement to the lien.
In a recent case, a veterinarian treated a rancher’s cattle. The rancher didn’t pay the vet bill and while the bill remained outstanding, the vet came into possession of cattle that the rancher was grazing for another party. The vet cared for the cattle for over two months and then filed a lien for his services. Ultimately the cattle were sold at a Sheriff’s sale and the rancher’s lender claimed it had a prior lien on the proceeds. Normally, the veterinarian’s lien would beat out the lender’s lien, but the court concluded that the veterinarian couldn’t establish who actually delivered the cattle to him or that the rancher requested his services.
The court said the vet didn’t meet his burden of proof to establish that the lien was valid. While liens have position, their validity still must be established.
Digital Assets and Estate Planning
One often overlooked aspect of estate planning involves cataloging where the decedent’s important documents are located and who has access to them. The access issue is particularly important when it comes to the decedent’s digital assets such as accounts involving email, banks, credit cards and social media.
Who has access to a decedent’s digital assets and information? Certainly, the estate’s fiduciary should have access, but it’s the type of access that is the key. The type of access, such as the ability to read the substance of electronic communications, should be clearly specified in the account owner’s will or trust. If access to digital assets and information is to be granted to a third party before death, the type and extent of access should be set forth in a power of attorney.
But, even with proper planning, it is likely that a service provider will require that the fiduciary obtain a court order before the release of any digital information or the granting of access.
Digital assets are a very common piece of a decedent’s estate. Make sure you have taken the needed steps to allow the proper people to have access post-death. Doing so can save time and expense during the estate administration process.
There are also tax consequences of exchanging digital assets after death.
New Corporate Reporting Requirements
The Corporate Transparency Act (CTA), P.L. 116-283, enacted in 2021 as part of the National Defense Authorization Act, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud and other illicit activities. In short, it’s an anti-money laundering initiative designed to catch those that are using shell corporations to avoid tax. It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market. The effective date of the CTA is January 1, 2024.
Who needs to report?
The CTA breaks down the reporting requirement of “beneficial ownership information” between “domestic reporting companies” and “foreign reporting companies.” A domestic reporting company is a corporation, limited liability company (LLC), limited liability partnership (LLP) or any other entity that is created by filing of a document with a Secretary of State or any similar office under the law of a state or Indian Tribe. A foreign reporting company is a corporation, LLC or other foreign entity that is formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or any similar office.
Note: Sole proprietorships that don’t use a single-member LLC are not considered to be a reporting company.
Reporting companies typically include LLPs, LLLPs, business trusts, and most limited partnerships and other entities are generally created by a filing with a Secretary of State or similar office.
Exemptions
Exemptions from the reporting requirement apply for securities issuers, domestic governmental authorities, insurance companies, credit unions, accounting firms, tax-exempt entities, public utility companies, banks, and other entities that don’t fall into specified categories. In total there are 23 exemptions including an exemption for businesses with 20 or more full-time U.S. employees, report at least $5 million on the latest filed tax return and have a physical presence in the U.S. But, for example, otherwise exempt businesses (including farms and ranches) that have other businesses such as an equipment or land LLC or any other related entity will have to file a report detailing the required beneficial ownership information. Having one large entity won’t exempt the other entities.
What is a “Beneficial Owner”?
A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:
- Exercises substantial control over a reporting company, or
- Owns or controls at least 25 percent of the ownership interests of a reporting company
Note: Beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.
What must a beneficial owner do? Beneficial owners must report to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing and other international crimes. Beneficial owners must report their name, date of birth, current residential or business street address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document. Company applicants can only be the individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the U.S. A company applicant may also be the individual who is primarily responsible for directing or controlling the filing of the relevant document by someone else. This last point makes it critical for professional advisors to carefully define the scope ot engagement for advisory services with clients.
Note: If an individual files their information directly with FinCEN, they may be issued a “FinCEN Identifier” directly, which can be provided on a BOI report instead of the required information.
Filing deadlines. Reporting companies created or registered in 2024 have 90 days from being registered with the state to file initial reports disclosing the persons that own or control the business. NPRM (RIN 1506-AB62) (Sept 28, 2023). If a business was created or registered to do business before 2024, the business has until January 1 of 2025 to file the initial report. Businesses formed after 2024 must file within 30 days of formation. Reports must be updated within 30 days of a change to the beneficial ownership of the business, or 30 days from when the beneficial owner becomes aware of or has reason to know of inaccurate information that was previously filed.
Note: FinCEN estimates about 32.6 million BOI reports will be filed in 2024, and about 14.5 million such reports will be filed annually in 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.
Penalties. The penalty for not filing is steep and can carry the possibility of imprisonment. Specifically, noncompliance can result in escalating fines ranging from $500 per day up to $10,000 total and prison time of up to two years.
State issues. A state is required to notify filers upon initial formation/registration of the requirement to provide beneficial ownership information to the FinCEN. In addition, states must provide filers with the appropriate reporting company Form.
Withdrawing an ERC Claim
Over the past year or so many fraudulent Employee Retention Credit claims have been filed. You may have heard or seen the ads from firms aggressively pushing the ability to claim the ERC. It’s gotten so bad that the IRS stopped processing claims for the fourth quarter of 2023. Many farming operations likely didn’t qualify for the ERC because they didn’t experience at least a 20 percent reduction in gross receipts on an aggregated basis (an eligibility requirement for the ERC) but may have submitted a claim.
Now IRS has provided a path for those that want to withdraw their claim so as not to be hit with a tax deficiency notice and penalties. IR 2023-169 (Sept. 14, 2023).
A withdrawal is possible for those that filed a claim but haven’t received notice that the claim is under audit. Just file Form 943 and write “withdrawn” on the left-hand margin. Make sure to sign and date the Form before sending it to the IRS. If your claim is under audit provide the Form directly to the auditor. If you received a refund but haven’t cashed it, write “VOID and ERC WITHDRAWAL” and send it back to the IRS.
How Much Gain on Land Can Be Excluded Under Home Sale Rule?
When you sell your principal residence, you can exclude up to $500,000 of gain on a joint return ($250,000 on a single return) if you have owned the home and used it as your principal residence for at least two out of the last five years immediately preceding the sale. I.R.C. §121. But how much land can be included with the sale of the home and have gain excluded within that $500,000 limitation? The Treasury Regulations provide guidance.
For starters, the land must be adjacent to the principal residence and be used as a part of the residence. Treas Reg. §1.121-1(b)(3). In addition, the taxpayer must own the land in the taxpayer’s name rather than in an entity that the taxpayer has an ownership interest in (unless the entity is an “eligible entity” defined under Treas. Reg. §301.7701-3(1)). Land that’s been used in farming within the two-year period before the sale isn’t eligible because its use in farming means it’s not been used as part of the residence.
Note: Sale of the principal residence and sale of the adjacent land is treated as a single sale for purposes of the gain limitation amount. That’s true even if the sale occurs in different years but within the two-year time constraint. Treas. Reg. §1.121-1(b)(3)(ii)(c). Also, when computing the maximum limitation for the gain exclusion, the sale of the principal residence is excluded before any gain for the sale of the vacant land. Treas. Reg. §1.121-1(b)(3)(ii).
For land that is eligible to be included with the residence, how much can be included? It depends. Land that contains a garden for home use and land that is landscaped as a yard can be included. Also, local zoning rules might be instructive. This all means that it’s a fact-based analysis. There is no bright-line rule. IRS rulings and case law illustrate that point.
Written Farm Lease Expires by its Terms; No Holdover Tenancy
A recent case from Kansas illustrates how necessary it is to pay attention to the terms of a written farm lease. Under the facts of the case, the plaintiff entered into a written farm lease with a landowner on January 10, 2018. The purpose of the lease was the maintenance and harvesting a hay crop on the leased ground. By its terms, the lease terminated on December 31, 2018, and contained a provision specifying that the parties could mutually agree in writing to extend the lease. However, the parties did not extend the lease and it expired as of December 31, 2018.
In 2019, the landowner sold the farm to a third-party buyer. After the sale, but before the buyer took possession, the plaintiff had the hay field fertilized. During the summer of 2019, the new landowner hired the defendant to cut and bale the hay, which the defendant ultimately completed late one night. However, early the next morning the plaintiff entered the property and took some of the hay after it was harvested and baled. The new owner called law enforcement and the plaintiff was informed not to return to the property. But the plaintiff returned to the property and took more hay. The plaintiff was criminally charged for multiple offenses. Ultimately, the plaintiff received a diversion in lieu of prosecution for the charges (against the new owner’s wishes) and was required to provide restitution and perform community service.
The plaintiff claimed that he was entitled to the hay bales because he had a verbal lease and tried to tender a rent check after removing the bales. The landowner refused to cash the check and moved cattle onto the hay ground. The plaintiff sued for breach of contract, breach of duty of good and fair dealing, and tortious interference with a contract or business relationship. The trial court rejected all of the claims and dismissed the case as a matter of law on the basis that the plaintiff did not have a valid lease after 2018. The trial court denied a motion to reconsider. On appeal, the appellate court affirmed noting that the lease had not been extended in writing and a holdover tenancy did not exist. As for monetary damages, the new landowner recovered $27,000 from the plaintiff. Thoele v. Lee, 2023 Kan. App. Unpub. LEXIS 381 (Kan. Ct. App. Sept. 15, 2023).
