In February of 2017, the IRS issued an Action on Decision letter (“AOD”) in response to the IRS’ loss in the 5th Circuit Court of Appeals in Burnett Ranches, Ltd. v. U.S. (5th Cir. 2014). AOD 2017-17 places a cloud over thousands of legitimate agricultural businesses and threatens the livelihoods of American farm and ranch families. It does so by calling into question the accounting methods traditionally used by agriculture and exposing farmers and ranchers to needless litigation with the IRS.

“This issue could impact farm and ranch families across the United States,” said Brian Kuehl, Director of Farmers for Tax Fairness. “Whether you raise corn or soy or hogs or almonds or any other ag product, you shouldn’t live in fear of an IRS audit declaring you to be a tax shelter because of the way you have structured your operation. Active farmers are not tax shelters.”
Farmers for Tax Fairness formed in 2013 when Congress proposed limiting the ability of farmers to use the cash method of accounting.

Farmers for Tax Fairness helped demonstrate to Congress why the cash method of accounting is critical to farm and ranch operations and ultimately Congress elected not to limit this important financial tool. Farmers for Tax Fairness is concerned that the IRS ruling on farming syndicates will impact active farm and ranch operations – many of whom may not even be aware that they are at risk.

The letter from the 29 agriculture organizations and businesses calls for the repeal of AOD 2017-17 and asks Congress to consider changing this section of the tax code to protect the ability of active farmers to use the cash method of accounting.

“What U.S. pork producers and other farmers don’t need right now is more uncertainty,” said David Herring, president of the National Pork Producers Council and a pork producer from Lillington, North Carolina. “At a time when many farmers are facing export market and other headwinds, more uncertainty is exactly what we will face without access to the cash method of accounting used by so many farmers.”

Leading ag CPA firms also joined on the letter explaining how American farmers could be impacted by this ruling.

“A farmer should not be penalized if they hold their farm through an S corporation, complex trust, or similar entity. Farmers hold their operations using these types of structures for a variety of reasons including inheritance and succession planning and liability protection,” said Bryce Gibbs, a CPA with K·Coe Isom, a leading national agriculture accounting and consulting firm. “Congress and the Trump Administration should work together to make sure America’s farmers aren’t hurt by this IRS ruling.”

Chris Hesse, a Principal with the accounting firm CliftonLarsonAllen who works closely with U.S. ag producers added: “The farm syndicate rules have taken on a heightened importance as a result of the Tax Cuts and Jobs Act. It would be helpful if Congress would at least provide an exception for small farm entities that otherwise meet the gross receipts test. Abusive situations are already covered under other provisions.”

Bryan Powell, National Practice Leader for Moss Adams’ Agribusiness Service, concluded: “Having Congress’ continued support for American farm and ranch families is critical to their sustained success. Clarifying this substance-over-form issue will remove uncertainty that jeopardizes our family farm and ranch operations.”

Organizations and Businesses Signing the Letter to Congress:

American Farm Bureau Federation
American Soybean Association
California Farm Bureau Federation
CliftonLarsonAllen, LLP
CoBank
Farm Credit Council
Farmers for Tax Fairness
Illinois Farm Bureau
Indiana Corn Growers Association
Indiana Soybean Alliance
Iowa Corn Growers Association
Iowa Farm Bureau Federation
Kansas Farm Bureau
Kansas Livestock Association
K·Coe Isom, LLP
Minnesota AgriGrowth
Minnesota Farm Bureau
Missouri Farm Bureau
Moss Adams, LLP
National Cattlemen’s Beef Association
National Corn Growers Association
National Council of Farmer Cooperatives
National Federation of Independent Businesses
National Milk Producers Federation
National Pork Producers Council
Ohio Farm Bureau Federation
United Fresh Produce Association
Wisconsin Farm Bureau Federation
Wyoming Stock Growers Association

(Nov. 2, 2017) – Farmers for Tax Fairness, a national coalition of farmers and ranchers, today applauded the U.S. House of Representatives for not restricting the use of cash accounting in H.R. 1, the Tax Cuts and Jobs Act.  This tax reform legislation proposes significant changes to the tax code and would limit or eliminate many deductions used by U.S. agriculture.

“Farmers for Tax Fairness is pleased that Chairman Brady understood the importance of cash accounting to agriculture and saw fit to not restrict the ability of farmers and ranchers to use this important tax tool,” said Brian Kuehl, Director of Farmers for Tax Fairness and Director of Federal Affairs for K·Coe Isom.  “Because of the high volatility in agriculture – swings in commodity prices and swings in input costs – it is critical that farmers and ranchers be able to use cash accounting to level their cash flow.”

Introduced today, the “Tax Cuts and Jobs Act,” H.R. 1, would reduce the top corporate rate to 20%, reduce individual rates into four brackets, create a new 25% tax rate for pass-through entities, double the standard deduction, provide for increased expensing of capital assets, and phase out the estate tax.  At the same time, the bill would remove many deductions used by farmers and ranchers today.

“While we’re obviously concerned about the potential loss of other deductions used by farmers and ranchers, Farmers for Tax Fairness is pleased that Congress appears to understand the importance of cash accounting to our industry,” added Kuehl.  “We will continue to track tax reform legislation in the House and Senate to make sure that limitations on the use of cash accounting by agriculture are not inserted into these bills.

About Farmers for Tax Fairness

Farmers for Tax Fairness is an ad hoc coalition of farmers, ranchers and agricultural businesses that are opposed to limitations on the use of cash accounting by agriculture.  In 2013, then House Ways and Means Committee Chairman Dave Camp proposed to limit the use of cash accounting by businesses with more than $10 million in gross receipts.  Farmers for Tax Fairness organized against this proposal and was pleased when Chairman Camp agreed to exempt farm businesses from this provision when he introduced his tax reform legislation in 2014.

About K·Coe Isom

K·Coe Isom leads, nationally, as consultants and CPAs in the food and agriculture industry—services constituting more than two-thirds of the firm’s business. The firm is embedded throughout the US food-supply chain—from policy to plate—working with producers, input suppliers, processors, packagers, distributors, biofuel manufacturers, equipment dealerships, landowners, lenders, and many agencies and policy organizations that support the industry.  The firm provides staff support for the Farmers for Tax Fairness coalition. The firm also has regional strengths in community banking, construction and real estate development, education, manufacturing, and technology. K·Coe Isom serves domestic and international clientele from 21 coast-to-coast offices. Visit kcoe.com.

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(Sept. 27, 2017) – K·Coe Isom, the nation’s leading agricultural accounting and consulting firm, today applauded the U.S. House and Senate leadership and the White House for moving forward with tax reform targeted at growth and tax simplification. This morning, House and Senate leadership and the White House released the “Unified Framework for Fixing Our Broken Tax Code.”

The Framework would modify many provisions in the tax code including reducing the top corporate rate to 20%, reducing individual rates into three or possibly four brackets, creating a new tax rate for pass-through entities, raising the standard deduction, and eliminating the estate tax. While more detailed than some of the past tax reform documents that have been released, the Framework stops well short of legislative language leaving substantial questions about what deductions will be eliminated and how Congress will pay for the proposed rate reductions.

“Tax reform would be a great shot in the arm for the U.S. economy,” said K·Coe Isom CEO Jeff Wald.  “Simplifying the tax code and lowering individual and business rates can improve the competitiveness of American businesses and put additional dollars into the pockets of American families. Creating a new rate for pass-through entities in particular could be helpful for many farms and ranches.”

Wald called on Congress to make sure that tax reform legislation doesn’t hurt America’s farms and ranches:

“As the House and Senate move from the general Framework and begin crafting tax reform legislation, they need to make sure they don’t raise taxes on American farmers and ranchers, or take away the flexibility that agricultural producers rely upon to manage their businesses.”

Three specific provisions that K·Coe Isom is calling on Congress to preserve for agriculture include:

• Preserve and enhance the ability of U.S. agriculture to use the cash method of accounting. Cash accounting is a critical tool that farmers and ranchers use to balance their cash flow through commodity and input price swings. Studies commissioned by K·Coe Isom demonstrate that removing cash accounting would cost agriculture $4.8 billion and reduce the borrowing capacity of agriculture by an additional $7 billion. The Framework is silent on whether cash accounting will be maintained or limited for agriculture.
• Maintain the ability of U.S. agriculture to deduct interest expense. Farms and ranches often finance equipment, land, and input costs with debt financing. Unlike other sectors of the economy, agriculture rarely turns to equity financing, relying much more heavily on debt financing to operate. Because of this, it is vitally important that farms and ranches are allowed to continue deducting interest expense as a real cost of conducting business. The Framework states that “[t]he deduction for net interest expense incurred by C corporations will be partially limited. The committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.”
• Allow farmers and ranchers to “step up” their basis in assets upon death. The tax code currently allows families to step up the tax basis in inherited land and other assets. The Framework calls for the elimination of the estate tax but is silent on whether Congress will modify the rules governing the step up in tax basis. As Congress moves to repeal the estate tax, it needs to make sure that families won’t have to pay massive capital gains taxes triggered by the death of a loved one.

“K·Coe Isom represents many of America’s most successful farm and ranch businesses. We’re also helping some of America’s leading agricultural organizations to assess how tax reform will affect producers of critical commodities,” added Wald. “As Congress releases tax reform legislation in the coming month, we’ll be looking closely to make sure that it doesn’t inadvertently raise taxes on agriculture or reduce the flexibility that farms and ranches need to function. Until the details are released and we can analyze the effect on actual farms and ranches, it is too early to tell whether tax reform legislation will be a net gain for agriculture.”

K·Coe Isom is a national agriculture accounting and consulting firm that represents farmers and ranchers throughout the U.S. In 2013, K·Coe Isom helped launch Farmers for Tax Fairness, a national coalition of farmers who work together to educate Congress on the importance of cash accounting to U.S. farmers.

“Agriculture is the backbone of America, creating millions of jobs, supporting local economies, and providing food security for the world,” said Wald. “As Congress considers comprehensive tax reform, it must make sure that its rewrite of the tax code will continue to promote U.S. agriculture.”

About K·Coe Isom

K·Coe Isom leads, nationally, as consultants and CPAs in the food and agriculture industry—services constituting more than two-thirds of the firm’s business. The firm is embedded throughout the US food-supply chain—from policy to plate—working with producers, input suppliers, processors, packagers, distributors, biofuel manufacturers, equipment dealerships, landowners, lenders, and many agencies and policy organizations that support the industry. The firm also has regional strengths in community banking, construction and real estate development, education, and manufacturing. K·Coe Isom serves domestic and international clientele from 21 coast-to-coast offices. Visit kcoe.com.

The Honorable Ron Wyden
Ranking Member
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200

Chairman Hatch and Ranking Member Wyden:

This letter is in response to your June 16 request from public stakeholders for “ideas, proposals, and feedback on how to improve the American tax system.” We appreciate both the considerable thoughtfulness and energy you are putting into this tax reform effort, and the opportunity to share our views on important issues surrounding this initiative.

We write to voice our opposition to any proposals that would eliminate a vital element of our existing tax system that greatly benefits American agriculture, and by extension, rural communities: access to cash basis accounting. In 2013, certain leaders on both House Ways and Means Committee and Senate Finance Committee proposed legislation that would have required farming operations and other businesses with annual gross receipts of greater than $10 million (averaged over a three-year period) to use accrual basis accounting when determining their tax obligations. Farmers for Tax Fairness (FTF)¹ was established in the fall of that year by concerned members of the agricultural community in opposition to these proposals.

For a host of reasons, FTF strongly supports preserving the tax code’s existing access to cash accounting for all agricultural businesses. Mandating a switch to accrual basis accounting would inflict significant financial harm on many of these operations and deny them the flexibility they need to succeed going forward.

For one, unlike many other impacted industries, farmers and livestock producers face very high input costs and wide swings in commodity prices, production, and income, meaning significant gross receipts frequently do not correlate to high overall operational profitability and an ability to pay higher taxes.

Such a change also would likely require affected producers to pay income tax on all deferred cash receipts they are carrying currently and would also restrict their ability to manage future risk by pre-purchasing inputs such as seed, fertilizer, or feed.

Moreover, agriculture producers’ margins are often vanishingly small. Where other industries and professional service firms often enjoy margins of 30 or 40 percent or more, agriculture typically has profit margins below 20 percent, and in many operations margins may average in the low single-digits, with some years profitable and some not. As a result, many agricultural operations survive on very modest profits despite experiencing significant gross sales.

Operations with high throughput and input costs would be particularly hard hit. For example, under this proposal, cash basis accounting would no longer be available to a:

• Cattle feeder that markets 6,000 head per year. Assuming out weight of 1,300 pounds and a sales price of $1.26 per cwt.
• Feed yard that maintains approximately 8,000 head on feed, assuming sales per head day of $3.40.
• Dairy operation that milks 2,000 cows per day. Assuming sales provide receipts of $16.00 per cwt and 86 pounds/cow per day.

Beyond these few examples, this change has the potential to severely impact many diverse sectors of agriculture, including horticulture, egg production, fresh fruits and vegetables, orchard crops, and other similar segments of the industry.

Additionally, because agricultural producers endure significant price and production volatility from year to year, they rely on cash accounting to balance out that volatility and create more consistent cash flows and tax liabilities. To illustrate, USDA is estimating that net farm income in 2017 will see its fourth consecutive annual decline, and be approximately half of what it was in 2013. In these periods of low commodity prices access to cash accounting can preserve precious working capital that may be the difference between the operation surviving and failing.

Finally, aggregation rules could sweep many farm operations with less than $10 million in gross receipts into this prohibition. The 2013 proposals would have aggregated smaller operations with more than 50 percent common ownership, meaning that even businesses with less than $10 million in annual gross receipts could be affected if its owners also own other businesses. The rules pool businesses with related ownership together for the purposes of determining gross receipts, and if multiple related businesses total $10 million, each business would be required to use accrual accounting.

We are pleased that neither the Blueprint released by Republican leadership in the House of Representatives last June (“A Better Way – Our Vision for A Confident America,” June 24, 2016) nor President Donald Trump’s recent tax reform outline (“2017 Tax Reform for Economic Growth and American Jobs,” April 27, 2017) voice any support for this cash-to-accrual mandate for agriculture. That said, we understand the pressures facing your committee to offset the significant rate reductions envisioned by tax reform proponents, and we are concerned that tax writers may feel pressure to reanimate this concept as the package evolves and solidifies.

FTF has broad, national grassroots support for preserving cash accounting in agriculture and we are seeking your support in opposing any efforts to insert such a provision into the tax code in the tax reform process. Thank you again for your good work, for the opportunity to share our views, and for your consideration of this request.

Regards,

/s/ Ryan Stroschein
Farmers for Tax Fairness
K·Coe Isom, LLC
Washington, DC 20002
(202) 544-8200

¹Farmers for Tax Fairness operates as an initiative coordinated by the national agriculture accounting firm K·Coe Isom, LLC, and not as a separate non-profit legal entity.

(April 5, 2017) –Congress is weighing significant changes to the way farmers and agribusinesses are taxed, which could have a profound impact on how they do business. With tax reform holding opportunities and risks for U.S. agriculture in the balance, K·Coe Isom’s Doug Claussen, CPA, traveled to Washington, D.C., to provide testimony to the House Committee on Agriculture.

“Tax reform has broad implications across all areas of U.S. agriculture,” Claussen said. “We were honored to be invited to speak to the interests of producers and agribusinesses who strive to raise food and families profitably while adjusting to potential changes in the tax code.”

In the U.S. House of Representatives, legislation will be based on the Tax Reform Blueprint released by Speaker Ryan in June of 2016. The Blueprint proposes to lower and flatten corporate and individual rates, create a new business tax rate for pass-through entities, and repeal the estate tax. It also allows for immediate expensing of qual­ified purchases and capital expenditures (excluding land), but would limit the ability to carry forward net operating losses, eliminate the ability to carry back net operating losses, and limit deduction of interest expenses.

Among the many agriculture and tax reform topics touched on in the public hearing, Mr. Claussen made a point to the committee that forecast for farming net income in 2016 is half of what it was in 2013. And that adding the ability to carry back operating losses for five years, as opposed to the current two years, is critical to helping farmers deal with the volatility of the markets.

About K·Coe Isom

K·Coe Isom leads, nationally, as consultants and CPAs in the food and agriculture industry—services constituting more than two-thirds of the firm’s business. The firm is embedded throughout the US food-supply chain—from policy to plate—working with producers, input suppliers, processors, packagers, distributors, biofuel manufacturers, equipment dealerships, landowners, lenders, and many agencies and policy organizations that support the industry. The firm also has regional strengths in community banking, construction and real estate development, transportation, education, healthcare, manufacturing, and technology. K·Coe Isom serves domestic and international clientele from 19 coast-to-coast offices.

U.S. House Committee on Ways and Means
Representative Kevin Brady, Chairman
Representative Richard Neal, Ranking Member
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Brady and Ranking Member Neal,

We are writing today to express our strong opposition to any tax reform proposals that would limit the ability of agricultural businesses to use the cash method of accounting. Cash accounting is critical to the management of agricultural businesses facing high volatility of commodity prices and input costs.

Farmers for Tax Fairness is a nationwide coalition of farmers, agricultural businesses, and agricultural organizations (www.FairFarmTax.com). We are committed to ensuring that Congress maintains the flexibility in the tax code necessary for farmers to manage their businesses during periods of high commodity and input price volatility. As you prepare legislation to effect comprehensive reform of the tax code, we urge you to not restrict the ability of agricultural businesses to use the cash method of accounting.

Discussion Draft Restricts the Use of Cash Accounting by U.S. Agriculture

On March 12, 2013, the U.S. House of Representatives Committee on Ways and Means issued a discussion draft of provisions to reform the taxation of small businesses. Section 212 of the discussion draft proposed limitations on the use of the cash method of accounting for farmers with gross receipts of more than $10 million. This section would affect farming operations structured as partnerships and as S-corporations. Section 213 of the discussion draft proposed to repeal certain requirements for the use of accrual accounting by C-corporations and to increase the number of family corporations that would be required to use the accrual method of accounting.

When this discussion draft was released, farmers across America objected to the proposal that would seriously impact cash flows and limit their ability to respond to price volatility. In response to this proposal, Farmers for Tax Fairness commissioned a national economic study that revealed that the proposal would remove almost $12.1 billion in equity and borrowing ability from U.S. agriculture. The ripple effects of this impact would be felt far and wide—with some agricultural operations forced out of business and others forced to put off purchasing necessary equipment and inputs. In response to the national opposition against this proposal, Representative Camp, the Chair of the House Ways and Means Committee exempted farming businesses from this proposed change when he introduced the Tax Reform Act of 2014.

Expected Impact on U.S. Agriculture

There are many reasons why Congress should preserve the ability of agricultural businesses to use cash accounting. The cash method of accounting presents simpler recordkeeping for most farmers and provides agricultural operators with significant flexibility to manage their farming operations consistent with their cash flow. By contrast, under accrual accounting, a farmer could incur a significant tax liability even though they have not yet received payment for a product.

As you know, commodity and input price volatility may dramatically affect the profitability of farming and other agricultural operations from year to year. Cash accounting methods allow operations to compensate for price volatility and create greater financial stability for their businesses. Because of this, the vast majority of agricultural businesses use a cash method of accounting.

Many of the farms and ranches that would be affected by this change are third-generation family operations being run by a parent and child or by siblings whose parents or grandparents founded the business. Many of these family operations support dozens of employees but run at very thin margins and with very low net income.

The combination of historically thin margins, rising costs of production, and price volatility can dramatically impact the gross receipts that an entity engaged in farming may have from year to year and may not reflect the actual income or loss reported by the entity. As a result, if Congress were to establish a gross-receipts threshold for the use of cash accounting, an entity may be pushed into the accrual method of accounting because of a year or two of unusually high prices. Note that for an operation such as a feedlot, there is no correlation between an increase in gross receipts from high corn prices and an increase in profits. To the contrary, in a time of rising commodity prices, an increase in gross receipts could narrow margins and reduce profitability.

Under a cash-basis system, a farmer can sell products or pay for inputs based on their cash flow. This cash flow is then reflected in the income or loss that they report. Under the accrual method, income or losses are not related to the actual cash flow of the farmer and may vary dramatically. If farmers are required to use the accrual method, significantly more time and costs will be expended on record keeping and filing claims to carry operating losses back or forward.

The profit margin in agriculture is not large enough to be subject to a gross receipts test. Where other industries may experience a 40% to 50% gross margin to cover operating costs, agriculture usually has gross profit margins under 20% and, in many operations, typical margins may be just 4% to 5%. As a result, many agricultural operations have significant gross sales to generate a modest profit.

A final point that should be noted in this discussion is that increasing the use of accrual accounting in agriculture may actually lead to increased tax complexity rather than simplification. Under an accrual method of accounting, farming operations will increasingly be forced to file amended returns to offset gains from prior years with losses incurred in subsequent years. This constant refiling of tax returns is mitigated to a considerable degree by the use of cash accounting.

Conclusion

We are pleased that the tax blueprint released by the House Ways and Means Committee on June 24, 2016 does not propose to limit the use of cash accounting by agricultural businesses. Nonetheless, we remain very concerned that Congress will seek to raise revenue to support rate reductions by restricting cash accounting. Please know that we are strongly opposed to such proposals and the negative impact they would have on agricultural businesses.
On behalf of the thousands of farmers and agricultural businesses represented by Farmers for Tax Fairness, we appreciate your consideration of this important matter.

Sincerely,
Brian Kuehl, Director
Farmers for Tax Fairness
Read Full Letter

One of the top priorities for Congress in 2017 and 2018 will be comprehensive reform of the tax code.

The food and agriculture industries will need to carefully analyze these sweeping proposals and work hard to ensure that the rewrite of the tax code strengthens and does not disadvantage U.S. agriculture.

We expect the U.S. House Ways and Means Committee will introduce its tax reform bill as early as the first quarter of 2017. The Senate Finance Committee will likely take longer to craft and introduce legislation and is more likely to move forward in a bipartisan fashion. While the House and the White House will strive to pass legislation during 2017, we expect that comprehensive tax reform is more likely to become law in 2018 prior to the mid-term elections.

Republican Tax Reform Blueprint

In the U.S. House of Representatives, legislation will be based on the Tax Reform Blueprint released by Speaker Ryan in June 2016. You can download a copy of the Blueprint here.

The Blueprint proposes to lower and flatten corporate and individual rates, create a new business tax rate for pass-through entities, and repeal the estate tax. It also allows for immediate expensing of qualified purchases and capital expenditures (excluding land), but would limit the ability to carry forward net operating losses, eliminate the ability to carry back net operating losses, and limit deduction of interest expenses.

One of the most significant changes proposed by the Blueprint is to incorporate “border adjustability” into the tax code. Under border adjustability, revenue accruing to a company from U.S. exports is not treated as income. Conversely, companies selling imports into the U.S. will pay income tax on such revenue. Further, the cost to U.S. companies of imported goods, such as fertilizer or farm equipment, would likely not be deductible as business expenses.

While some elements of the Blueprint could benefit agriculture, given the complexity and sweeping nature of the proposed changes, a detailed analysis based on actual legislative language will be necessary to determine how tax reform will impact the food and agriculture industries.

Key Questions

As Congress debates tax reform, some key questions include:

• Would border adjustability strengthen the U.S. dollar, lead to retaliatory tariffs or otherwise weaken the competitiveness of agricultural exports?
• Would agricultural producers be able to take advantage of border adjustability if they sell to domestic processors?
• How much would immediate expensing of qualified purchases help agricultural operations if loss carry-forwards and carry-backs and interest deductions are limited?
• What will be the effect on pass-through entities of establishing a new business tax rate?
• Will Congress limit the ability of agricultural operations to use cash accounting?
• Would comprehensive tax reform raise or lower effective rates for agriculture?

How K·Coe Isom Can Help

At K·Coe Isom, we are working closely with key members of Congress to make sure that tax reform strengthens America’s agricultural economy. If cash accounting is important to you, please ask us about Farmers for Tax Fairness (www.FairFarmTax.org) and how you can join this effort.

Beyond cash accounting, if you run a significant agricultural business or are part of an agricultural trade association, there are multiple ways we can help you prepare for tax reform. Click the link below to learn more and request a consultation with a K·Coe Isom advisor.

Question: It seems like our business structures have gotten out of hand with too many entities. What should we do?

Answer: Many times there are serious gaps in the way the entities are transacting business with each other. So, it’s not necessary to throw away the entire business structure, but rather change the timing, nature or documentation of the transactions.

We often run into complicated business models. I like to say they’ve gotten there by design or by default. In either case, the answer to your question is to consult with a qualified business strategist who can help you determine where to consolidate, what to start doing and what should go away.

As a firm, K·Coe Isom can bring a team of specialists in to make a comprehensive appraisal of the purpose of all those different business entities. That’s where the process should start. By questioning the purpose of each entity. If it doesn’t have a clear purpose, it probably doesn’t have a place in the overall structure of your business.

For more information on “cleaning up” your business structures, contact Doug Claussen at doug.claussen@kcoe.com.

Question: When is it advantageous for me to realize a net operating loss in my farming operation?

Answer: With much of agriculture expected to experience a drop in income in 2016, the current situation offers some planning opportunities. The last several years have provided for some of the best years to date for many farmers, which means the increase in deferred income and in the amount of prepaid expenses has typically grown as well. It could be a good time to smooth earnings and recognize some of that income that has been deferred year after year.

Typically it’s best not to create a loss by prepaying and buying additional equipment. It’s better to utilize the lower tax brackets and any itemized deductions or tax credits available to you. If you do find yourself in a loss position, there are some advantages for farmers.

A farming net operating loss (NOL) is eligible to be carried back five years rather than two. If it is more advantageous to carry the NOL two years instead of five, you can elect to forgo the five-year carryback and use the two-year carryback instead. This gives you the opportunity to maximize the benefit of the NOL and increase the amount of cash flow to help offset the loss.

For more information contact Tommy Irvine at tommy.irvine@kcoe.com.

Recently we worked with a farmer and landowner who was presented with what you might call a once-in-a-lifetime opportunity to sell farm ground. We gave the family options for how to handle the sale, including a 1031 exchange. In a 1031 exchange, the land is sold and no taxes are paid provided the land is converted into another real estate asset.

There are several alternatives to a 1031 exchange, including a deferred sales trust or a structured sale that can result in tax deferral. The family opted for a different approach than a 1031 exchange because they did not want to convert the proceeds from the sale of the land into another land asset.

The sale resulted in taxable income in the millions of dollars, so we gave the family several options for managing the tax exposure. In this case, we gave the family specific scenarios and settled on pre-paying expenses like seed, fertilizer, chemicals and water. These prepaid expenses acted as a buffer against a portion of the proceeds from the sale of the land.

As a result, the family was able to defer a portion of the tax exposure and begin planning for successive years.

There is no one-size-fits-all solution to land sales. Consult your accountant or reach out to me at jeff.tatsumura@kcoe.com to learn more.