Commodity Wages
Farmers can pay employees in-kind wages. In-kind wages are the payments of crops a farmer has raised and are not subject to self-employment taxes. The structure of these wages is very important because if the IRS determines these are cash equivalents, the wages are subject to payroll taxes. Wages paid in-kind are crops transferred from the employer into the name of the employee. The employee then has the risk or benefit from fluctuations in the value of the crop. For example, the employer may transfer 1,000 bushels of soybeans to the employee at $10 per bushel or a total in-kind wage of $10,000. This amount is reported to the IRS on the employee’s W-2. After receiving the 1,000 bushel of soybeans, the employee will determine when and if he wants to sell the soybeans. If the soybeans go up in value by $1 per bushel, the employee will report a short-term capital gain of $1,000 (if held more than a year, then it is long-term). Conversely, if the soybeans drop in value by $1, they will report a short-term capital loss of $1,000. Note, there are a number of rules to follow to document requirements to qualify for this savings.

Charitable Giving of Commodities
Self-employed farmers using the cash-basis method of accounting have a unique opportunity to make “above-the-line” (i.e. before AGI) charitable contributions of raised commodities that can be readily marketable by the charity. The charitable contribution of unsold, raised commodities is only effective if it is inventory of an active cash-basis farm proprietor or partner. This opportunity may not apply to cropshare rent landlords. Also note that regulations allow a farmer to currently deduct costs of producing inventory as business expenses, even if the inventory is contributed to charity. The contribution of farm commodities to a charitable organization may result in both income tax and self- employment tax savings.

• Income Tax Savings. A charitable contribution of unsold inventory removes the income before recognition and avoids the need to claim a charitable contribution as an itemized deduction. This can be beneficial to those who do not have sufficient deductions to itemize (more than $11,600 for joint filers and $5,800 for single filers in 2011).
• Self-employment Tax Savings. Since the sale is reportable to the charity rather than the farmer, a savings in self-employment tax will result due to reduced self-employment income, assuming the farmer’s net farm income is below the self-employment tax maximum ($106,800 for 2011).

Tax law and business planning can be complicated. We at Frontier Farm Credit specialize in rules that apply to agricultural farm and ranch taxation. Contact a local office to work with a Tax Accounting Specialist.

Business Services
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Deferral of Crop Insurance Farmers interested in deferring crop insurance proceeds must have a normal business practice of typically deferring the sale of crops to the following year. The IRS guideline on normal business practice is that 50% or more of the crop sales must normally be deferred into the following year. Each crop is examined on an individual basis. It is important to note that if you are eligible to defer your crop insurance proceeds, all of those proceeds from that eligible deferred crop must be deferred. There are specific guidelines on what type of insurance is eligible for deferral. Farmers are not eligible to defer crop insurance proceeds related to the revenue portion of crop protection insurance. If you received insurance proceeds related to both, only the portion associated with the weather related event is eligible for deferral.

Note there are very specific rules for crop insurance that can throw your farm out of compliance including: Name or federal ID number changes, changes in entity structure or ownership and marketing grain in a different name than your crop insurance is under. Consult your Frontier Tax Specialist and Crop Insurance agent for details.

Drought Sale of Livestock
There are three tax rules in place that guard against tax problems caused by a forced sale of livestock. The first provision allows cash basis farmers a one-year deferral of income if the taxpayer operates in an area that has been declared eligible for federal assistance. This one-year elective deferral is available only if the farmer establishes that, under his usual business practices, the livestock sale would not have occurred but for the weather conditions that resulted in the area being designated as eligible for federal assistance. Secondly, the tax code allows for the postponement of any capital gain from the sale of breeding stock when the producer intends to replace the livestock at a later date. The replacement period may be as long as four years if the taxpayer resides in an area declared eligible for federal assistance. If the taxpayer resides in an area that is not eligible for federal assistance, the replacement period is two years. Thirdly, if it’s not feasible for a taxpayer to reinvest the proceeds from the forced sale of livestock due to drought, they can buy other property used for farming purposes and still qualify for non-recognition of income under the involuntary conversion rules. However, the replacement property can’t be real property (examples of real property include land, buildings, driveways, etc.).

Tax law and business planning can be complicated. We at Frontier Farm Credit specialize in rules that apply to agricultural farm and ranch taxation. Contact a local office to work with a Business Services Specialist.

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The first provision allows cash basis farmers a one-year deferral of income if the taxpayer operates in an area that has been declared eligible for federal assistance. This provision could be helpful to a taxpayer that sells a livestock crop in 2011 that would normally be marketed in 2012. This one-year elective deferral is available only if the farmer establishes that, under his usual business practices, the livestock sale would not have occurred but for the weather conditions that resulted in the area being designated as eligible for federal assistance.

Secondly, the tax code allows for the postponement of any capital gain from the sale of breeding stock when the producer intends to replace the livestock at a later date. The replacement period may be as long as four years if the taxpayer resides in an area declared eligible for federal assistance. If the taxpayer resides in an area that is not eligible for federal assistance, the replacement period is two years.

Thirdly, if it’s not feasible for a taxpayer to reinvest the proceeds from the forced sale of livestock due to drought, they can buy other property used for farming purposes and still qualify for nonrecognition of income under the involuntary conversion rules. However, the replacement property can’t be real property (examples of real property include land, buildings, driveways, etc).

Hopefully, you will never need to use these provisions. However, in the unfortunate event that you do need to utilize them, we can help you plan to choose which provision or provisions will provide the maximum benefit for you.

If you have any questions regarding the forced sale of livestock due to drought, please contact your Tax Accounting Specialist.

There are specific guidelines on what type of insurance is eligible for deferral. Farmers are not eligible to defer crop insurance proceeds related to the revenue portion of crop protection insurance. If you received insurance proceeds related to a Revenue Protection (RP) policy, you may not be eligible to defer. Farmers may still continue to defer crop insurance proceeds related to qualifying weather related events like droughts, floods, wind, hail, or frost. Farmers must incur a physical loss of yield from a weather related event in order to defer the income. If you received insurance proceeds related to both, only the portion associated with the weather related event is eligible for deferral.

If you have any questions regarding the deferral of your insurance proceeds, please contact your Tax Accounting Specialist.

The IRS has issued detailed guidance on the 2010 Tax Relief Act’s 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Overall, the rules are quite generous. For example, they permit 100% bonus depreciation for self-constructed property started before Sept. 9, 2010. The rules also allow a taxpayer to elect to “step down” from 100% to 50% bonus depreciation.

Under the 2010 Tax Relief Act, a taxpayer who buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write off its entire cost in the placed-in-service year. A heavy SUV is one with a gross vehicle weight (GVW) rating of more than 6,000 pounds.

The IRS further delays health insurance coverage information reporting for small employers. The new health reform legislation generally requires employers to report the cost of health insurance they provide to employees on their W-2 forms. Last fall, the IRS made this new reporting requirement optional for all employers for the 2011 W-2 Forms. Recently, the IRS announced the reporting requirement will continue to be voluntary for small employers through 2012.

Estates of decedents dying in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents’ basis plus certain increases. The IRS has forthcoming guidance to explain the manner in which an executor of an estate may elect to have the estate tax not apply for a decedent dying in 2010.

Expanded 1099 reporting has been repealed. The original rules indicated that generally required payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS. Reporting on Form 1099 was required only when the payer was considered to be engaged in a trade or business and has made the payment in connection with that trade or business. Congress had previously expanded the reporting requirements to include payments for any type of property, gross proceeds and/or any goods and services. Additionally, Congress also had included payments to corporations which were previously exempt. Now, with the repeal, the information reporting rules effectively revert to the original rules.

For more information, please contact your local Frontier Farm Credit office to work with a Business Services Specialist.

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• The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income.

• 15% on qualified dividends and long-term capital gains will also be retained for two years (2011 and 2012).

• Employees and self-employed workers will receive a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self employed.

• A two-year AMT “patch” for 2010 and 2011 provides a modest increase in AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax.

• The new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit.

• Businesses can write off 100% of their NEW equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. The original use of the property must commence with the taxpayer – used machinery doesn’t qualify.

• Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition. Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.

• After a one-year gap, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010’s or 2011’s rules.

This is the time of year to make some key decisions for 2011. Ask yourself these questions. Do I keep accurate and up-to-date business records? Do my records tell me whether my business is improving or what changes I need to make? Record keeping is often one of the most difficult and important aspects of operating a business. If this area of business management is one that you find challenging, plan ahead so coping with this issue is easier. Tax law and business planning can be complicated; Frontier Farm Credit can help. We have specialists who understand rules that apply to agricultural, farm and ranch taxation. Contact a local office to work with a Business Services Specialist.

Business Services
an Individualized approach to Business Planning.

One big key boost in the bill is around the changes to depreciation. You may be able to expense up to $500,000 of the cost of assets placed into service in 2010 and 2011. This is double the current limit. Also, the $500,000 cap will phase out once over $2 million of assets are placed in service. Previously, the phase out had started at $800,000. Also the additional 50% bonus depreciation on the cost of certain new property was extended. Eligible property includes: tangible property that has a recovery period not exceeding 20 years, purchased computer software, water utility property and qualified leasehold improvement property. Don’t forget that this includes buildings and only new assets qualify.

Another big break is self employed business owners may now be able to deduct the cost of their medical premiums against their self employed income. Other tax measures, such as raising the exemptions for the alternative minimum tax, fixing the estate tax, and reinstating a series of expired tax breaks, will likely not get through until after the November elections.

Several options exist for you to complete your year-end business planning. See your Frontier Farm Credit Business Services Tax and Accounting Specialist to discuss these options, as well as your records, estate and/or transition plan:

• Prepaying expenses
• Deferring income until the next tax year
• Paying your spouse and children for the work they provide
• Contributions for yourself and family employees to retirement plans
• Applying the current depreciation rules
• Lease versus purchase
• Available energy credits
• Three-year income averaging
• Deferring disaster payments and crop insurance indemnity payments
• Utilizing a Health Savings Account
• New 1099 and W2 reporting requirements

Do you have the correct entity structure (LLC or corporation)?

Tax law and business planning can be complicated. We at Frontier Farm Credit specialize in rules that apply to agricultural farm and ranch taxation. Contact a local office to work with a Business Services Specialist.

IRS Circular 230 Disclosure: Pursuant to requirements related to practice before the Internal Revenue Service, any tax advice included in this communication was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Service Code or applicable state or local tax law provisions.

What the Health Care Reform Bill Means to You
The recent health care reform legislation contains the most significant health care changes in decades. Basically, the legislation expands health insurance coverage by requiring “minimal insurance coverage” for individuals and their dependents beginning in 2014, by obtaining coverage through their employers or by purchasing coverage through newly created market places called “exchanges”. Some highlights include:

• Coverage of adult children up to the age of 26. Children can either be unmarried or married and student status is no longer required.
• Lifetime or annual benefit limits are now prohibited and cannot be imposed by group health plans or health insurance issuers offering group or individual health insurance.
• The reimbursement of non-prescription medicines under Health Flexible Spending Account and Health Savings Account has been eliminated. Over-the-counter drugs
  such as Advil, Prilosec, Claritin, Sudafed, etc., cannot be reimbursed through your FSA or HSA unless you have a prescription from your physician.
• Starting with 2010 taxes, small businesses (with fewer than 25 full-time equivalent employees) paying at least 50 percent of the health care premiums for their employees
  qualify for a tax credit up to 35 percent of their premiums. The credit increases to 50 percent after 2014 if insurance is purchased through an exchange. The credit phases out based on the number of employees and average wages. Seasonal worker hours and wages are not counted in determining the number of full-time equivalent employees unless the worker works for the employer more than 120 days during the taxable year.

Energy Incentives
The Residential Energy Property Credit is for homeowners who make qualified improvements to their homes, such as adding insulation, energy efficient exterior windows, or energy-efficient heating and air conditioning systems. The credit equals 30% of the cost of the qualifying improvements, with a maximum credit of $1,500 for improvements placed in service in 2009 and 2010 combined.

Depreciation Changes
Section 179 Expensing Limit has been retained at $250,000 for 2010. The 50% bonus depreciation provision was NOT extended.

Business Planning can be complicated. We at Frontier Farm Credit specialize in working with family business to help develop plans and strategies that assist you in reaching success. Contact a local office to work with a Business Services Specialist to develop an Individualized approach to Business Planning.

Planning Tips for 2010

As we start 2010, many things are uncertain – the market, weather, new tax laws. You often cannot control many of these, but you can develop a plan to help you reach success. There really is no such thing as “not having a plan.” Your federal and state government have rules and laws already set up for those who don’t choose to develop a plan of their own. Start 2010 by making your own plan for your family business.

Start off by keeping accurate and up-to-date business records. This is often one of the most difficult and important aspects of operating a business. If this area of business management is one that you find challenging, plan ahead so coping with this issue is easier. Don’t wait until tax time or year end. Your records will be used to prepare tax returns, make business decisions and apply for loans. Set aside a special time each day to update your records or seek help from a qualified professional.

Develop your estate plan. Often people tend to be complacent about preparing for their own estate plan. It is usually something they do not want to think about. However, it is an inevitable part of life, and planning for it ahead of time will often benefit both you and your loved ones. Having a plan you choose and working with a professional can offer you several benefits.

• You can remain in control and determine who is in control after your death
• You direct where and when your property goes
• You select in advance your Executor or Trustee
• You choose who is the guardian for minor children
• Minimize taxes
• Avoid probate
• Keep things from be publically published

Develop a plan for family business succession. Determine whether there is a desire by a family member or members to participate in the family farm business. If this is anticipated, then it is often helpful to develop a formal Succession Plan.

• Every family and business is different, so realize a succession plan won’t happen quickly and often needs to be re-visited. You cannot start on this too early in a family business.
• Communication is key to a successful succession. It must occur frequently and across all levels of the family and business.
• Identify the strengths and weaknesses and how to leverage or develop these.
• Build the proper management team.
• Develop a known plan for conflict resolution.
• Be ready for unanticipated disruptions. A good succession plan will be flexible enough to cope with the possibility of disruptions within the family or business environment.
• Develop a formal vision and mission statement for the business.
• Set goals that the whole family understands and can measure.
• Value ownership interests fairly and make sure minority owners are protected as well.
• Have the correct business structure. The business needs to be organized in a type of entity that lends itself to transfers of interests to family members with little or no loss of management or control. Personal liability can be minimized with the proper business structure.

Business Planning can be complicated. We at Frontier Farm Credit specialize in working with family business to help develop plans and strategies that assist you in reaching success.

Contact a local office to work with a Business Services Specialist.

Your Frontier Farm Credit Business Services Tax and Accounting Specialist can: 1. make sure you have accurate and up-to-date business records; then, 2. help develop and analyze projections for your income and expense items through the year-end. This will enable you to save or defer tax dollars and minimize the impact to your cash flow.

Options for completing year-end business planning include:

Prepay expenses
If you are a cash method taxpayer, you can prepay many expenses, which may be deductible in the year that you pay for them.

Defer income until the next tax year
You may benefit from delaying income until next year. But remember that leaving checks out in the mailbox until January won’t work, because all income that you receive (even if you didn’t bother to collect it) is taxable.

Pay your spouse and children for the work they provide
If your spouse and children work for the business, you may hire them as employees and deduct their compensation. This process can possibly save you social security tax and may increase your contributions to retirement plans. You can provide health insurance as a tax-free fringe benefit to a spouse who is on your payroll, and you may save income tax and self-employment tax at the same time.

Contributions for yourself and family employees to retirement plans
There are many options to fund your future; consult with your Business Services Specialist to learn about your choices of the various retirement options available for farmers and ranchers.

Section 179 depreciation
For the tax year 2009, the deduction limit is $250,000. Qualifying property for Section 179 includes breeding livestock, machinery, single purpose ag structures and drainage tile. Property can be new or used. Property eligible for Section 179 cannot be purchased from a related party (spouse, ancestors, or lineal descendant).

Bonus depreciation
Businesses are allowed to depreciate an additional 50% of the cost of certain property. Eligible property includes: tangible property that has a recovery period not exceeding 20 years, purchased computer software, water utility property and qualified leasehold improvement property. Only new assets qualify.

Take advantage of the New 5-year MACRS Recovery Period
added for 2009 only. New farm machinery and equipment (but not used equipment) placed in service during 2009 qualifies for a 5-year recovery period.

Lease versus purchase
Leasing can be a good option to avoid some of the limitations surrounding depreciation. With the correct structure, your lease payment may be fully deductible each year and even provide a faster write off than with depreciation. If you have used all of your section 179, have purchased too much in the 4th quarter of the year, or have purchased too much over the entire year, leasing may be a beneficial option.

Take advantage of available energy credits
During 2009, individuals can make energy-conscious purchases that will provide tax benefits when completing their tax returns next year.

Use 3-year income averaging
Farmers can elect an amount of their current farm income to divide equally among the previous three years. Savings may result if the previous year’s income was taxed at a lower tax rate than the current year.

Defer disaster payments and crop insurance indemnity payments
You may postpone reporting crop insurance proceeds as income until the year following the year the damage occurred if you meet certain conditions. The insured must suffer actual physical loss in yield.

Utilize a Health Savings Account
A Health Savings Account (HSA) is a tax-exempt custodial account that must be used in conjunction with a highdeductible health plan. The contribution limits for a Health Savings Account in 2009 are: single $3,000 and family $5,950.

Tax law can be complicated. We at Frontier Farm Credit specialize in rules that apply to agricultural farm and ranch taxation. Our goal of tax planning is to minimize your taxes for the long run, not just this year.

Contact your local office to work with a Business Services Specialist.