Month: July 2013

The Math of the Nebraska Beginning Farmer Tax Credit

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While out and about at workshops, I’ve been speaking about the Nebraska Beginning Farmer Tax Credit.  Today, I want to build upon an idea from the workshops, which is how to use the tax credit to provide more than a three-year lift to a beginning farmer.

But first, a recap of the tax credit.  An individual is eligible for the tax credit if they are the owner of an agricultural asset located in Nebraska and lease the agricultural asset to a beginning farmer for three years.  An agricultural asset is land, breeding livestock, grain bins, machinery etc.; however, note that a residence is not an agricultural asset.  The rental price must be based upon   An agricultural asset may only be used once in the program.  For example, the same parcel of land cannot be used to obtain the tax credit with successive three-year leases to beginning farmers.

A beginning farmer is defined as a person who has farmed for 10 out of the past 15 years.  A person’s age is not considered, meaning someone can be a 40-year-old beginning farmer.  The net worth (all assets minus all liabilities) of the beginning farmer must be under $200,000.  The beginning farmer must have some education and/or experience in farming or ranching and must provide the day-to-day physical labor and management.  The beginning farmer must also follow a soil management program if such a plan is in place or provide a narrative of how the farmer will maintain the soil/nutrients.  A beginning farmer is eligible for the program so long as the beginning farmer is a person who has farmed less than ten out of the past fifteen years.  But keep in mind that this eligibility requirement is for the beginning of the three-year lease, not the entirety of the lease.  Finally, the beginning farmer and owner of agricultural assets may be family members, but a succession plan, such as a will, trust, or business entity, is required which passes the leased agricultural asset to the beginning farmer.

If the above requirements are all met, the owner of the agricultural asset receives a refundable Nebraska state income tax credit.  (This means if the owner’s state income taxes are less than the tax credit amount, the owner will receive a refund in the amount of the tax credit not used to reduce income taxes.)  The amount of the tax credit depends upon whether the lease is a cash lease or share lease.  If the lease is for cash, the owner of the agricultural asset receives a 10% tax credit for Nebraska state income taxes.  If the lease is a share lease (such as a share-crop lease), the owner of the agricultural asset receives a 15% tax credit for Nebraska state income taxes from the gross profits.

The above are the requirements in a nutshell.  But, how can the tax credit be leveraged to assist a beginning farmer, especially in the context of a business succession by a farmer ready to retire?

Example 1:

The owner of the agricultural assets owns two parcels of cropland — Parcel A and Parcel B.  Parcel A is 100 dryland acres and Parcel B is 150 irrigated acres.  The owner decides to lease to a beginning farmer, who has five years of farming.  The owner and beginning farmer sign a three-year lease for Parcel A and Parcel B.  The rent is cash rent at $300/acre.

The tax credit available for the owner is 10% of the rent for Parcels A and B.  The rent is $75,000/year.  The owner receives a tax credit of $7,500 per year for three years for a total tax credit of $22,500.

Example 2:

Using Parcels A and B described above, the owner decides to lease to the same beginning farmer with five years experience.  However, this time the owner leases Parcel A only on a three-year cash lease at $300/acre.  After the three year lease and a successful landlord/tenant relationship, the owner leases for three years the beginning farmer Parcel B on a share-crop agreement, with the owner receiving 40% with corn traditionally averaging 200 bushels/acre at a (reasonably) predicted price of $4.50/bushel.

Is this possible?  Yes, it is.  First, Parcel A and Parcel B are separate agricultural assets and thus, can be leased at different times.  It does not matter when an agricultural asset is leased, it only matters that the agricultural asset has not previously obtained the tax credit and it is leased for three years to a beginning farmer.  Second, the beginning farmer is a beginning farmer at the start of the lease of Parcel A (and farms for years six, seven, and eight during the lease) and a beginning farmer at the start of the lease to Parcel B (and farms for years nine, ten, and eleven during the lease).  The tax credit is concerned with the beginning of the lease for eligibility of a beginning farmer, not whether the beginning farmer surpasses ten years of farming during the time of the qualifying lease.

Since this is a possible arrangement, what does the math show?  For Parcel A, the owner receives a tax credit of $3,000/year for three years ($30,000 rent/year at a 10% tax credit).  For Parcel B, the owner receives a tax credit of $8,100 per year for three years.  This number is found by calculating 150 acres multiplied by 200 bushel/acre multiplied by 40%, which equals 12,000 bushels for the owner.  Next, 12,000 bushels is multiplied by $4.50/bushel, equaling $54,000.  Fifteen percent of $54,000 is $8,100.

The total tax credit for Parcels A and B is $33,300.

Example 3:

The owner of the agricultural asset’s daughter is returning to the farm after obtaining her degree in agronomy.  The owner owns 500 acres of tillable land, machinery, and grain bins.  The land is three separate parcels; Parcel A is 100 dryland acres, Parcel B and C 200 acres center pivot irrigated each.

The owner signs a three-year lease for Parcel A to his daughter for $100/acre in her first year of farming.  The daughter wants to continue farming after those three years and the owner then leases for three years Parcel B to his daughter at the start of her fourth year of farming at $325/acre.  The farmer also leases storage for three years in a grain bin to his daughter for .10/bushel.  The daughter stores her harvest in the bins. Things are still going well in year seven of the daughter’s return to the farm.  The owner then leases for three years Parcel C to his daughter at 50% share-crop and his machinery for $5,000/year.  Parcel C traditionally produces 190/bushels of corn per acre and it is estimated that the price for corn will be $4.00/bushel.

Assuming the daughter remains under the $200,000 net worth requirement and a succession plan is in place, the above arrangement is possible.  The tax credit for Parcel A is $1,000/year for three years, for a total of $3,000.  The tax credit for Parcel B is $6,500/year for three years, for a total of $19,500.  The tax credit for Parcel C is $11,400/year for three years, for a total of $34,200 for three years.  The tax credit for the machinery is $500/year, for a total of $1,500 for three years.  The tax credit for the grain bin is $380/year (assuming 190 bushels per acre for 200 acres), for a total of $1,140 for three years.

Total tax credit for all parcels, machinery, and grain bin is $59,340.

Conclusion:

The Nebraska Beginning Farmer Tax Credit provides a mechanism for Nebraska’s farmers and ranchers to help assist in retirement by providing a possible means of income to a beginning farmer but also allows a beginning farmer to start or expand their operation.  Have more questions or need some help with the math?  Feel free to contact us!

Friday Facts, Fun, and Food.

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It has been a long week of travel for me but certainly worth it.  It is always wonderful to engage with farmers and ranchers and learn what is going on in the field (if you will).  Here are some tidbits to tide you over until next week:

Nebraska NRCS has authorized emergency CRP grazing in the northern Panhandle.

August 1 is the deadline to submit nominations for FSA county committees.  You may nominate yourself or a candidate of your choice.

Any South Dakota producers interesting in learning about grazing planning?  Several workshops are planned throughout the late summer and fall across the state.  In the similar vein, SDSU Extension provides some information on how to price any excess hay a producer may have.

Looking for a delicious, simple fresh tomato bruschetta recipe?  Look no further.

Women Landowners

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This week, I’ve attended a workshop sponsored by the University of Nebraska – Lincoln Women in Ag and scheduled another workshop for women landowners in south-central Nebraska in mid-August (more info in a future post!).  The workshops have got me thinking about women landowners, the possibility for beginning farmers to rent from a woman landlord, and if there are any differences between renting from a woman or renting from a man.  These workshops, and previous workshops I’ve attended, demonstrate what the numbers bear out:  there is a growing segment of landowners in farming and ranching and it is women.

Women landowners are a growing group and control significant amounts of farmland.  In Iowa, women wholly or partially own 51% of the farmland.  Some of the women landowners are non-operators, meaning have not operated the farming operation.  The converse is that some women landowners are operators.  What does this mean for the beginning farmer and for women landlords?

For the beginning farmer, it means that your landlord may be a woman.  (And that’s okay!)  A woman who likely spent years helping her father and/or husband with their farming operation.  A woman who may, it turns out, be a source of immense knowledge of the land, its production history, and farming or ranching in general.  A woman who may need a successor.  Or a woman who is interested in helping beginning farmers get up off the ground.

For the women landlords, it means that you may have a younger person who may some new ideas they want to try.  Maybe the operator wants to expand into value-added agriculture or specialty crops.  A person who is invested in the idea of farming or ranching and wants to succeed.  A person who may need and want a mentor.

Moreover, there is some evidence that women landowners have different goals and values with regards to use of the land than men.  Knowing the goals and values of both the farmer and landowner is critical to creating a long-lasting, stable relationship.  So beginners, ask what goals and values the landowner has!  Landowners, don’t let someone farm your land without an understanding of your goals and values.

As with all landlord/tenant relationships, the key is communication.  Women landlords should communicate what goals and values they have to the land.  Tenants should decide if they want to work towards those same goals and if they can operate a successful business with the lease terms offered.

Want someone to further discuss the above issues with?  Contact us!  We’re happy to help if you are a beginning farmer or a landowner looking to create a business plan and/or succession plan.

The essential terms that must be in a lease

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We’ve talked about why leasing may not be a bad option but, when presented with an opportunity to enter into a lease, what do you need to include in the lease?

First, you need the names of the lessor (landlord) and lessee (tenant).  Make sure you have the correct lessor and lessee.  The land may be in a trust, which means the trustee of the trust must sign the lease.  You may have a limited liability company, meaning you sign on behalf of the LLC.

Second, you need a description of the property to be leased.  This is ideally the legal description of the real estate.  If you are going to lease buildings, such as a barn or residence, also include that in the lease.

Third, you need to memorialize the rental price.  How much is rent and how will it be paid?  Will you pay a graduated rent (rent increasing every year of the lease to a set amount) or will you pay a share of the crops grown?  Will rent be paid monthly, quarterly, yearly, or some other schedule?  Should rent be mailed to the landlord at a specified address or can rent be paid when in person?

Fourth, you need a term for the lease, or how long it will be in effect.  Is this a one-year lease?  Two-year lease?  Five-year lease?  Is it a lease that renews automatically every year unless one party takes action to terminate the lease?

Fifth, each party to the lease needs to sign it.  This is such an obvious step that it is easy to overlook it.

Finally, remember the statute of frauds.  If you enter into a lease that is over one year, the lease must be in writing.  If you enter into a lease for under one year, it may be an unwritten lease if the essential elements (except signatures) are agreed upon.  However, a written lease is preferable to an unwritten lease.

Do you have a lease question?  Or are you considering entering into a lease, either as a landlord or tenant?  Feel free to contact us as we’re happy to discuss the lease with you.

Friday Facts, Fun, and Food.

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I don’t know about everyone else, but I am hoping the heat breaks soon.  Take care of yourself, drinks lots of water, and find some shade every now and again if you are outside.  And if you are inside, avoiding the heat, check out some reading material below:

Give some consideration to your cash rental rates as the 2013 and 2014 corn and soybean price projections are lower than the past few years.

Researchers at Virginia State University are piloting a program to gross $1/square foot on a one acre vegetable farm.

The University of Illinois Extension has a new website for local food systems and small farms.  Check it out here.

On a related note, the Leopold Center at Iowa State University has released new research on sustainable vegetable production.

Nebraska NRCS is accepting applications to restore windbreaks.

Finally, while there is typically only one recipe, the USDA released the Healthy Lunchtime Challenge cookbook.  It contains the recipes of all the kid chefs from the Challenge.  There are some amazing lunch (and dinner) recipes.  Congratulations to all the contestants!

Emblements, Not Implements.

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Trust me on this, the doctrine of emblements is relevant to the transfer on death deed we discussed earlier this week.  To explain why, it is necessary to discuss what the doctrine of emblements is.

An emblement is defined as annual crops produced by cultivation.  Thus, an emblement is corn, soybeans, or the like.  The doctrine of emblements is important because it addresses ownership of annual crops between the time they are planted and the time of harvest. 

The doctrine arises most often during life estate issues because the doctrine is applicable when a tenancy is of an uncertain duration.  A life estate is of an uncertain duration as the life estate terminates at death.  As a result of the doctrine, when a life estate tenant dies between the time annual crops are planted and harvested, the crops and resulting profit belong to the estate of the life estate tenant.  The crops and resulting profit do not belong to the person or entity who inherits the land where the crops are growing.

How is this relevant to TOD deeds?  Nebraska has a special provision in its statutes which allows a transferor in a TOD deed to designate whether crops growing at the time of the transferor’s death are transferred to the transferor’s estate or to one or more of the designated beneficiaries listed on the TOD deed.  This statutory provision is because the doctrine of emblements.

Confusing?  Or just have questions about other beginning farmer or succession planning issues?  You are welcome to contact us because we’re here to help.

The Transfer on Death Deed … Say What?

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We’ve spent some time discussing taxation, contracts (and more contracts with some more contracts thrown in) but I want to turn our focus to estate planning issues.

As of January 2013, Nebraska introduced a new tool in estate planning — the transfer on death deed, or TOD deed.  This blog post gives an overview of the TOD deed but you are encouraged to speak with your attorney or contact us if you have further questions about TOD deeds or estate planning generally.

What is a TOD deed?  It is a deed filed with the Register of Deeds in the appropriate county that allows real property (e.g. land) to transfer upon the owner’s death to the beneficiary designed on the TOD deed.  A TOD deed does not require probate because it is considered a non-probate transfer, just like bank accounts or life insurance policies with beneficiary designations.

What are the requirements?  The TOD deed is only for real property, such as land or residences.  The property must be in the State of Nebraska.  The person transferring the property must be an individual acting only as an individual.  The designated beneficiary may be an individual, corporation, estate, trustee of a trust, partnership, limited liability company, association, joint venture, public corporation, a government or governmental subdivision, agency, or any other legal or commercial entity.

The TOD deed must be signed by the transferor and two disinterested witnesses.  At the same time, a Notary Public must be present to witness all three persons and their signatures on the TOD deed.  The transferor (person make the transfer) must have the same capacity as the capacity required to make a will.

When is a TOD deed filed?  Per Nebraska law, the TOD deed must be filed within thirty days at the appropriate county office where the real estate is located.  If the TOD is not filed within 30 days of its execution, it is invalid.  Additionally, the TOD deed must be filed prior to the death of the transferor.

What if I change my mind?  The TOD deed may be revoked.  Because the TOD deed does not transfer real property until the death of the transferor, the TOD deed may be revoked.  The transferor must filed a revocation of the TOD deed in the same appropriate county office within 30 days of executing the revocation.  A divorce automatically revokes a TOD deed if the now-divorced spouses are a transferor and beneficiary respectively.

In short, the TOD deed is a tool in the estate planning toolbox.  Each specific estate plan requires different questions and considerations.  Thus, feel free to attend our workshops or contact your attorney for further information about your estate planning goals.

Friday Facts, Fun, and Food

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I hope everyone had a wonderful week in the mini heat-wave.  As we head into mid-July, here are some tidbits for your reading pleasure.

Need to buy some hay?  Want to sell some hay?  The Nebraska Department of Agriculture’s Hay and Forage Hotline may be of assistance.

FSA acreage reporting deadline is extended to August 2, 2013.  The crop insurance acreage reporting deadline remains July 15, 2013.

Interested in whether cover crops may help your corn and soybean yields?  There is evidence yields increase.  Curious about whether you can insure your cover crops?  This post has some great information.

A truck farm is driving around Omaha.

Finally, no one wants to turn on their oven in this heat.  However, fresh veggies are everywhere.  Keep your oven off and enjoy some fresh food with Green and Yellow Bean Salad with Chunky Tomato Dressing and Feta Cheese.

The consequences of breaking your contractual promise

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While this blog admittedly has a bias for written contracts, as such contracts (ideally) detail the obligations of each party to the contract, it is important to realize the consequences of not undertaking the obligations in the contract.

Contracts are legally enforceable promises.  For example, you promise to cut the hay by August 1 and the landowner promises to pay you for your work.  If you cut the hay on September 1, you are in breach of the contract and the landowner can institute legal proceedings against you for the breach (that is, breaking your promise).

A breach of contract may carry significant consequences.  A court of law may order you to pay damages to the other party due to the breach.  This means a court of law may require you to keep your promise, regardless of the financial consequences to you and/or your operation.

There are other potential consequences outside a court of law.  The other party may withhold payment until your promise is kept.  Legal recourse may be threatened and/or initiated, with the likely result of high stress, attorney fees, and uncertainty of the outcome.  Longer-term consequences may include the other party no longer contracting with you and encouraging others to not contract with you as well.

Keep in mind that as you add more and more obligations to your contract, there are more and more ways for a potential breach of contract to occur.  You want to ensure that you are capable and willing to meet all your contract obligations.  This means reviewing any proposed contract with a fine-tooth comb and, if you do not understand the contract, contacting an attorney licensed in your state.

Want some more tips on contract drafting and review?  This is a wonderful publication.  Have more questions or concerns?  Contact us as we are here to help.

LLC Taxation Requires A Great Relationship With Your Accountant

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We have discussed what an LLC (limited liability company) is and how to form an LLC, but how is it taxed at the federal level?

The simple question has a somewhat complicated answer.  The LLC is a relatively new form of business entity that combines features of both partnerships and corporate structure.  In 1997, the IRS clarified how an LLC would be taxed.  This is known as “check-the-box” taxation, as the LLC checks a box on a form.

A single-member LLC may elect to be taxed as either a C corporation or a sole proprietorship.  A multiple-member LLC may elect to be taxed as either a partnership or a C corporation.  So, in order to determine how an LLC is taxed, we need to discuss sole proprietorships, partnerships, and C corporations.

Sole Proprietorship:

A sole proprietorship is a business owned by a single, sole individual and is treated as the individual owner for tax purposes.  There is no tax return specific to the business entity.  The only tax return is the individual’s tax return with the income of the sole proprietorship reported on Schedule C.  The business income is then taxed at the individual’s tax rate.  Note that business income includes distributed net profits and retained earnings.  Finally, keep in mind that a sole proprietorship is responsible for paying self-employment tax.

Partnership:

A partnership is, in its most simplest form, two or more people work together to advance their business interest(s).  The partners share profits, losses, deductions, credits etc.  A partnership is not taxed; rather, income, losses, deductions, credits etc. “pass through” to the partners.  The partnership reports each partner’s share of income, losses, deductions, credits etc. to the IRS and each partner in accordance with the partnership agreement.  The partners then report their share on their own tax return, regardless if there was an actual distribution of income to the partner.

Note that along with the potential distributions of profits and losses, partners may also be provided guaranteed payments for their services or capital contribution to the partnership.  These guaranteed payments are ordinary income for the partner and deducted by the partnership as an ordinary business expense.  However, if the guaranteed payment is for personal services, the partner is liable for self-employment tax.

C Corporations:

A C corporation is what a person typically thinks of when the word ‘corporation’ is used.  A C corporation is so called because it is governed by Subchapter C of the Internal Revenue Code.

Unlike a sole proprietorship and partnership, a C corporation is a taxable entity.  In other words, the C corporation files its own tax returns separate from its shareholders.  Taxable income is calculated by the C corporation and the corporation pays tax.  There are various tax strategies in C corporation’s that this blog post will not address.  What a farmer or rancher should be aware of is that the C corporation is taxed as an entity, unlike the other business entities discussed in this post.

Conclusion:

All in all, this post is a very small look at the considerations in selecting a business entity for your farm or ranch operation.  If you want a more detailed discussion of various business entities, feel free to contact us.  And don’t forget, also contact your financial professional — they know taxes, after all!