Passage of the latest farm bill brought a sigh of relief for most people involved in agriculture, but for farmers it creates some changes that may require reworking of the farm financial plan.
The 2008 farm bill incorporates several self-employment and income tax changes that can affect farmers in both the short and long-term. These changes affect the reporting of income, expenses, deductions and credits that are reported on income tax returns.
North Carolina State University Ag Economist and Farm Tax Specialist Guido van der Hoeven says, “farmers, both active and retired, should be aware of changes in the most recent farm bill, concerning land in the Conservation Reserve Program.”
Van der Hoeven says, IRS Notice 2006-108 called for CRP payments to be subject to self employment taxes, regardless whether the land owner was farming, absentee, or disabled. “I, and many of my colleagues took exception to that IRS Notice. The 2008 farm bill did not follow that guideline and effective December 2007, taxpayers who are retired or disabled will not be subject to taxes on CRP payments,” van der Hoeven says.
The 2008 farm bill, he says, made it very clear that it is not Congress’s intent for retired or disabled farmers to pay self employment tax on CRP contracts.
“As part of the CRP contract, farmers are required to maintain the land — whether planting grass or other things. By virtue of them working on the land, the IRS apparently didn’t consider these folks to be retired,” van der Hoeven explains.
The most recent farm bill also made changes relative to the ability of taxpayers to offset non-farm business income with farming losses.
The new rules allow for the offset of non-farm business income to be the greater of $300,000 or the net farm income the taxpayer generated over the last five years. Losses that are limited may be carried forward to subsequent years.
This provision is only applicable to taxpayers who receive any direct or counter-cyclical payments under Title 1 of the 2008 farm bill, or Commodity Credit Corporation (CCC) loans, according to van der Hoeven.
This provision broadens the definition of “farming business” to include the processing of commodities regardless of the scope of the taxpayer’s activity in the processing versus production of the commodity.
The effective date is for tax years beginning after December 31, 2009.
For younger farmers changes in the 2008 farm bill will allow them easier, though more expensive, avenues to qualify for disability benefits. Changes in the Optional Self Employment Tax make it possible for farmers to get coverage they need to protect their family and children, especially in cases in which the farmer becomes disabled.
Under past guidelines, a farmer had to be covered by social security for four quarters over a 10 year period or 40 quarters over a lifetime of working to be qualified to receive Social Security as a retirement benefit.
“More importantly, for young families, the farmer had to be covered for the most current quarters for disability.
“Farming is a hazardous industry, and until this change in the 2008 farm bill, the quarters of coverage was translated to $400 per quarter or $1,600 per year. Over the past 6-8 years inflation adjusters were added on and the $1,600 per year only bought one quarter of coverage. Since the law required two consecutive quarters — the old guidelines ($400 per quarter) had no value,” van der Hoeven says.
Under the new farm bill, a young farmer will pay more in the short-term, but will reduce the risk to his family in the long-run. “Growers need to be aware there are some options under Form SE. “For easy math, let’s say the value is $1,000 per quarter. The farmer will be required to pay 15.3 percent tax on the four quarters of value, or $4,000. It is more money up front, but it does provide them with disability benefits,” van de Hoeven, adds.
Rural Heritage Conservation Extension (Conservation Easements) makes it more valuable to put conservation easements on their land. For 2008 or 2009, farmers can make donations and get an enhanced charitable deduction.
In the past the original law stated that folks giving conservation easement would only get 30 percent of their adjusted gross income. If you are a farmer, defined as getting at least 50 percent of your income from farming, under the new law, they can offset 100 percent of their income, and it can be carried over for 15 years, compared to five years under the previous law.
“A family should really think about taking this deduction. Because it basically takes away any development rights for the farmland. The new law takes away development rights on the land for perpetuity — or forever, plus two days,” van der Hoeven says. It does affect family income for generations and should be considered carefully, he adds.
The 2008 farm bill also affects many farmers with current or future interest in alternative fuels. These changes include:
• A temporary production credit of $1.01 per gallon until Dec. 31, 2012. Cellulosic biofuels are produced from agricultural waste, wood ships, switch grass and other non-food feed stocks.
• Reduces the 51 cent per-gallon credit for ethanol to 45 cents per gallon beginning Jan. 1, 2009 and thereafter. Should the Treasury Department determine that production of ethanol, including cellulosic, not attain 7.5 billion gallons (including imports) the imposition of this reduction may be delayed.
The North Carolina State specialist urges farmers who have an accountant or other professional tax person filing for them to discuss changes in the 2008 farm bill and how these may affect their farming operation.
A series of Tax Schools will be held for North Carolina Farmers and will include tax changes made in the 2008 farm bill.