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Agricultural & Natural Resource Issues Chapter 10 pp. 321 -368 2016 National Income Tax Agricultural & Natural Resource Issues Chapter 10 pp. 321 -368 2016 National Income Tax Workbook™

Agricultural & p. 321 Natural Resource Issues 1. Tangible Property Regulations De Minimus Safe Agricultural & p. 321 Natural Resource Issues 1. Tangible Property Regulations De Minimus Safe Harbor 2. Contribution of Food Inventory 3. Bonus Depreciation on Vines and Trees 4. Cost Recovery for Hoop Structures 5. Conservation Reserve Program Payments 6. Easements

Agricultural & p. 321 Natural Resource Issues 7. Valuation of Unharvested Crops 8. CCC Agricultural & p. 321 Natural Resource Issues 7. Valuation of Unharvested Crops 8. CCC Loan with Commodity Sale on Form 1099 -PATR 9. 4 -H Club and FFA Projects 10. Multiple Entities

Issue 1: p. 322 Tangible Property Regulations § New rules affecting all taxpayers that Issue 1: p. 322 Tangible Property Regulations § New rules affecting all taxpayers that acquire, produce, or improve tangible property § Safe harbors simplify the new rules for both small & large businesses

Issue 1 pp. 322 -323 De Minimis Safe Harbor Taxpayers may annually elect to Issue 1 pp. 322 -323 De Minimis Safe Harbor Taxpayers may annually elect to deduct the cost of tangible property § Accounting policy to expense § Deduction limit $2, 500 without AFS, $5, 000 with AFS § Sale gain ordinary - not § 1221 or § 1231 § May be preferable to not elect

Issue 1 p. 323 De Minimis Safe Harbor § Example 10. 1 § Paid Issue 1 p. 323 De Minimis Safe Harbor § Example 10. 1 § Paid $2, 450 for laser level § Accounting procedure expenses item that cost $2, 500 or less § If safe harbor elected, must expense $2, 450

Issue 1 p. 323 De Minimis Safe Harbor Q 1: Later sells for $2, Issue 1 p. 323 De Minimis Safe Harbor Q 1: Later sells for $2, 800? A 1: $2, 800 gain - line 10, Form 4797 Q 2: If § 179 deduction instead? A 2: $2, 450 § 1245 recapture; $350 § 1231 gain

Issue 1 p. 323 De Minimis Safe Harbor § Example 10. 2 § Accounting Issue 1 p. 323 De Minimis Safe Harbor § Example 10. 2 § Accounting procedure: exp. ≤ $1, 000 § Paid $600 for heifers § Elect safe harbor → expense heifers § Sold for $1, 000: $1, 000 gain ordinary § W/out safe harbor election, sale gain is § 1245 recapture and § 1231 gain

Issue 1 p. 323 De Minimis Safe Harbor § Self-Employment Tax? § Gain on Issue 1 p. 323 De Minimis Safe Harbor § Self-Employment Tax? § Gain on sale of items expensed is ordinary income § Reported on Form 4797 § Does not flow through Sch C or F

Issue 2 p. 324 Contributions of Food Inventory § PATH Act reinstates enhanced deduction Issue 2 p. 324 Contributions of Food Inventory § PATH Act reinstates enhanced deduction for contributions of food inventory & made permanent § Inventory basis for contribution § Actual cost § If inventory not required, elect basis = 25% FMV

Issue 2 p. 324 Contributions of Food Inventory § Example 10. 3 § § Issue 2 p. 324 Contributions of Food Inventory § Example 10. 3 § § Cash Basis Net farm income was $7, 150 Broccoli would have sold for $280 Basis: $70 ($280 x 25%) Deduction is lesser of: § $70 + (½ × $210) = $175 or § 2 × $70 = $140 § Limited to 15% × $7, 150 = $1, 073

Issue 2 p. 325 Contributions of Food Inventory § Donee must also use the Issue 2 p. 325 Contributions of Food Inventory § Donee must also use the property for the care of the ill, needy, or infants § Donation to nonprofit for fund-raising dinner would not qualify § Deduction would be broccoli FMV reduced by ordinary income if sold § Deduction of -0 -

Issue 2 p. 325 Contributions of Food Inventory § Must obtain and retain a Issue 2 p. 325 Contributions of Food Inventory § Must obtain and retain a receipt § Must keep reliable records of: 1. Organization name and address 2. Date and location of donation 3. Description of property 4. FMV and how it was determined 5. Cost or other basis of property 6. Terms and conditions of gift

Issue 3: p. 325 Bonus Depreciation-Vines &Trees Options for depreciating assets § MACRS § Issue 3: p. 325 Bonus Depreciation-Vines &Trees Options for depreciating assets § MACRS § Bonus Depreciation § UNICAP election § Section 179

Issue 3: p. 325 Bonus Depreciation-Vines &Trees MACRS Rules Generally, farmers can choose: 1. Issue 3: p. 325 Bonus Depreciation-Vines &Trees MACRS Rules Generally, farmers can choose: 1. GDS recovery period a. 150% DB method b. SL method 2. ADS (SL over longer recovery period)

Issue 3: p. 325 Bonus Depreciation-Vines &Trees Bonus Depreciation Rules § 50% deducted in Issue 3: p. 325 Bonus Depreciation-Vines &Trees Bonus Depreciation Rules § 50% deducted in first year § 40% for 2018 § 30% for 2019 § 0% for 2020 and later

Issue 3: p. 325 Bonus Depreciation-Vines &Trees Bonus Depreciation Requirements: § § Recovery period Issue 3: p. 325 Bonus Depreciation-Vines &Trees Bonus Depreciation Requirements: § § Recovery period < 20 year Original use commenced with TP Placed in service before 1/1/2020 ADS must not be required method

Issue 3: p. 326 Bonus Depreciation-Vines &Trees UNICAP Rules § Capitalize costs of preproductive Issue 3: p. 326 Bonus Depreciation-Vines &Trees UNICAP Rules § Capitalize costs of preproductive period if preproductive period > 2 years § Most farmers can elect out § Elect out by not applying on 1 st return UNICAP would be required § Farmer & related must use ADS on property used predominantly in farming

Issue 3: p. 326 Bonus Depreciation-Vines &Trees Preparatory Costs § Costs incurred so that Issue 3: p. 326 Bonus Depreciation-Vines &Trees Preparatory Costs § Costs incurred so that the plant’s growing process may begin § Must be capitalized regardless of UNICAP rules

Issue 3: p. 326 Bonus Depreciation-Vines &Trees Preproductive Period Costs § Costs of cultivating, Issue 3: p. 326 Bonus Depreciation-Vines &Trees Preproductive Period Costs § Costs of cultivating, maintaining, or developing the plant during the period after plants are planted and before they are placed in service § Includes management, irrigation, fertilizing, tax depreciation, & repairs on buildings and equipment

Issue 3: pp. 326 -327 Bonus Depreciation-Vines &Trees PATH Act adds a new option Issue 3: pp. 326 -327 Bonus Depreciation-Vines &Trees PATH Act adds a new option § Election to deduct 50% of adjusted basis in year plants are planted or grafted § Must be tree or vine that bears fruits or nuts or § Any other fruit or nut plant with preproductive period > 2 years

Issue 3: p. 327 Bonus Depreciation-Vines &Trees PATH Act adds a new option § Issue 3: p. 327 Bonus Depreciation-Vines &Trees PATH Act adds a new option § Basis of plant must be reduced by bonus depreciation § Cannot claim bonus depreciation for plant in year it is placed in service

Issue 3: p. 327 Bonus Depreciation-Vines &Trees Differences New and General Rules § New Issue 3: p. 327 Bonus Depreciation-Vines &Trees Differences New and General Rules § New election applies to any tree or vine that bears fruits or nuts regardless of its preproductive period § UNICAP applies only to plants that have a nationwide weighted average preproduction period of > 2 years

Issue 3: p. 327 Bonus Depreciation-Vines &Trees UNICAP Rules End of 2 -year preproductive Issue 3: p. 327 Bonus Depreciation-Vines &Trees UNICAP Rules End of 2 -year preproductive period § Under New: “the time at which such plant begins bearing fruits or nuts” § Under UNICAP: “the period before the 1 st marketable crop or yield from such plant”

Issue 3: p. 327 Bonus Depreciation-Vines &Trees New vs General Bonus Depreciation Property does Issue 3: p. 327 Bonus Depreciation-Vines &Trees New vs General Bonus Depreciation Property does not have to qualify for the general bonus depreciation to be eligible for the special elective bonus depreciation for plants that bear fruit or nuts.

Issue 3: p. 327 Bonus Depreciation-Vines &Trees New vs General Bonus Depreciation § Property Issue 3: p. 327 Bonus Depreciation-Vines &Trees New vs General Bonus Depreciation § Property does not have to meet the following requirements: 1. Recovery period < 20 years 2. Original use commences with TP § Property that must be depreciated under the ADS is eligible property.

Issue 3: p. 327 Bonus Depreciation-Vines &Trees Benefits of the New Legislation 1. Farmer Issue 3: p. 327 Bonus Depreciation-Vines &Trees Benefits of the New Legislation 1. Farmer that elected out of UNICAP can claim bonus depreciation 2. Bonus depreciation can be deducted in an earlier year

Issue 3: pp. 327 -328 Bonus Depreciation-Vines &Trees Example 10. 4 Elect out of Issue 3: pp. 327 -328 Bonus Depreciation-Vines &Trees Example 10. 4 Elect out of UNICAP § ADS for depreciable assets § Figure 10. 1 Example 10. 4 Elective Bonus Dep § 2016: Bonus $23, 500, $7, 000 maint. § 2017: $12, 000 maintenance, § 179 § 2018: § 179, ADS dep. , Deduct $12 K

Issue 3: p. 328 Bonus Depreciation-Vines &Trees Example 10. 4 No Elective Bonus § Issue 3: p. 328 Bonus Depreciation-Vines &Trees Example 10. 4 No Elective Bonus § 2016: Capitalize $47, 000 planting costs Deduct $7, 000 maintenance § 2017: Deduct $12, 000 maintenance § 2018: Expense all/part $47, 000 - § 179 Deduct $12, 000 maintenance § ADS due to election out of UNICAP

Issue 3: p. 328 Bonus Depreciation-Vines &Trees Example 10. 5 Apply UNICAP § Neighbor Issue 3: p. 328 Bonus Depreciation-Vines &Trees Example 10. 5 Apply UNICAP § Neighbor with same costs as Ex. 10. 4 § § 179: $8, 000 support posts § Must be capitalized into tree basis

Issue 3: p. 329 Bonus Depreciation-Vines &Trees Example 10. 5 Elective Bonus Dep § Issue 3: p. 329 Bonus Depreciation-Vines &Trees Example 10. 5 Elective Bonus Dep § 2016: Capitalize $7, 000 maintenance Bonus Dep: $23, 500 § 2017: Capitalize $12, 000 maintenance § 2018: Begin dep. , Figure 10. 2: Basis Qualifies for: § 179 and MACRS Deduct $3, 000 maintenance

Issue 3: p. 329 Bonus Depreciation-Vines &Trees Example 10. 5 No Elective Bonus § Issue 3: p. 329 Bonus Depreciation-Vines &Trees Example 10. 5 No Elective Bonus § 2016: Capitalize $47, 000 + $7, 000 § 2017: Capitalize $12, 000 maintenance § 2018: Begin dep. , Figure 10. 3: Basis Qualifies for: § 179, 40% bonus, & MACRS Deduct: $3, 000 maintenance

Issue 3: p. 330 Bonus Depreciation-Vines &Trees Planning Pointer Can increase the adjusted basis Issue 3: p. 330 Bonus Depreciation-Vines &Trees Planning Pointer Can increase the adjusted basis of plants that are eligible for the elective bonus depreciation by choosing a more rapid cost recovery method for assets that are placed in service in the year the plants are planted and used to plant the plants

Issue 4 pp. 330 -332 Cost Recovery - Hoop Structures § Figure 10. 5: Issue 4 pp. 330 -332 Cost Recovery - Hoop Structures § Figure 10. 5: Farm recovery periods § Hoop structures likely to be treated as farm buildings (20 -year property) § Building per Regs. : § Appearance test – structure enclosing a space w/walls and usually a roof § Functional test – same purpose as in reg. examples

Issue 4 p. 332 Cost Recovery - Hoop Structure Hoop not a single-purposes structure Issue 4 p. 332 Cost Recovery - Hoop Structure Hoop not a single-purposes structure § Does not meet the “specifically designed, constructed, and used” § Can be used for many purposes

Issue 4 pp. 332 -333 Cost Recovery - Hoop Structure Example 10. 6: 3 Issue 4 pp. 332 -333 Cost Recovery - Hoop Structure Example 10. 6: 3 identical hoop structures 1. To store grain: argue grain bin (7 yr)? 2. To house dairy goats: argue singlepurposes (10 yr)? 3. To store farm equipment: 20 year – general purposes farm building

Issue 4 p. 333 Cost Recovery - Hoop Structure § MACRS if placed in Issue 4 p. 333 Cost Recovery - Hoop Structure § MACRS if placed in service after 1986 unless an exception (list p. 333) § Use GDS unless ADS required/elected. § On a farm, ADS would be required for: 1. Listed property used ≤ 50% in T or B 2. With election out of UNICAP (other required ADS usage – p. 333)

Issue 4 pp. 333 -334 Cost Recovery - Hoop Structure Example 10. 7 Required Issue 4 pp. 333 -334 Cost Recovery - Hoop Structure Example 10. 7 Required use of ADS § Apple orchard, preproductive pd. > 2 yrs § Elected out of UNICAP § New machine shed placed in service in 2016 § Must use ADS – 25 year recovery pd.

Issue 4 p. 334 Cost Recovery - Hoop Structure MACRS Depreciation Methods 1. 200% Issue 4 p. 334 Cost Recovery - Hoop Structure MACRS Depreciation Methods 1. 200% DB; GDS recovery period (non -farm only) 2. 150% DB; GDS recovery period 3. SL; GDS recovery period 4. SL; ADS recovery period

Issue 4 p. 334 Cost Recovery - Hoop Structure Example 10. 8 Depreciation Methods Issue 4 p. 334 Cost Recovery - Hoop Structure Example 10. 8 Depreciation Methods § Not subject to UNICAP § MACRS options - hoop structure for storing machinery 1. 150% DB; 20 -year recovery period 2. SL; 20 -year recovery period 3. SL; 25 -year recovery period

Issue 4 pp. 334 -335 Cost Recovery - Hoop Structure Section 179 Expense Deduction Issue 4 pp. 334 -335 Cost Recovery - Hoop Structure Section 179 Expense Deduction § Must be § 1245 property which includes: 1. Real property (not a building) a. an integral part of production or b. bulk storage facility or 2. Single purpose livestock and horticultural structures § Hoop structure, as a building, not eligible

Issue 4 p. 336 Cost Recovery - Hoop Structure Bonus Depreciation – 50% AFYD Issue 4 p. 336 Cost Recovery - Hoop Structure Bonus Depreciation – 50% AFYD § Specific type of property including § Tangible property depreciated under MACRS with recovery period ≤ 20 years § Original use begins with taxpayer § Not an excepted property (list – p. 336) § Hoop structure, Example 10. 6, qualifies

Issue 4 p. 337 Cost Recovery - Hoop Structure Conventions § Cost of the Issue 4 p. 337 Cost Recovery - Hoop Structure Conventions § Cost of the hoop structure is included in the 40% rule for the mid-quarter convention § Hoop structure will be depreciated under the half-year or mid-quarter convention

Issue 4 p. 337 Cost Recovery - Hoop Structure Order of cost recovery: 1. Issue 4 p. 337 Cost Recovery - Hoop Structure Order of cost recovery: 1. Section 179 2. Bonus depreciation 3. MACRS depreciation As hoop structure unlikely to qualify for section 179 - bonus depreciation, then MACRS.

Issue 4 pp. 337 -338 Cost Recovery - Hoop Structure Example 10. 11 Hoop Issue 4 pp. 337 -338 Cost Recovery - Hoop Structure Example 10. 11 Hoop Depreciation Purchase price Bonus depreciation MACRS depreciation Total depreciation $125, 000 $62, 500 4, 688 $67, 188

Issue 5: Conservation Reserve Program (CRP) Payment p. 338 Notice 2006 -108: Participation in Issue 5: Conservation Reserve Program (CRP) Payment p. 338 Notice 2006 -108: Participation in a CRP contract is a trade or business § Farmer is subject to SE tax § Non-farmer is subject to SE tax § Proposed revenue ruling has not been issued

Issue 5: p. 340 CRP Payments 2008 Farm Bill: Excludes CRP payments from the Issue 5: p. 340 CRP Payments 2008 Farm Bill: Excludes CRP payments from the definition of net earnings from selfemployment if owner is receiving: § Old age or survivor’s benefits § Disability benefits

Issue 5: p. 341 CRP Payments Morehouse v Commissioner § Tax Court followed IRS Issue 5: p. 341 CRP Payments Morehouse v Commissioner § Tax Court followed IRS reasoning and held CRP payments subject to SE tax § 8 th Circuit reversed and held that CRP payments are rent § Not subject to SE tax because taxpayer did not materially participate

Issue 5: p. 342 CRP Payments CRP, NIIT & Additional Medicare Tax § NIIT Issue 5: p. 342 CRP Payments CRP, NIIT & Additional Medicare Tax § NIIT applies to income reported as rent – CRP on Sched E § Additional Medicare tax applies to selfemployment income – CRP on Sched F § Neither if TP collecting social security as CRP not in SE income & not rents

Issue 5: pp. 342 -344 CRP Payments Example 10. 12 No SS benefits § Issue 5: pp. 342 -344 CRP Payments Example 10. 12 No SS benefits § Schedule F profits § CRP payments § SE tax § Additional Medicare tax § Figures 10. 7 and 10. 8 $275, 000 $22, 059 $486

Issue 5: pp. 342 -344 CRP Payments Example 10. 12 With SS benefits § Issue 5: pp. 342 -344 CRP Payments Example 10. 12 With SS benefits § SE tax § Additional Medicare tax $21, 470 $383 (Total savings is $589 + 103 = $692) § Figures 10. 9 and 10. 10

Issue 6 Easements p. 345 § An easement is the right to use (or Issue 6 Easements p. 345 § An easement is the right to use (or to prevent others from using) real estate that is owned by another person.

Issue 6 Easements p. 345 Easements can be created by: § Normal purchase negotiations Issue 6 Easements p. 345 Easements can be created by: § Normal purchase negotiations § Eminent domain § Other operations of state law § implied and prescriptive easements § easements of necessity

Issue 6 Easements p. 345 Types of payments for easements: § land purchase (fee-simple Issue 6 Easements p. 345 Types of payments for easements: § land purchase (fee-simple sale) § temporary access to a work site § continuing right-of-way § diminished value of other property § loss of income

Issue 6 Easements p. 346 Payment for Easement Treas. Reg. § 1. 61 -6(a): Issue 6 Easements p. 346 Payment for Easement Treas. Reg. § 1. 61 -6(a): 1. Basis is allocated among parts 2. Sale of each is separate transaction 3. Gain or loss is not deferred

Issue 6 Easements p. 346 Issues of Allocating Basis 1. Property affected 2. Easement Issue 6 Easements p. 346 Issues of Allocating Basis 1. Property affected 2. Easement v. rest of property

Issue 6 Easements p. 346 Example 10. 13 § 600 acre farm § Easement Issue 6 Easements p. 346 Example 10. 13 § 600 acre farm § Easement on 20 acres § Basis is $300 per acre Payment $10, 000 Basis -6, 000 Gain $ 4, 000

Issue 6 Easements p. 346 Entire Property Affected § Reduce entire basis § Example Issue 6 Easements p. 346 Entire Property Affected § Reduce entire basis § Example 10. 14 § Easements affect entire property § Compare the easement payment with the entire basis

Issue 6 Easements p. 347 Allocation of Basis to Transferred Rights § Allocate basis Issue 6 Easements p. 347 Allocation of Basis to Transferred Rights § Allocate basis using ratio of FMV of each interest (Rev. Rul. 77 -413) § If impossible to allocate basis, then easement sale proceeds can be compared to entire basis in land affected (Rev. Rul. 77 -414)

Issue 6 Easements p. 347 § If amount received < basis in affected acreage Issue 6 Easements p. 347 § If amount received < basis in affected acreage § Reduce basis in affected acreage § No loss deductible – retains interest § If amount received > basis in affected acreage, excess is gain § Examples 10. 15 and 10. 16

Issue 6 Easements pp. 347 -348 Severance Damages § Compensation for damage to property Issue 6 Easements pp. 347 -348 Severance Damages § Compensation for damage to property § Reduce basis of damaged portion of the property § Excess over basis is gain

Issue 6 Easements p. 348 Example 10. 17 – Severance award § $60, 000 Issue 6 Easements p. 348 Example 10. 17 – Severance award § $60, 000 for pipeline easement over 12 acres with $36, 000 basis § Gain $24, 000 reported § $15, 000 damage award for 100 acres with $300, 000 basis § Reduce basis by $15, 000

Issue 6 Easements p. 348 Taxation of other payments § Sales or leases of Issue 6 Easements p. 348 Taxation of other payments § Sales or leases of a portion of land: report on appropriate form § Improvements such as fencing or gates: report FMV as easement payment § Current or future crop damage: report as income from a crop sale

Issue 6 Easements pp. 348 -349 Replacement property § Like-kind exchange § 1031 and Issue 6 Easements pp. 348 -349 Replacement property § Like-kind exchange § 1031 and involuntary conversion § 1033 rules allow landowners to defer gain from transfer of an easement into replacement property. § Rev. Ruling support (p. 348 -349)

Issue 6 Easements Example 10. 18 § § p. 349 Like-kind exchange Example 10. Issue 6 Easements Example 10. 18 § § p. 349 Like-kind exchange Example 10. 17 to increase farm size Buys 20 -acre adjoining for $60, 000 If purchased in qualified deferred exchange, no current taxable gain, basis of $36, 000 in new land Report on Form 8824

Issue 6 Easements p. 349 Example 10. 19 Involuntary conversion § State to condemn Issue 6 Easements p. 349 Example 10. 19 Involuntary conversion § State to condemn - eminent domain § Submit statement with tax return § Date and details of invol. conversion § Amount received & gain calculation § Replaced: Statement w/return w/details § Gain to report? Amend conversion year

Issue 6 Easements pp. 349 -350 Example 10. 20 § Allowing two wind turbines Issue 6 Easements pp. 349 -350 Example 10. 20 § Allowing two wind turbines on land § Cost: $3 K/acre, sharecrops: 20% crop § Figure 10. 11: Payments received & treatment of each on return § $100, 000 and $20, 000 eligible for likekind exchange

Issue 7 pp. 350 -351 Valuation of Unharvested Crops FMV of unharvested crop needed Issue 7 pp. 350 -351 Valuation of Unharvested Crops FMV of unharvested crop needed for 1. Transfer by sale, gift, or inheritance 2. To make IRC § 754 adjustment 3. To make IRC § 336(e) election 4. To calculate potential built-in gains

Issue 7 p. 351 Valuation of Unharvested Crops Sale of Unharvested Crop with Land Issue 7 p. 351 Valuation of Unharvested Crops Sale of Unharvested Crop with Land § Unharvested crop is § 1231 asset if: 1. On land held for > 1 year 2. Sold at same time and to same buyer as sale of land § § 268 denies deduction of cost of raising the crop (including prior year)

Issue 7 p. 351 Valuation of Unharvested Crops Valuation of Annual Crops 1. Appraisal Issue 7 p. 351 Valuation of Unharvested Crops Valuation of Annual Crops 1. Appraisal by a qualified appraiser 2. Discount FMV of crops at harvest

Issue 7 p. 351 Valuation of Unharvested Crops Appraisal of Growing Crop Example 10. Issue 7 p. 351 Valuation of Unharvested Crops Appraisal of Growing Crop Example 10. 21 Crop Wheat Soybeans Corn Cost $200 $335 $560 Growth 60% 15% FMV $320 $385 $644

Issue 7 pp. 351 -352 Valuation of Unharvested Crops Discounting Harvested Crops Example 10. Issue 7 pp. 351 -352 Valuation of Unharvested Crops Discounting Harvested Crops Example 10. 22 FMV of harvested wheat Weather risk Fire risk Discounted value $100, 000 - 12, 000 - 2, 000 $ 86, 000

Issue 7 p. 352 Valuation of Unharvested Crops Non-Materially Participating Landlord § If decedent Issue 7 p. 352 Valuation of Unharvested Crops Non-Materially Participating Landlord § If decedent did not materially participate, share rent is IRD (no date of death FMV basis) § Must determine FMV on date of death to allocate rent before and after death

Issue 7 p. 352 Valuation of Unharvested Crops Timber Valuation 1. Sales comparison 2. Issue 7 p. 352 Valuation of Unharvested Crops Timber Valuation 1. Sales comparison 2. Cost 3. Income capitalization

Issue 8: CCC Loan/Commodity Sale Form 1099 -PATR p. 353 § 77 election: treat Issue 8: CCC Loan/Commodity Sale Form 1099 -PATR p. 353 § 77 election: treat CCC loan as income if commodity used as collateral § Basis in commodity = loan amount § Repay loan & sell commodity → report sale on Sch F line 1, basis on line 1 b. § Sell thru Coop & Coop reports as PURPIM → PURPIM on line 3 a, 3 b - basis deducted in “other expenses” as “CCC loan repayment”

Issue 8: CCC Loan/Commodity Sale Form 1099 -PATR p. 353 Example 10. 17 Loan Issue 8: CCC Loan/Commodity Sale Form 1099 -PATR p. 353 Example 10. 17 Loan $150, 000 PURPIM $262, 000 Interest $ 1, 200

Issue 8: CCC Loan/Commodity Sale Form 1099 -PATR p. 354 Example 10. 24: Sch Issue 8: CCC Loan/Commodity Sale Form 1099 -PATR p. 354 Example 10. 24: Sch F - Figure 10. 12 Lines 3 a and 3 b 262, 000 Line 5 a 150, 000 Line 21 b 1, 200 Line 32 a 150, 000

Issue 9 p. 355 4 H Clubs & FFA Projects 4 H or FFA Issue 9 p. 355 4 H Clubs & FFA Projects 4 H or FFA Member: Tor B or not? § Not T or B (& not SE income) → if for educational purposes, not for profit, follow organization rules/restrictions § Report on line 21 (show expenses in line 21 or attach statement)

Issue 9 p. 355 4 H Clubs & FFA Projects 4 H or FFA Issue 9 p. 355 4 H Clubs & FFA Projects 4 H or FFA Member: Tor B or not? § T or B (& SE income) → Sch F if: § Regular & recurring activity § Not primarily for educational purpose § Intends to make a profit and/or § Other farming activities conducted

Issue 9 pp. 355 -356 4 H Clubs & FFA Projects Example 10. 25 Issue 9 pp. 355 -356 4 H Clubs & FFA Projects Example 10. 25 No profit intent § § § Comparing steer/heifer growth rates Sold steer and heifer @ fair: $3, 300 Prize of $500 Expenses of $2, 900 $900 net on line 21 – Figure 10. 13 If loss, no deduction

Issue 9 pp. 355 -356 4 H Clubs & FFA Projects Example 10. 26 Issue 9 pp. 355 -356 4 H Clubs & FFA Projects Example 10. 26 Profit intent § § § Comparing steer/heifer growth rates Used offspring of parents’ herd Commodity wages for work on farm Filing Schedule F for other activities Sale $3, 300, Prize $500, Exp. $2, 600 Likely to be treated as T or B

Issue 9 pp. 356 -357 4 H Clubs & FFA Projects Gift of Inputs: Issue 9 pp. 356 -357 4 H Clubs & FFA Projects Gift of Inputs: Noncash gift – c/o basis § Example 10. 27 § Parents: cow-calf operation/feedyard § Juan purchased steer from neighbor § Used grain/supplements from 2015 § Basis -0 - (parents expensed in 2015) § If paid parents, parents have income

Issue 9 pp. 357 -358 4 H Clubs & FFA Projects § Line 21 Issue 9 pp. 357 -358 4 H Clubs & FFA Projects § Line 21 income not included in earned income for dependent’s standard deduction comp. in 1040 instructions § Earned income not defined – FFA or 4 -H income result of personal labor & management → argue as earned? § Example 10. 28 (example 10. 25) § Earned: $1, 250 – Not earned: $1, 050

Issue 9 p. 358 4 H Clubs & FFA Projects Kiddie Tax § Earned Issue 9 p. 358 4 H Clubs & FFA Projects Kiddie Tax § Earned income if T or B treatment § § 911(d)(2): Personal service & capital material income producing factors, reas. allow. for comp not > 30% of net § Line 21 – not earned income § Sch F – 30% as earned income

Issue 9 pp. 359 -360 4 H Clubs & FFA Projects Example 10. 29 Issue 9 pp. 359 -360 4 H Clubs & FFA Projects Example 10. 29 Age 16 § Netted $6, 000 from 4 -H swine project § Primarily educational – line 21 § $3, 500 interest income § Parents claimed him § Standard deduction of $1, 050 § Form 8615 – Figure 10. 14

Issue 9 p. 360 4 H Clubs & FFA Projects Example 10. 29 Age Issue 9 p. 360 4 H Clubs & FFA Projects Example 10. 29 Age 16 § If not primarily educational § $6, 000 subject to SE Tax § Show efforts worth $1, 800 – earned income for kiddie tax § Figure 10. 15 - Taxable income comp § Figure 10. 16 – Form 8615 entries

Issue 9 pp. 361 -362 4 H Clubs & FFA Projects IRA Contribution § Issue 9 pp. 361 -362 4 H Clubs & FFA Projects IRA Contribution § If T or B, earned in for IRA purposes § Example 10. 30 Ex. 10. 29 as T or B § $5, 500 IRA makes AGI < standard § Split contributions: Roth & regular § Example 10. 31 Other unearned, age 18 § Figures 10. 17 and 10. 18

Issue 9 p. 362 4 H Clubs & FFA Projects Buyers at a Fair Issue 9 p. 362 4 H Clubs & FFA Projects Buyers at a Fair Auction § Often purchase at > FMV, sell at loss § Done for promotional purposes § Deduct as ordinary and necessary business advertising expense § Example 10. 32 § If donates: lesser of FMV or basis

Issue 10 Multiple Entities p. 363 Benefits of using multiple entities: § § § Issue 10 Multiple Entities p. 363 Benefits of using multiple entities: § § § Separate legal liability Increase section 179 deduction Reduce self-employment tax Facilitate transferring business Maintain a retirement income stream for the older generation

Issue 10 Multiple Entities pp. 363 -364 Section 179 Deduction Example 10. 34 § Issue 10 Multiple Entities pp. 363 -364 Section 179 Deduction Example 10. 34 § One LLC: one $500, 000 limit one $2010, 000 limit § Two LLC’s: two $500, 000 limits two $2010, 000 limits

Issue 10 Multiple Entities p. 364 Example 10. 35 Additional Entities § Expenditures exceed Issue 10 Multiple Entities p. 364 Example 10. 35 Additional Entities § Expenditures exceed $2, 010, 000 limit § A third LLC solves the expenditure problem § But, each owner has $500, 000 limit § Each loses $250, 000 of § 179 expense § Asset basis & basis in LLC still reduced

Issue 10 Multiple Entities p. 365 Example 10. 36 Reducing SE tax Net earnings Issue 10 Multiple Entities p. 365 Example 10. 36 Reducing SE tax Net earnings $500, 000 SE earnings for each ($250, 000 × 0. 9235) or $230, 875 SE tax for each $21, 389

Issue 10 Multiple Entities p. 365 Example 10. 36: Form real estate LLC § Issue 10 Multiple Entities p. 365 Example 10. 36: Form real estate LLC § Pay $200, 000 rent per year Net earnings $300, 000 SE earnings for each ($150, 000 × 0. 9235) $138, 525 SE tax for each $18, 711 (self-rental – not subject to NII tax)

Issue 10 Multiple Entities pp. 365 -366 Asset Ownership and Operations Example 10. 37 Issue 10 Multiple Entities pp. 365 -366 Asset Ownership and Operations Example 10. 37 § Separate LLCs for limiting liability also increases section 179 deduction Example 10. 38 § Rent equipment to operating LLC

Issue 10 Multiple Entities p. 367 Facilitate Transfers Example 10. 39 Real estate $2, Issue 10 Multiple Entities p. 367 Facilitate Transfers Example 10. 39 Real estate $2, 500, 000 Operating assets $1, 000 § Don and Doris sell 50% of operating LLC to Johnny for $350, 000

Issue 10 Multiple Entities pp. 367 -368 Example 10. 40: Split Entity & SE Issue 10 Multiple Entities pp. 367 -368 Example 10. 40: Split Entity & SE tax Sole proprietorship Employer’s FICA $ 5, 738 Johnny’s FICA 5, 738 Don’s SE tax 23, 398 Total OASDI/Medicare $34, 874

Issue 10 Multiple Entities pp. 367 -368 Example 10. 40 Two LLCs Don’s SE Issue 10 Multiple Entities pp. 367 -368 Example 10. 40 Two LLCs Don’s SE tax $ 5, 298 Johnny’s SE tax 16, 723 Total OASDI/Medicare $22, 701

Issue 10 Multiple Entities p. 368 Example 10. 42: Split Entity & NIIT § Issue 10 Multiple Entities p. 368 Example 10. 42: Split Entity & NIIT § Self-rental rule exempts rent from both Don’s and Doris’ NIIT § If Don does not materially participate, rent is net investment income

Questions? Questions?