1. Tax Law Changes in the Farm Bill ??? Huh? Guido van der Hoeven Dept. Ag. and Resource Econ. 919-515-9071, guido_vdh@ncsu.edu

2. 2008 Farm Bill Tax Law Changes Conservation Reserve Program Optional Method for SE Tax Conservation Easement Donations Equine Depreciation Commodity Credit Corp. Transactions Agricultural Bonds Limitation on Farming Losses Agricultural Chemicals Security Credit Like-kind Exchange of Shares

3. 2008 Farm Bill Tax Law Changes Endangered-Species Recovery Deduction Alternative and Renewable Fuels Timber Provisions

4. CRP payments Conservation Reserve Program payments to taxpayers who are receiving social security benefits (retirement and disability) are treated as rents that are excluded from self-employment (SE) tax.

5. Example 1 Guy Wire owns and operates 900 acres as a crop farm. In 2002 he enrolled 85 acres in the CRP. Guy turned 65 on March 15, 2004 and began receiving SS retirement benefits. He continues to farm full-time. Beginning in 2008, his CRP payments are not subject to SE tax.

6. Example 2 Peach Blossom inherited a farm with a CRP contract in place in 2006. Peach is disabled and receives SS disability benefits. She hires a neighbor to maintain the CRP land. Beginning in 2008, her CRP payments are not subject to SE tax.

7. Other recipients (not receiving SS benefits) Does law change imply that all CRP payments are rent that is excluded from SE tax? Non-material participation –IRS will argue that they are subject to SE tax. –Taxpayer might argue that Congress overturned the court case positions.

8. Optional method for calculating SE tax Farmer with little net income can receive more quarters of social security coverage. 40 quarters needed to be fully insured for life (retirement benefits). 20 quarters needed in most recent 10 years to be currently insured (disability benefits).

9. Prior law If gross farm income < $2,400, pay SE tax on 2/3 of gross farm income. If gross farm income > $2,400, and net farm income < $1,733, pay SE tax on $1,600. $1,050 of SE income in 2008 yields one quarter of coverage.

10. Law change $1,600 replaced by lower limit (earnings for 4 quarters of coverage—$4,200 for 2008) $2,400 replaced by upper limit (150% of lower limit—$6,300 for 2008)

11. Gross < upper limit If gross farm income is less than upper limit, pay SE tax on 2/3 of gross farm income. Example—$4,500 of gross farm income; loss on Schedule F; pay SE tax on $3,000 and earn two quarters of coverage.

12. Gross > upper limit If gross farm income > upper limit, and 92.35% of net income < lower limit, pay SE tax on lower limit. Example—$6,500 gross farm income; $2,000 net farm income; elect to pay SE tax on $4,200 to receive four quarters of coverage.

13. Most important for young families The ability to obtain some disability coverage for young families should not be discounted. Generally, the Earned Income Credit will “pay” the Optional SE tax.

14. Conservation easement Enhanced charitable deduction extended through 2009. Farmers and ranchers can take deduction up to 100% of AGI with 15-year carryforward. Note: 2008 Extenders Act includes window for farmers to deduct food contributions up to 100% of AGI

15. Equine depreciation Cost-recovery period is 3 years for all race horses placed in service in 2009- 2013. Cost-recovery periods for work horses and breeding horses are not changed still remains 3 years.

16. CCC loans CCC is required to report market gain from repayment of a loan on Form CCC- 1099-G, whether the taxpayer repays the loan with cash or uses CCC certificates.  Be careful not to double-report if farmer included loan in income.

17. Aggie bonds Low-interest loans for first-time farmers and ranchers Loan limit raised to $450,000 Substantial farmland is parcel of land > 30% of median size of farm in same county; no minimum FMV

18. Farm loss limitation Begins in 2010 Affects recipients of CCC loans or direct or countercyclical payments Farm loss deduction limited to > of –$300,000, or –5-year aggregate net farm income Farm business includes processing of commodities

19. Examples 1.—$350,000 farm loss but no government payments or loans, allowed the loss 2.—$350,000 farm loss reduced by $100,000 profit from processing activity, allowed the loss because net loss is below $350,000. 3.—$500,000 loss with $550,000 net income during prior 5 years, allowed the loss because loss is less than 5 yr net income.

20. Exclusions Casualty, disease, drought losses Example 4.—subtract drought loss before applying limit, $150,000 of $400,000 loss is drought, $250,000 loss allowed.

21. Partnerships, LLCs and S- Corps Pass through; pro rate the loss. Example 5.— S corp loss of $500,000; 2 equal owner’s share is less than deduction limit, $250,000 pass through loss allowed.

22. Agricultural chemicals security credit Businesses that sell specified agricultural chemicals at retail predominantly to farmers and ranchers Businesses that manufacture, formulate, distribute, or aerially apply specified agricultural chemicals 30% credit for security expenditures $100,000 annual and 6-year cap per facility

23. Endangered species recovery deduction Site-specific measures included in Endangered Species Act plans are deductible conservation expenses under I.R.C. § 175. Total deduction is still limited to 25% of gross income from farming.

24. Fuel credits Cellulosic biofuels credit will be up to $1.01 per gallon (reduced for alcohol) for 2009- 2012 production. Ethanol incentive reduced from 51¢ per gallon to 45¢ per gallon in 2009 and later if 7.5 billion gallons are produced or imported in 2008.

25. Corporations 15% timber tax rate Trees held longer than 15 years I.R.C. § 631(a) and (b) gain 15% tax on corporation’s gain from 5/22/08 through 5/22/09 Tax years ending after 5/22/08 and beginning before 5/22/09