Examining the Ohio Farm Economy Crop Margins, Land Economics, Tax

Examining the Ohio Farm Economy Crop Margins, Land Economics, Tax
Barry Ward Ohio State University Extension The Ohio State University USDA Sept 1 Ohio Corn – 188 Soy – 58

New Tax Law and Strategy
Issues I worry about…. Expenses Margins Land Rents and Values Interest Rates New Tax Law and Strategy Disclaimers, caveats, weasel words, vague statements, economic jargon and several “on the one hand…” statements Facts may exceed your curiousity or interest….

Grain Yield of Hybrids Grouped by Insect Resistance and Herbicide Tolerance Traits, 2017 OCPT
Region SW/SC/C NW NC/NE Trait Set† No. Yield None 4 262 7 227 6 218 CB2+GT1 48 268 42 233 36 234 CB1+GT1+LL1 - 240 229 CB1+RW1+GT1+LL1 265 5 237 223 LEP1+CB1+RW1+GT1+LL1 1 276 238 CB3+RW3+GT1+LL1 270 49 38 232 CB2+RW1+GT1 241 220 CB2+GT1+LL1 14 273 15 243 19 CB = corn borer Bt; RW = corn rootworm Bt; LEP = lepidopteran Bt; GT = glyphosate tolerance; LL = glufosinate (Liberty) tolerance. The number after the trait indicates the number of different events of that type.

How much does it cost for corn seed technologies
How much does it cost for corn seed technologies? Where is the breakeven point? Cost ($/A) matrix of corn seed sold at a premium (i.e. technology fee) Yield Increase (bu/A) $20 Bag difference $40 Bag difference $60 Bag difference Corn Price $3.50 $4.00 $4.50 $-8 $-17 $-25 2 $-1 $0 $1 $-10 $-9 $-18 $-16 4 $6 $8 $10 $-3 $-11 $-7 6 $13 $16 $19 $4 $7 $-4 $2 8 $20 $24 $28 $11 $15 $3 10 $27 $32 $37 $18 $23 12 $34 $40 $46 $25 $31 $17 $29 Assume: 80,000 seeds/bag planted at 33,000 seeds/A for final population of 30,000 plants/A Source: J. Lauer, Univ. of Wisconsin (Update by P. Thomison, 2015) 80000 seeds/33000seeds=2.42 (i.e.a bag of seed plants 2.42 A planted a 33,000 seeds/A); if there is a $20 bag difference then on per acre basis this works out to an additional cost of $8.26/A in above table this was rounded to $8; for $40 bag difference this was an additional cost of $17/A ($8.26/A x 2 =16.52 rouned to 17) for $60 bag an additional cost of $25/A 6

Current Ohio Fertilizer Prices / Annual Change
NH3 $ % UAN(28%) $ % Urea $ % MAP $ % Potash $ % Source: DTN Fertilizer Index

Energy Outlook October 2018 Estimates EIA

Propane Stocks/Wholesale Price October 2018 Estimates EIA

Crop Input Costs Energy – Modestly Higher Fertilizer – Modestly Higher
Seed – Flat to Modestly Higher Chemical – Prices: Flat to Modestly Higher – Costs: Higher Machinery/Equipment Depreciation – Modestly Higher Labor – Modestly higher

Recent Iowa State Survey – 82% of Iowa farmland is owned debt free.
While the opportunity cost of land needs to be considered when comparing this enterprise to another enterprise on the farm or another investment off the farm.

Projected ‘19 Budgets SB/C Price Ratio = 2.32

Williams Fulton Lucas Ottawa Defiance Henry Wood Sandusky Paulding Putnam Hancock Seneca Wyandot VanWert Allen Hardin Mercer Auglaize Logan Darke Preble Butler Hamilton Clermont Brown Shelby Miami Montgomery Warren Clinton Champaign Clark Greene Adams Highland Scioto Pike Lawrence Gallia Jackson Meigs Hocking Athens Vinton Washington Ross Fayette Madison Pickaway Franklin Union Delaware Marion Monroe Noble Morgan Licking Fairfield Perry Muskingum Guernsey Belmont Jefferson Harrison Tuscarawas Coshocton Knox Morrow Crawford Richland Ashland Holmes Wayne Stark Carroll Columbiana Mahoning Trumbull Portage Summit Medina Huron Erie Lorain Cuyahoga Lake Geauga Ashtabula

Chicago Fed - 7th District
“Good” Farmland – April 1, 2017 to April 1, 2018 Entire District % Indiana (Northern ¾) - 3% Michigan (LP) %

Rental Rates: Outlook Competing Fundamentals:
-Crop Net Income will again be low or negative -Farmer equity positions are healthy but weakening -ARC/PLC payments in 2018 low/zero -CAUV/Property Taxes lower in many counties versus -Farmer equity positions are healthy in an historical context -ARC/PLC payments in 2017/ Market Facilitation Program Payments -Yields were relatively solid in 2017 and will be in 2018 -CAUV/Property Taxes still on landowner minds Market Facilitation Program Payments – $4.7 bil

Purdue Survey Northeast: -0.1 to -2.9% Central: +1.2 to +3%

Chicago Fed (July 1, 2018) Indiana - Northern 3/4 – “Good” Farmland Yearly (July 1, ‘17 – July 1, ‘18) NC (District 7, +1%) 2nd Qtr. Change % (District 7, +2%)

U.S. Treasuries – 10 Year T- Bills Source: CNBC

Farmland Values: Outlook
Competing Fundamentals: -Crop Net Income will again be low or negative -Farmer equity positions are healthy but weakening -ARC/PLC payments in 2018 -Livestock/Dairy income mixed -Higher interest rates versus -Farmer equity positions are healthy in an historical context -ARC/PLC payments in 2017/ Market Facilitation Program Payments -Yields will be relatively solid in 2018 -Limited supply of land for sale -Phosphorous regulations* -Development pressure - housing* -Estate taxes mostly inconsequential Iowa State Farmland Ownership and Tenure Survey 82% of farmland is owned debt-free

Interest Rates Fed Actions – Signaled possibly 1 more rate increase in 2018 and three (or four) in 2019 Target Rate (2.0 – 2.25%)….( %)? Full employment (~3.7% Unemployment) Economic growth – 3.5% growth in 3rd Qtr Inflation Indicators CPI-U 2.3% “Core” CPI 2.2% Rate increase in December? – Current Target Range % - 1 more increase in 2018? Changes in the federal funds rate will typically affect the U.S. dollar. When the Federal Reserve increases the federal funds rate, it normally reduces inflationary pressure and works to appreciate the dollar. Chained CPI 2.0% Inflation Indicators in August CPI – U 2.7% Core CPI – 2.2% Jerome Powell – Current Fed Governor – Lawyer and Investment Banker

Interest Rates >>Strong Dollar
>>Resilient demand for U.S. treasuries >>Federal debt prospects >>Trade disputes The deficit rose to $779 billion in fiscal year 2018, up 17% from last year, according to final figures released Monday by the Treasury Department. That's the largest number since 2012, when the country was still spending massively to stimulate an economy struggling to recover. Government receipts were flat this year from last year. Corporate tax collections fell $76 billion, or 22%, due to the Republican-backed tax cut. But that drop was more than offset by increased revenues from individual and self-employment taxes. The fiscal year ended September 30. Spending rose 3% over the previous year, fueled in part by increases to the defense budget agreed upon in September 2017 as part of a deal between Republicans and Democrats to head off a government shutdown. Social Security and interest on the federal debt also contributed to the increase. The Committee for a Responsible Federal Budget, a think tank that warns of the dangers of rising debt levels, said the deficit could reach $1 trillion as soon as next year. That would still be below a high of $1.4 trillion reached in 2009, but in a vastly different economy. "Those elected to Congress this year will face stark and difficult choices to put the debt on a downward path and protect our nation's social programs from insolvency," said Maya MacGuineas, the group's president. "It's no longer a problem for the future." The White House has steadfastly defended its policies, arguing that the yawning gap is a reason to cut deeper into social programs to balance out increases to the military budget. It's a long way from the Republican stance under President Barack Obama, when the GOP-led House demanded about $1 trillion in budget cuts over 10 years in exchange for a debt ceiling increase, leading to years of painful automatic reductions to federal spending. White House budget director Mick Mulvaney, a notable debt hawk while he was a congressman, said the numbers underscored a need to cut spending. "The president is very much aware of the realities presented by our national debt," Mulvaney said in a statement. "America's booming economy will create increased government revenues — an important step toward long-term fiscal sustainability. But this fiscal picture is a blunt warning to Congress of the dire consequences of irresponsible and unnecessary spending." His comments echoed remarks by Treasury Secretary Steven Mnuchin last week in an interview with CNN suggesting that Democrats' resistance to cutting government spending on education, health care and other social programs was to blame for deficit increases.

Barry Ward, OSU Extension

Also known as the: “Tax Cuts and Jobs Act” (TCJA)
Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (AtPfRPtTIIaVotCRotBfFY2018) Also known as the: “Tax Cuts and Jobs Act” (TCJA) Signed into law on December 22nd, 2017

Grain Glitch “Fixed” (Cooperative Glitch)
Consolidated Appropriations Act 2018 signed on March 23, 2018 The 20-percent deduction calculated based upon their gross sales was eliminated and replaced with a hybrid Section 199A deduction Grain sales made prior to March 23 to Coops do not qualify under the temporary provision

Tax Cuts and Jobs Act 2017 Farm Equipment Depreciation
Bonus First-Year Depreciation Section 179 Expensing Net Operating Loss Like Kind Exchanges Estate & Gift Tax Update Qualified Business Income Deduction Business interest (business with gross income < $25 mil) and property tax expenses still fully expensable on Schedule F Depreciation: Cost recovery period is now 5 years (not 7) for new farm machinery and equipment and 200% DB Used equipment still 7 years Bonus: Expands to 100% through 2023 and then 20% les each year after that until 0 in 2027. Recovery period still 20 year or less. Both New and Used Equipment is now eligible. Section Expanded to $1 million with a $2.5 million dollar phase-out limit ($1 for $1) . Provisions are not set to expire. NOL – Back – 2; Forward - Forever Limited to 80% of Taxable Income IRC §1031 for real property was retained but eliminated for personal property. Equipment trade-ins result in a taxable event Fed Estate Tax Exemption $11,180,000 for 2018. Annual gift exclusion is $15,000 Step up in basis has been continued. In 2026, will revert back current levels.

Corporate Tax – TCJA 2017 Corporate Tax Rate Flat tax at 21%
For those previously in the 15% bracket it is an increase of 40% Small C-Corps converting to S-Corps? Implications? C-Corp tax bracket prior Corporate in come up to $50K – 15% Most closely held family held C-corps make every attempt to keep corporate income low due to the issue of double taxation and will likely be disadvantaged by this tax law change Built-In Gains Tax – 5 years after switch C-corp - tax free housing for shareholder/employees

New IRC Section 199A Deduction for Qualified Business Income (QBI)
QBI Deduction A deduction in the amount of 20% is allowed for “pass through entities” - sole proprietorships, partnerships, and S corporations (LLCs are included) from qualified business income from what is termed a “qualified trade or business”. The deduction is claimed on the individual’s tax returns whether an individual itemizes or does not itemize. It reduces taxable income (not AGI) and is 20% of “qualifying business income” (or 20% of taxable ordinary income). Complex and still ambiguous Scheduled to sunset post-2025 Many provisions of the new tax law are projected to sunset post-2025 unless congress passes updates Why do they have sunset provisions – the new law could not create potential budget deficits exceeding thresholds without triggering sequestrations – therefore provisions are set to sunset

Things to remember if nothing else…. The very large majority of farmers will be eligible for the entire 20% deduction! Qualified Business Income from sales to cooperatives will need to be tracked separately Cash rent income to cash rent landlords will likely not qualify….. Provision Section 199A - Deduction for Qualified Business Income

QBI Deduction Phase-out Thresholds For individuals with taxable income of less than $157,500 for single filers and $315,000 for joint filers. The deductible amount for EACH qualified trade or business is 20% of the taxpayers qualified business income (QBI) with respect to each trade or business More precisely the lesser of 20% of QBI or taxable ordinary income Limitation phase-in

QBI Deduction Phase-out Thresholds High Income Taxpayers Need Wages and/or Property For individuals with taxable income of more than $157,500 for single filers and $315,000 for joint filers. Phase out ranges: $50,000 for single filers and $100,000 for joint filers Phase out range for single filers: $157,000 - $207,000 Phase out range for joint filers: $315,000 - $415,000

QBI Deduction Phase-out Thresholds Once filers exceed the phase out ranges ($207,500 for single filers and $415,000 for joint filers) the calculations are simple (relatively): The deduction is the greater of: 50% of the W-2 wages paid by the business or The sum of 25% of the W-2 wages with respect to the trade or business and 2.5% of the depreciable property. Let's start with "qualified property:" this is defined in Section 199A(b)(6)(A) as any tangible property, subject to depreciation (meaning inventory doesn't count), which is held by the business at the end of the year and is used -- at ANY point in the year -- in the production of QBI. But there's a catch: if you're going to count the basis towards your limitation, the "depreciable period" of the period could not have ended prior to the last day of the year for which you are trying to take the deduction. The depreciable period -- and I've seen a LOT of confusion about this -- starts on the date the property is placed in service and ends on the LATER OF: 10 years, or the last day of the last full year in the asset's "regular" (not ADS) depreciation period. To illustrate, assume S Co. purchases a piece of machinery on November 18, The machinery is used in the business, and is depreciated over 5 years. Even though the depreciable life of the asset is only 5 years, the owners of S Co. will be able to take the unadjusted basis of $10,000 into consideration for purposes of this second limitation for ten full years, from , because the qualifying period runs for the LONGER of the useful life (5 years) OR 10 years. Four quick notes: The basis taken into consideration is "unadjusted basis," meaning it is NOT reduced by any depreciation deductions. In fact, Section 199A(b)(2)(B)(ii) requires that you take into consideration the basis of the property "immediately after acquisition." Any asset that was fully depreciated prior to 2018, unless it was placed in service after 2008, will not count towards basis. Just as with W-2 wages, a shareholder or partner may only take into consideration for purposes of applying the limitation 2.5% his or her allocable share of the basis of the property. So if the total basis of S corporation property is $1,000,000 and you are a 20% shareholder, your basis limitation is $1,000,000 * 20% * 2.5% = $5,000. If you are a partner in a partnership, you must allocate your share of asset basis in the same manner in which you are allocated depreciation expense from the partnership. So go back to my earlier example where a partnership allocated W-2 wages, and the partner owned 20% of the capital of a partnership, was allocated 80% of depreciation, and only 30% of Schedule K-1, Line 1, ordinary income or loss. While that partner would be allocated 30% of the W-2 wages paid by the partnership, he or she would be allocated 80% of the unadjusted basis of the property, because that is the percentage of depreciation he is allocated.

Sales to Cooperatives: First, patrons calculate the 20 percent 199A QBI deduction that would apply if they had sold the commodity to a non-cooperative. But they don’t stop there. The patron must then subtract from that initial 199A deduction amount whichever of the following is smaller: 9 percent of net income attributable to cooperative sale(s) OR 50 percent of W-2 wages they paid to earn that income from the cooperative Note that if the patron does not pay W-2 wages to any employees, no reduction is required. But we are still not done. Once that amount is backed out, patrons get to add an additional “DPAD-like” deduction (if any) passed through to them by the cooperative pursuant to 199A(g)(2)(A). The determination of the amount of this new “DPAD-like” deduction will generally range from 0 to 9 percent of the cooperative's qualified production activities income (QPAI) atrributable to that patron's sales. The final amount passed through to the patron is at the discretion of the cooperative. It is governed by language copied directly from the old DPAD provision. In any event, the overall amount a cooperative can choose to pass through to its members cannot exceed 50 percent of the value of the wages the cooperative pays to its employees.The farmer's deduction cannot exceed taxable income (subtracting the 20 percent QBI deduction detailed above, but not subtracting capital gain).

Landlords: Crop share landlords filing a Schedule F are eligible Cash rent landlords filing a Schedule E likely won’t be eligible pending final regs (although there is some disagreement) Crop share landlords filing Form 4835 may qualify (if they are materially participating they likely will) Landlords will likely have to pass as a trade or business according to IRC Section 162 IRS released guidance – proposed regulations” on Aug 8 for TCJA The proposed regulations may also mean that the income a landlord receives from leasing land to an unrelated party (or parties) under a cash lease or non-material participation share lease may not qualify for the QBID. If that latter situation is correct it could mean that the landlord must pay self-employment tax on the lease income associated with a lease to an unrelated party (or parties) to qualify the lease income for the QBID.

Farms with Multiple Entities: Proposed regulations indicate that common ownership of business entities allows the farmer to combine the rent income with the farm income – an advantage Section 1231 Capital Gain Income: Will not qualify as QBI if the gain is treated as a capital gain – likely not good for dairy producers IRS released guidance – proposed regulations - on Aug 8 for TCJA

OSU AED Policy & Outlook
Fall 2004 Barry Ward (614) Matthew Roberts

Examining the Ohio Farm Economy Crop Margins, Land Economics, Tax

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Examining the Ohio Farm Economy Crop Margins, Land Economics, Tax

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