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2009 Farm and Ranch Tax Provision Changes

published: September 18th 2009
by: Joohn Mitchell, CPA
source: cattlebusinessweekly.com

As of summer of 2009 there are several tax code changes that will impact ranch and farm returns for the current year and beyond.

The 2008 depreciation write off limits under code section 179 have been extended one year for 2009. This allows a taxpayer who purchases not more than $800,000 of equipment, breeding livestock and single purpose Ag buildings to write off the first $250,000 the year of purchase.

For 2009 only, farm machinery which is normally depreciated over 7 years can be depreciated over 5 years. This applies to assets placed in service in the year 2009 only.

The 50% bonus depreciation that was put in place in 2008 continues until 12-31-2009. This allows up to 50% of the cost of property with a depreciable life of 20 years or less to be deducted in the first year. This would include, breeding livestock, machinery, and nearly all farm buildings other than residential buildings. Sequentially you take the 100% write off under code section 179, 1st and then the 50% bonus depreciation on the remaining acquisitions.

New beginning in 2010 is a limitation on deducting farm & ranch losses. For years after 2009 farm and ranch losses are limited to the greater of $300,000 or the farmers' aggregate net farm income for the preceding five years. Disallowed losses are carried forward.

Net operating losses are normally carried back 2 years and forward 20 years. Farm losses can be carried back 5 years and then forward 20. This gives the opportunity to pick which prior year had more income and yields better benefit of a carry back. As before, you can elect on the tax return for the year of the loss to forego the carry back and carry the loss forward only. This is smart in a situation where there was little tax in the carry back year and the loss would simply displace personal exemptions and things like tuition credits.

The Federal estate tax exemption jumped from $2.0 million in 2008 to $3.5 million in 2009. The gift tax exclusion stayed at $1.0 million with the annual gift exclusion of $13,000. The Federal estate tax is supposed to be repealed in 2010 but that seems unlikely to happen. Some are speculating on annual one year extensions of the $3.5 million exemption until the matter is settled in Congress. As before, a husband and wife each have their own estate exemption, so a couple could shield $7.0 million form Federal estate tax if they separate ownership of the assets and don't leave the first $3.5 million to the surviving spouse outright. A trust called a credit shelter trust is used for this purpose on the first $3.5 million, leaving income for life to a surviving spouse and the balance to others (children) upon the death of the second spouse. On smaller estates this is likely not a necessary provision.

The tax rate on capital gains (raised cows, land) is capped at 15% for 2009 and 2010 but is scheduled to go to 20% in 2011. Things could change before 2011 and this bears watching. Machinery and purchased livestock are not a capital gain on sale, to the extent of prior depreciation, which is often the entire gain on sale.

Maximum earnings subject to FICA or self employment tax is raised from $102,000 in 2008 to $106,800 in 2009. As always the 2.9% Medicare component of self employment tax has no earnings limit.

Mandatory distributions from IRA and other retirement accounts have been suspended for one year only for 2009. This applies to the over age 70 1/2 mandatory distribution rules. This provision came about because of mounting losses in the stock market in an attempt to prevent mandatory sales of accounts at substantially low prices.

There are standard COLA provisions for 2009 for things such as personal exemption amounts ($3,650), standard deductions ($5,700 single and $11,400 married). The IRS mileage rate is 55 cents per mile for 2009 down from 58.7 cents the last 1/2 of 2008. Health savings account limits increased to $3,000 single, $5,900 married with a $1,000 over age 55 extra allowance.

Income from Crop insurance proceeds can be deferred one year under code section 451 as long as the Ag producer normally sells all or a substantial portion of their crop after the year of harvest. This is nothing new, but on June 10, 2009 the US Court of Appeals ruled that a farmer that normally sold 65% of their crop in the year of harvest and 35% the following year did not meet the substantial portion rule (Nelson USTC 130 TC 70.). Apparently 35% is not substantial according to the court. The deferral of the crop insurance income was disallowed in this case. A producer may now need to show that they normally sell closer to 1/2 of their crop after the year of harvest in order to defer crop insurance proceeds under code section 451.

John Mitchell is a CPA with Casey Peterson & Associates of Rapid City, S.D.