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Agricultural & Natural Resource Issues Chapter 10 pp. 321-368

This chapter explores tax implications relating to tangible property regulations, food inventory contributions, bonus depreciation on vines and trees, conservation reserve program payments, easements, and more in the agricultural and natural resource sectors.

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Agricultural & Natural Resource Issues Chapter 10 pp. 321-368

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

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

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

  4. 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

  5. Issue 1 pp. 322-323De 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

  6. Issue 1 p. 323De 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

  7. Issue 1 p. 323De 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

  8. Issue 1 p. 323De 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

  9. Issue 1 p. 323De 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

  10. Issue 2 p. 324Contributions 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

  11. Issue 2 p. 324Contributions 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

  12. Issue 2 p. 325Contributions 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-

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

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

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

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

  17. Issue 3: p. 325Bonus Depreciation-Vines &Trees Bonus Depreciation Requirements: • Recovery period < 20 year • Original use commenced with TP • Placed in service before1/1/2020 • ADS must not be required method

  18. Issue 3: p. 326Bonus 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 1st return UNICAP would be required • Farmer & related must use ADS on property used predominantly in farming

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

  20. Issue 3: p. 326Bonus 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

  21. Issue 3: pp. 326-327Bonus 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

  22. Issue 3: p. 327Bonus 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

  23. Issue 3: p. 327Bonus 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

  24. Issue 3: p. 327Bonus 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 1st marketable crop or yield from such plant”

  25. Issue 3: p. 327Bonus 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.

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

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

  28. Issue 3: pp. 327-328Bonus 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 $12K

  29. Issue 3: p. 328Bonus 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

  30. Issue 3: p. 328Bonus 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

  31. Issue 3: p. 329Bonus 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

  32. Issue 3: p. 329Bonus 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

  33. Issue 3: p. 330Bonus 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

  34. Issue 4 pp. 330-332Cost 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

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

  36. Issue 4 pp. 332-333Cost Recovery - Hoop Structure Example 10.6: 3 identical hoop structures • To store grain: argue grain bin (7 yr)? • To house dairy goats: argue single-purposes (10 yr)? • To store farm equipment: 20 year – general purposes farm building

  37. Issue 4 p. 333Cost 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: • Listed property used ≤ 50% in T or B • With election out of UNICAP (other required ADS usage – p. 333)

  38. Issue 4 pp. 333-334Cost 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.

  39. Issue 4 p. 334Cost 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

  40. Issue 4 p. 334Cost Recovery - Hoop Structure Example 10.8 Depreciation Methods • Not subject to UNICAP • MACRS options - hoop structure for storing machinery • 150% DB; 20-year recovery period • SL; 20-year recovery period • SL; 25-year recovery period

  41. Issue 4 pp. 334-335Cost 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 • Single purpose livestock and horticultural structures • Hoop structure, as a building, not eligible

  42. Issue 4 p. 336Cost 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

  43. Issue 4 p. 337Cost 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

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

  45. Issue 4 pp. 337-338 Cost Recovery - Hoop Structure Example 10.11 Hoop Depreciation Purchase price $125,000 Bonus depreciation $62,500 MACRS depreciation 4,688 Total depreciation $67,188

  46. 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

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

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

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

  50. Issue 5: pp. 342-344CRP Payments Example 10.12 No SS benefits • Schedule F profits $275,000 • CRP payments $22,000 • SE tax $22,059 • Additional Medicare tax $486 • Figures 10.7 and 10.8

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