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Taxation

Some Farm Families are Underpaying Their Self-Employment Tax
Gary J. Hoff
ALTB_08-01, January 2008
 

Abstract

If both husband and wife are receiving USDA farm program payments they may be underpaying their self-employment tax. Except for crop share landlords, a participant must actively participate in the farming operation to qualify for payments. This means each person also is liable for self-employment tax on the profits created by the farming operation.
 
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Self Employment Tax Treatment of CRP Payments
Gary J. Hoff
ALTB_07-08, November 2007
 

Abstract

As the end of 2007 nears, farmers may be able to save thousands of dollars of federal income tax or self employment tax with adequate planning. In this article Gary Hoff describes some of the possible areas for tax saving.
 
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Yearend Farm Tax Planning Considerations
Gary J. Hoff
ALTB_07-07, November 2007
 

Abstract

As the end of 2007 nears, farmers may be able to save thousands of dollars of federal income tax or self employment tax with adequate planning. In this article Gary Hoff describes some of the possible areas for tax saving.
 
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Conservation Easements: Act Quickly to Take Advantage of 2006 Tax Law
Paul Queck and Gary J. Hoff
ALTB_07-06, August 2007
 

Abstract

Farmers and ranchers can protect their land from urban sprawl and qualify for an enhanced federal tax deduction. However, they must act quickly as the federal law granting the enhanced deduction is set to expire December 31, 2007.
 
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Tax Reporting of Alcohol Credit Pass-Through from Cooperative
Gary Hoff
ALTB_07-02, February 2007
 

Abstract

Investors in limited liability companies and members of cooperatives with ethanol plants may receive various tax forms reporting income and losses, and credits. This article describes the tax consequences of the ethanol-related income, losses, and credits reported to investors and co-op members.
 
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Tax Reporting of Crop Insurance Payments
Gary Hoff
ALTB_05-01, September 2005
 

Abstract

Congress recognized the unpredictability of the weather and its effect on farm income many years ago. Consequently, it developed crop insurance programs and special federal income tax provisions to help farmers survive financially in times of drought and flooding.
 
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Charitable Contributions of Commodities
Gary Hoff
ALTB_04-08, March 2004
 

Abstract

For some farmers, making a charitable contribution in kind, rather than cash can increase the tax benefit of the gift. The tax consequences of the gift differs depending on whether the donor is an active farmer or a landlord.
 
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Self Employment Tax on Rented Farmland
Gary Hoff
ALTB_04-07, March 2004
 

Abstract

IRS has challenged taxpayers regarding whether rental payments for land paid to an owner who materially participates in farming the rented land is liable for self employment (SE) tax. The Courts have agreed with IRS in a number of cases. However, the Eight Circuit overruled the IRS on appeal. Relying on this successful appeal, taxpayers who did not recognize SE tax liability had an argument to avoid a negligence penalty. In 2003, IRS issued an official non-acquiescence statement regarding the appeal, making the possibility of penalties more probable for both taxpayers and tax professionals.
 
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Self Employment Tax on CRP Payments
Gary Hoff
ALTB_04-06, March 2004
 

Abstract

On June 23, 2003, IRS released a Chief Counsel’s letter ruling on the taxability of CRP payments for self-employment tax purposes. The ruling changes the way many taxpayers will handle these payments.
 
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Agricultural Labor Taxation
Gary Hoff
ALTB_04-05, March 2004
 

Abstract

Some laws regarding payroll taxes for agricultural labor are different than those for other types of businesses. The following will explain these differences so a farmer can report his farm labor correctly. This article covers major differences but is not intended to be complete or to cover state law.
 
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Taxation of Commodity Credit Loans
Gary Hoff
ALTB_04-04, March 2004
 

Abstract

In early 2002, the IRS issued a Revenue Procedure that allows a change in reporting methods from treating CCC loans as income to reporting CCC loans as loans. Rev. Proc. 2002-9, I.R.B. 2002-3. Under the procedure, a taxpayer who has been reporting CCC loans as loans may shift at any time to reporting CCC loans as income.

Effective for taxable years ending on or after December 31, 2001, a taxpayer reporting CCC loans as income can switch automatically to treating CCC loans as loans. For the year of change, all loans that year are reported as loans.

Loans taken out previously continue to be treated as if the election to report loans as income is still in effect. As the 2002 guidance states, the change is made on a “cut-off” basis.

The change can be very helpful for those wishing to revert back to treating CCC loans as loans late in the taxable year.

 
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Combing the 30%/50% Special Depreciation Allowance with the IRC §179 Expensing Allowance
Gary Hoff
ALTB_04-03, March 2004
 

Abstract

For taxpayers who make qualifying purchases, it is possible to use both the §179 expensing deduction and the special depreciation allowance (SDA). This article discusses some limitations and shows examples of how this can maximize tax depreciation, with a special focus on agricultural applications.
 
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New 50% Special Depreciation Allowance
Gary Hoff
ALTB_04-02, March 2004
 

Abstract

When Congress enacted the Job Creation and Worker Assistance Act of 2002 (JCWAA), they made one of the largest changes to the depreciation rules since 1986. This change allowed taxpayers who purchased qualified, first-use assets to deduct 30% of their cost in the first year. As a part of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), Congress made an even larger change to the depreciation rules. JGTRRA allows taxpayers to claim a first year deduction of 50% of the cost of qualified assets. The basic rules governing the 30%/50% deduction are discussed in this article using primarily agricultural examples.
 
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Internal Revenue Code §179 Expensing
Gary Hoff
ALTB_04-01, March 2004
 

Abstract

Taxpayers who have a farm or business have been allowed to claim a first year tax deduction up to $24,000 on qualifying purchases, e.g., of machinery and equipment. This deduction reduces the basis in the asset for purposes of regular depreciation. The Jobs and Growth Tax Relief Reconciliation Act of 2003 increased this deduction to $100,000 for tax years 2003 - 2005. The deductions will be reduced to $25,000 in 2006. The rules governing §179 are discussed in this article, using primarily agricultural examples.
 
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Pine Creek farms, Ltd. V. Commissioner [§§1221 and 6662] (losses on the sale of futures were capital losses since taxpayer was not sufficiently engaged in hog farming)
ALTB_02-09, 2002
 

Abstract

Taxpayer raised corn, soybeans, and cattle and used its corn and soybean crops either to feed its cattle, which it raises and markets, or to sell to two other corporations, which have a common shareholder with taxpayer. One of these corporations raised piglets and sold them to the other corporation, which raised them to maturity and sold them at market. Taxpayer also sold grain to the other two corporations to feed the pigs. Prior to incorporating, the common shareholder had a commodities hedging account, which was transferred to taxpayer. The other two corporations did not have a commodities account; however, the common shareholder claimed that he maintained one account for all three corporations to simplify the record keeping and tax reporting. Taxpayer was involved in numerous futures transactions for corn, soybeans, cattle, and hogs and deducted the hedging expenses as an ordinary loss. The IRS disallowed the losses related to hog futures on grounds that taxpayer was not engaged in the production of hogs.
 
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Estate of Rosano v. Commissioner [I. R. C. §§2033, 2503, and 2511] (checks written by decedent but not yet paid until after death were not completed gifts)
ALTB_02-08, 2002
 

Abstract

Decedent attempted to decrease the amount of money in her taxable estate by making gifts of less than $10,000 to numerous relatives and friends. Decedent wrote checks to relatives and friends, but the checks were not paid until after her death. The executor did not include the amount of the checks in the value of the estate. The IRS determined that the checks should be included in the value of the estate and determined a deficiency in the estate tax liability. The District Court agreed with the IRS.
 
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Knight v. Commissioner [I. R. C. §§2511,2512, and 2704] (Tax Court found family limited partnerships valid, but reduced the discounts allowed to value the interests)
ALTB_02-07, 2002
 

Abstract

Taxpayers owned a family ranch and two homes in which their son and daughter lived without paying rent. Taxpayers formed a family limited partnership (FLP) and conveyed the ranch, the two homes, and other investment assets to it. The fair market value of the FLP assets on the date the assets were transferred was approximately $2 million. Taxpayers established trusts for the son and daughter and gave interests in the FLP to each trust. Taxpayers filed federal gift transfer tax returns for the year of the transfers and reported a gift of 22.3% interest in the FLP to each child’s trust.
 
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T.D. 8905 (final regulations outlining the due diligence requirements for tax preparers regarding EIC)
ALTB_02-06, 2002
 

Abstract

The IRS has issued final regulations, Treas. Reg. §1.6695-2, relating to due diligence requirements under I.R.C. §6695(g) for paid preparer of federal income tax returns or claims for refund involving the earned income credit (EIC), reflecting the changes made by the Taxpayer Relief Act of 1997.
 
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Haeder v. Commissioner [I.R.C. §§61,74,162,166,274,408,6651 and 6662] (taxpayer failed to show that his wife provided services as an employee)
ALTB_02-05, 2002
 

Abstract

Taxpayer, a sole-proprietor attorney, deducted wages that he claimed were paid to his wife for services performed for his legal practice and amounts for a medical reimbursement plan on his Schedule C (Form 1040). The amounts deducted as wages were transferred into wife’s IRA account and deducted as IRA contributions on taxpayers’ jointly filed tax returns. The IRS disallowed the wage deductions, IRA contributions, medical plan expenses, legal and professional fees, travel, entertainment, bad debt deduction, and repairs to an Oriental rug. The IRS also determined that the taxpayers failed to report prize income and additional business income, but the taxpayers overstated their dividend income. The IRS imposed penalties for failure to file and understatement of taxes.
 
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Patton v. Commissioner [I.R.C. §55] (§179 expensing election cannot be changed after tax return filing)
ALTB_02-04, 2002
 

Abstract

The taxpayer, a self-employed welder, reported a business loss for 1995 and was unable to benefit from his §179 election to expense a $4,100 asset. On audit, the IRS determined that due to unreported income the business actually earned a profit. The IRS also recharacterized as depreciable assets three items that taxpayer had expensed as materials and supplies. The IRS denied the taxpayer’s request to revoke, amend, or modify his I.R.C. §179 election to expense the three assets.
 
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Ward Ag Products, Inc. v. Commissioner [I.R.C.§§446, 448 and 471 (farm supply business required to use accrual method of accounting
ALTB_02-03, 2002
 

Abstract

Taxpayer sold seeds, herbicides, fertilizers, and pesticides to local farmers, and the owner provided advice and some financial assistance to the taxpayer’s customers. Taxpayer used the cash method of accounting for the years at issue. The IRS determined that the taxpayer was required to use the accrual method of accounting and, accordingly, assessed tax deficiencies for the 1990 and 1992. The Tax Court held that the taxpayer must use the accrual method of accounting since the taxpayer’s purchase and sale of merchandise was a material income-producing factor and the taxpayer did not qualify as a farmer for purposes of using the cash method of accounting. The Tax Court further held that the IRS’s determination was not an abuse of discretion.
 
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Seggerman Farms, Inc. v. Commissioner (recognition of gain when liabilities exceed basis of assets on incorporation)
ALTB_02-02, 2002
 

Abstract

The taxpayers incorporated their family farming business, which had previously been operated as a joint venture. As part of the incorporation, various farm assets were transferred to the corporation. The corporation assumed the farm liabilities, and some of the property was transferred subject to liability. The adjusted basis of the assets was less than the liabilities assumed plus the amount of liabilities to which property was subject. However, the taxpayers were personally liable for all the debt before and after the incorporation.
 
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Substantial authority and Judicial System for Tax Disputes (effect of rulings and cases interpretation of tax laws)
ALTB_02-01, 2002
 

Abstract

If there is substantial authority for a position taken on a tax return, neither the taxpayer nor the tax preparer will be subject to the penalty for underreporting income even if the IRS successfully challenges the position taken on the return. By contrast, if there is not substantial authority for a position taken on a tax return, the underreporting penalties may be imposed unless the position has been adequately disclosed and there is a reasonable basis for the position.
 
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Shared Appreciation Agreements
ALTB_01-16, 2001
 

Abstract

Certain farmers who had Farm Service Agency (FSA) loans were eligible for a write-down of the loan if they met certain criteria. As a condition of the write-down, the FSA is allowed to require the farmer to enter into a shared-appreciation agreement. This agreement obligates the farmer to repay part or all of the debt if the land appreciates in value from the time the debt is restructured until a trigger event occurs. This material discusses the tax consequences of the write-down and the recapture.
 
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Self-Rental Rule
ALTB_01-15, 2001
 

Abstract

The IRS regulation on self-rental provides that when a taxpayer rents property to his or her own business, the rental profit is not treated as passive activity income. This means it can not be used to offset passive activity losses. This material has examples illustrating the concept of the regulation and lists recent court cases affirming the regulation.
 
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Reverse Exchanges
ALTB_01-14, 2001
 

Abstract

IRS has issued a Rev. Proc. that provides a “safe-harbor” for acquisitions of property on or after September 15, 2000. If followed, the acquisition of the property will qualify for like-kind treatment. This material charts out the procedures required.
 
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Recapture of §179 deductions
ALTB_01-13, 2001
 

Abstract

The §179 expense deduction is recaptured when the business use of the qualifying property drops to 50% or less. The material discusses how to compute the recapture amount and where to claim it on the tax return.
 
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Prepaid Expenses
ALTB_01-12, 2001
 

Abstract

While the rules for deducting prepaid farm expenses have not changed, the IRS is taking a closer look at the deduction in recent audits. This material discusses the general rules that make the expenses eligible for a current deduction.
 
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McNamara v. Commissioner
ALTB_01-10, 2001
 

Abstract

The IRS has held that partners or shareholders that own land outside of the partnership or corporation they own and operate are subject to self-employment tax on the rents they receive from that same partnership or corporation. The issue is that they are continuing to farm the land the same as if they were farming it as a sole proprietor. The Tax Court has agreed with the IRS. The Eighth Circuit has reversed and remanded the Tax Court decision and has given the IRS an opportunity to show a connection between the rents and the production arrangement. This material discusses the facts of the cases.
 
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Like Kind Exchange
ALTB_01-09, 2001
 

Abstract

Effective for 2000 tax returns IRS Notice 2000-4 sets out the procedures for claiming depreciation on property received in a like-kind exchange. No longer does the taxpayer add the unrecovered cost of the traded property to the cash paid for the newly acquired property. The traded asset continues to depreciate at its existing rate and the cash paid for the new property is depreciated in accordance with current depreciation rules. At the time the asset is sold the gain attributable to depreciation recapture is treated as ordinary income. This material steps the reader through the recapture computation.
 
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§179 Expense Election
ALTB_01-08, 2001
 

Abstract

The §179 expensing election is increased to $24,000 in 2001. This material discusses the basic rules that qualify property for the election.
 
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Contingent Attorney Fees
ALTB_01-07, 2001
 

Abstract

Court cases determining whether contingent attorney fees are includible in gross income differ in various jurisdictions. The inclusion can add substantial taxes to the taxpayer. This material discusses the tax consequences and lists which jurisdictions have ruled in favor of inclusion and which for exclusion.
 
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Capital Gains
ALTB_01-06, 2001
 

Abstract

The new 8% capital gain tax bracket is available to taxpayers that are in the 15% tax bracket in 2001 and have held the capital gain assets more than five years. An 18% capital gain rate will be available to taxpayers in 2006 that have sold assets purchased in 2001 or later and held for more than five years. Taxpayers who owned property prior to 2001 may make an election in 2001 to begin the five year holding period. This is treated as an elective sale and will begin the new holding period. The difference between the FMV on the date of election and the original basis will be reported as income in the year of the election. This material discusses the procedures to be taken if the taxpayer desires to make the election.
 
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Self-Employment Tax on Rental and CRP Land
ALTB_01-05, 2001
 

Abstract

The issue of whether CRP payments and land rental payments are treated as self-employment income is discussed in this section. For several years, the IRS position was that CRP payments were self-employment income if the land owner was a materially participating farmer. In a 1998 case, Wuebker v Commissioner, 110 T.C. No. 31, the Tax Court agreed with the taxpayer that the payments were not self-employment income even when the taxpayer was a materially participating farmer. The 6th Circuit has reversed the decision of the Tax Court and held the CRP payments are self-employment income if made to a materially participating farmer. Taxpayers who filed amended returns to comply with the Tax Court decision are now faced with the question of whether to file a second amended return.

There has also been disagreement whether cash rental payments are self-employment income where the land owner materially participates in the crop production. The Eighth Circuit has overruled the Tax Court and returned the case to the IRS. Taxpayers in that Circuit are not held to the Tax Court decision. This material discusses the facts of both the CPR and land rental cases. It gives suggestions on how these issues should be addressed on currently filed tax returns.

 
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Offer in Compromise
ALTB_01-04, 2001
 

Abstract

In an effort to resolve outstanding taxpayer liability issues, IRS has modified the Offer in Compromise procedures. The IRS may legally compromise a portion of the tax liability if there is doubt as to liability, doubt as to collectibility or for effective tax administration. Effective tax administration means that the collection of the tax would create an economic hardship or would be unfair or inequitable. This material gives the reader an overview of where to begin with the offer in compromise procedure.
 
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Commodity Credit Loan
ALTB_01-03, 2001
 

Abstract

The rules relating to the taxation of CCC loan proceeds have not changed. They may still be treated as income in the year received or treated as a loan. There have been some recent IRS examination adjustments regarding CCC loans. The rules and the adjustments are discussed in this section.
 
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Economic Growth and Tax Relief Act of 2001
ALTB_01-02, 2001
 

Abstract

The Economic Growth and Tax Relief Act of 2001, Public Law No: 107-16, became law on June 7, 2001. Provided below are links to a summary of the legislation, the text of the legislation, the Conference Report, and a private sector newsletter noting highlights of the new law.
 
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Like-Kind Exchange of Conservation Easements
ALTB_00-08, 2000
 

Abstract

With the increasing interest in preserving open space, conservation easements are becoming more popular. If certain requirements are met, the owner can make a like-kind exchange for additional land. The requirements are listed in this excerpt.
 
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Correcting Erroneous Depreciation
ALTB_00-07, 2000
 

Abstract

Mistakes are common in depreciation calculations. Prior errors can be corrected on a current return if certain rules are followed. The correction procedures and examples are shown in this excerpt.
 
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Considerations for the Buyers and Sellers of a Business
ALTB_00-06, 2000
 

Abstract

The purchase or sale of a business has distinct tax considerations that differ depending on the type of business entity. This material lists some considerations for the buyers and sellers of the business.
 
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Filing Requirements for Partnerships and LLCs that the Are Taxed as that Partnerships
ALTB_00-05, 2000
 

Abstract

This material discusses the filing requirement for partnerships and LLCs that are taxed as partnerships. It defines those entities that are excluded from the partnership rules and discusses. how and when to make the election
 
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Family Limited Partnerships
ALTB_00-04, 2000
 

Abstract

A family limited partnership is a very attractive estate-planning tool because it permits a parent to significantly discount the value of gifts to children.Ý This material discusses the advantages and disadvantages of forming a family limited partnership.
 
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Income Tax Consequences of Changing Business Entity
ALTB_00-03, 2000
 

Abstract

Current businesses may consider changing their type of entity for a number of reasons. It is very important that they consider the tax consequences of making the change. This material discusses the various types of change and what tax liability can be expected.
 
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Disclosing Gifts on Gift Tax Returns
ALTB_00-02, 2000
 

Abstract

Taxpayers will want to file gift tax returns to report all gifts made, even if they are under the required filing limit. A section of the Taxpayer Relief Act of 1997 provides that when a gift tax return is filed, the IRS may not challenge the value of the gift if the statute of limitations has run. This material discusses the law, lists the disclosure rules and gives examples on how to file the appropriate tax returns.
 
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Abusive Trust Schemes
ALTB_00-01, 2000
 

Abstract

This material defines the basic format of trusts. It also discusses why some trusts are abusive and why the Internal Revenue Service has targeted them with audits
 
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