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Agricultural IssuesChapter 9 pp. 301-347
2015 National IncomeTax Workbook™
Issues pp. 302-347
1. Livestock Transactions
2. Form 1099-MISC
3. Net Investment Income Tax
4. Inherited Property
5. Oil and Gas Payments and Deductions
6. Repairs
7. Revoking a CCC Loan Election
8. Marketing Gain on CCC Loans
Issue 1: Livestock Transactionspp. 302-315
Livestock acquisition Livestock sales Casualty gain or loss
Livestock acquisition p. 302
Reason for acquiring determines treatment Example 9.1: Purchased for resale
Sale price $13,000
Purchase price - 8,000
Gain $ 5,000
Depreciation pp. 302-303
Depreciation begins when first placed in service for intended use
Immature livestock IRS says When draft animals can be worked When dairy animals can be milked When breeding animals can bred
Taxpayers could argue when dairy animals can be bred
Example 9.2: Placed in Servicepp. 303-304
Purchased 15 heifers in 2014 for $22,500 Bred the heifers in May 2015
Cost $22,500
50% AFYD*- 11,250
Depreciable basis $ 11,250
MACRS rate × 15%
Cost recovery $ 1,688
Livestock sales pp. 304-307
Purpose for holding livestock determines where a sale is reported.Held for sale: Schedule F (Form 1040)Dairy, breeding, sport, or draft: Form 4797
< 12 (24) months: Form 4797, Part II > 12 (24) months:
• Depreciated: Form 4797, Part III
• Not depreciated: Form 4797, Part I
Example 9.3: Dairy livestockpp. 304-307
Calves held for sale $12,150
Raised cows $48,600
Purchased cows $ 6,800
Culled heifers $8,500
Schedule F, line 2: 12,150
Form 4797, line 2: 48,600
Form 4797, line 10: 8,500
Form 4797p. 307
Line 20 6,800
Line 21 15,000
Line 22 15,000
Line 23 0
Line 24 6,800
Line 25a 15,000
Line 25b, 30, 31, 13 6,800
Casualty gain or losspp. 307-315
Dairy, breeding, sport, or draft livestock is treated the same as other trade or business property:Loss is decrease in FMV (limited to basis)Gain is insurance or government payments in excess of basis
Example 9.4: Dairy Livestockpp. 307-310
Cost FMV Insur. Basis
2 raised cows 0 2,200 2,000 0
Purchased cow 2,100 1,100 1,000 0
Purchased cow 2,100 1,100 1,000 1,062
Form 4684p. 308
A B C
Line 20 1,062
Line 21 2,000 1,000 1,000
Line 22 2,000 1,000
Line 23 1,100
Line 24 0
Line 25 1,100
Line 26 1,062
Lines 27 & 28 62
I.R.C. § 1231 Netting p. 310
Net casualty gains are netted with other I.R.C. § 1231 gains (unless they are deferred)
Net casualty losses are ordinary deduction
Example 9.5: Casualty gain deferred pp. 310-311
Insurance proceeds received $3,000
Adjusted tax basis - 0
Gain realized $3,000
Gain deferred - 3,000
Gain recognized $ 0
Cost of replacement property $4,500
Gain deferred - 3,000
Basis of replacement property $1,500
Property held for sale p. 312
Generally, no special tax treatment of involuntary conversionReimbursements reported on Schedule FUsually no gain or loss items have zero basis
Weather-related provisionspp. 312-314
Two provisionsInvoluntary conversion (applies only to draft, breeding, or dairy animals)1-year postponement of gain (applies to all livestock)
Involuntary Conversionpp. 312-313
Sale must be due to weather conditions (disaster declaration is not required)
Replaced within 2 years New livestock used for same purpose
(breeding, dairy, or draft) Applies only to sales in excess of normal Must attach a statement to tax return
1-year deferralp. 313
Must be disaster declaration Applies only to sales in excess of normal Must attach statement to tax return
Livestock deaths due to disease pp. 314-315
Not a casualty because not sudden It is an involuntary conversion Section 1231 property gain or loss is
netted with other section 1231 gains and losses
Reported on Schedule F or Form 4797
Issue 2: Form 1099-Miscpp. 315-317
Taxpayers must issue Form 1099-MISC to vendors whom they pay $600 or more for Rent Services
Exception for corporations other than Attorneys fees Veterinarians
Reconciling Forms 1099-MISC to tax return pp. 316-317
Taxpayers should report amounts reported on Forms 1099 they receive where IRS expects to see it or get corrected Form 1099
Example 9.6:
Form 1099-PATR $952
IRS expects to see it on Sch. F
Interest was deducted on Sch. E
Example 9.7: Triple net leasepp. 316-317
Mortgage interest $ 6,500
Mortgage principal 13,500
Property taxes 7,500
Insurance 2,500
Total deemed payments $30,000
Issue 3: Net Investment Incomepp. 317-319
Active farmers are not subject to NIIT on Operating income Gain on sale of assets used in farming
NIIT is 3.8% of lesser of Net investment income Excess MAGI
MAGI Thresholds for NIITp. 317
Investment income p. 317
Gross income from interest; dividends; net capital gains; rental and royalty income; nonqualified annuities; and
Income from businesses that are involved in trading of financial instruments
or commodities passive activities for the taxpayer
Not investment income p. 317
wages; unemployment compensation; operating income from a nonpassive business; social security benefits; alimony; tax exempt interest; self-employment (SE) income; Alaska Permanent Fund dividends; and Distributions from retirement plans
Farms in transitionpp. 318-319
Income from payments received during farm transition may be net investment incomeExample 9.8: renting to LLC
Under self-rental rule, rent and gain on sale are not net investment income
Example 9.9: not materially participatingExample 9.10: sale of assets
Issue 4: Inherited Propertypp. 319-320
Basis of inherited property is adjusted to the value on the date of death or alternate valuation date
Automatic long-term capital gain holding period
Exception: income in respect of a decedent (IRD)
Example 9.11: Growing crops pp. 319-320
Issue 5: Oil and Gas Payments and Deductions pp. 321-328
Transfers of Mineral Rights (sale or lease) Damage Payments Advance Royalty Payments Oil and Gas Depletion Pipeline Right-of-Way Easements
Transfers of Mineral Rightspp. 321-322
Sale of mineral rights Section 1231 gain or loss Landowner must prove cost basis or
inherited basis Lease of mineral rights
Landowner reports payments on Schedule E (Form 1040)
Damage Payments pp. 322-323
Payments for crops go to owner of the crops Reported on Sch. F or Form 4835
Payments for damage to land or timber reduce basis Excess over basis is reported on Form 4797
or Form 8949
Advance Royalty Paymentsp. 323
Ordinary incomeTo extent of actual production, claim greater of percentage or cost depletionFor remaining payment, claim cost depletion
Oil and Gas Depletionpp. 323-327
Owners of an economic interest in oil or gas can claim a depletion deduction to recover their capital investment in amount sold or consumed. The deduction is greater of:Cost depletion, orPercentage depletion
Cost depletion pp. 324-325
Estimate reserves Divide adjusted depletable basis by
remaining oil or gas to get unit cost Multiply unit cost by number of units sold
to get cost depletion deduction
Example 9.15 p. 325
Adjusted basis $22,000
Barrels sold 5,000
Barrels remaining 35,000
Percentage depletionpp. 325-326
Allowed even if basis is zero Generally, 15% of gross income Cumulative percentage depletion for all of
the taxpayer’s properties is limited to his or her taxable income from all sources
Gross income p. 325
Normally, royalty payment Does not include
lease bonus or advance royalty payable without regard to production
delay rental payments and most land damage payments
Taxable income from the property p. 325
Gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to the mining processes, including mining transportation (gross income for most landowners)
Taxable income form all sources pp. 325-326
Percentage depletion deduction for all properties may not exceed 65% adjusted taxable income from all sources for the year
Adjustments net operating loss carrybacks; capital loss carrybacks; percentage depletion; and distributions to trust beneficiaries.
Example 9.20 p. 326
Gross income $55,000
Royalty check (taxable income limit) $51,700
Adjusted taxable income $120,000
Percentage depletion (15% of $55,000) $8,250
Gross income limit ($120,000 × 65%) $78,000
Remaining basis ($22,000 - $8,250) $13,750
Pipeline Right-of-WayEasements pp. 327-328
Perpetual easement: right to lay, construct, operate, maintain, inspect, remove, alter, abandon in place, replace, relocate, and reconstruct a pipeline
Temporary easement: during construction: rental income on Schedule E (Form 1040)
Crop damage proceeds: ordinary income on Schedule F (Form 1040) or Form 4836
Perpetual Easement Issuespp. 327-328
Payment for easement reduces basis in land affected by the easement
Payment in excess of basis is section 1231 gain
Issue 6: Repairs pp. 328-335
T.D. 9636: Amounts paid may be:Currently deductible orCapitalized
De Minimis Safe Harborp. 328
Economic useful life < 12 months, or Cost < an amount specified by the
taxpayer ($500 or $5,000 limit)
De Minimis Safe Harborp. 329
Must deduct amounts paid that are in the safe harbor
If the cost of property was deducted under the safe harbor, gain on disposition of the property is ordinary income
Example 9.22: Accounting Procedure pp. 329-330
Accounting procedure says < $400 Elected safe harbor $350 power washer must be deducted
Q&A #1: Change in accounting procedure does not require Form 3115
Example 9.22: Accounting Procedure p. 329
Q&A #2: 10 heifers @ $400: must deduct
7 heifers @ $450: must capitalize
Example 9.22: Accounting Procedure p. 330
Q&A #3: Accounting procedure says < $600$550 compressor is not in the safe harbor
Example 9.23: AFS pp. 330-331
Richard has an AFS and qualifies for $5,000 safe harborQ&A #1: Program converts cash basis to accrual basisQ&A #2: Cannot choose to capitalize 20 heifers on his tax return
Example 9.23: AFS pp. 330-331
Richard has an AFS and qualifies for $5,000 safe harborQ #3: Chooses to capitalize 20 heifers when he submits a financial statement to his bankA #3: IRS could use anti-abuse authority to deny $100,000 deduction
Improvements to Propertypp. 331-334
Amount paid is an improvement if it:Results in a bettermentRestores the propertyAdapts the property
Example 9.24: Combinepp. 331-332
Deducted all $150,000 under IRC § 179 in 2012
FMV in 2015 is $70,000 Paid $10,000 to overhaul engine
Q&A #1:
Example 9.24: Combinepp. 331-332
Q&A #1:Combine is the unit of propertyOverhaul is not an improvementTherefore, $10,000 can be deducted
Example 9.24: Combinepp. 331-332
Q&A #2: Safe harbor election does not prevent deduction
Q&A #3: Prior year determination does not bind current year
Q&A #4: Form 3115 is not required
Example 9.24: Combine p. 332
Q&A #5: Corn header is the unit of property. Cost must be capitalized
Q&A #6: New snapping rollers are not an improvement
Example 9.25: Replacement tractor tires p. 332
Depreciated original tires as part of tractor
Unit of property is the tractor Replacement tires do not improve the
tractor Therefore, $12,000 can be deducted
Example 9.26: Restored tractor p. 333
Inoperable tractor New tires are part of restoration cost $2,500 must be capitalized
Example 9.27: Barn roofpp. 333-334
$3,500 to replace cupolas Barn cost $200,000 Average annual gross receipts are
$300,000
Cherry can deduct $3,500 under the small taxpayer safe harbor
Example 9.27: Barn roofp. 333
Q&A #1: Also paid $5,000 to paint the barnCannot use the small business safe harborCupolas are not a significant portion of the roofPaint is not an improvement
Example 9.27: Barn roofp. 333
Q&A #2: Elected partial disposition of building and deducted adjusted basis of cupolas as a lossMust capitalize cost of new cupolasCan deduct cost of removing old cupolas
Example 9.27: Barn roofp. 334
Q&A #3: Replaced entire roofMust capitalize cost of new roofPartial disposition election does not negatively affect treatment of new roof
Prepaid Expensespp. 334-335
Prior rules are still in place:Generally taxpayers must keep an inventory [Treas. Reg. § 1.471-1]Generally, taxpayers must use accrual accounting[Treas. Reg. § 1.446-1(c)(2(i)]
Exceptions for farmers p. 334
Treas. Reg. § 1.471-6(a) Rev. Proc. 2001-10 Rev. Proc. 2002-28
Limitations on Deducting Prepaid Expenses pp. 334-335
IRC § 464 Rev. Rul. 79-229
Repair regulations leave these rules in place.
Example 9.29: Qualified farm related taxpayer p. 335
$180,000 of current deductible expenses $100,000 of prepaid expenses
No IRC § 464 limit
Issue 2: Revoking a CCC Loan Election pp. 335-345
Rev. Proc. 2002-9 gives automatic consent to revoking election to treat
loan as income.
Effect of Election pp. 336-340
Example 9.3075,000 bushels of wheat$150,000 loanMade section 77 electionReport on line 5a of Sch. F
Example 9.31: No section 77 election
Market Price > Loan Ratepp.336-338
Farmer will choose to repay the loan and sell the commodity
Tax consequences depend on treatment of the loan
Example 9.32: Section 77 election and sale p. 337
Schedule F (Form 1040) Line 1a 262,000 Line 1b 150,000 Line 1c 112,000 Line 5a 150,000 Line 21b 1,200
Market Price < Loan Ratepp.338-340
Farmer will choose to redeem the commodity by paying the posted county price
Farmer reports gain or loss from sale in the year the commodity is sold
Example 9.34: Section 77 election, redeemed pp. 338-339
75,000 bushels of wheat $150,000 loan Made section 77 election Redeemed for $135,000 Sold for $142,500 Form CCC-1099-G reports $15,000
Example 9.34: Section 77 election, commodity redeemed pp. 338-339
Schedule F (Form 1040) Line 1a 142,500 Line 1b 135,000 Line 1c 7,500 Line 4a 15,000 Line 5a 150,000
Example 9.35: No election, commodity redeemed p. 339
Schedule F (Form 1040)
Line 2 142,500
Line 4a&b 15,000 15,000
Loan Deficiency Paymentp. 340
Farmers can choose to receive
a payment equal to the difference
between the loan rate and the PCP
Example 9.36: Loan deficiency payment p. 340
Loan rate $2.00/bu.
PCP $1.80/bu.
LDP $15,000
Sale price $142,500
Example 9.36: Loan deficiency payment p. 340
Schedule F (Form 1040)
Line 2 142,500
Line 4a&b 15,000 15,000
Changing the Electionpp. 340-345
Automatic consent File Form 3115 with return File signed Ogden office copy No user fee
Cut-off basis No adjustments for prior years
Issue 8: Marketing Loan Gainp. 346-347
Taxpayers who report
CCC loan as income
reduce basis of commodity
by the amount of the
loan that is not paid.
Example 9.39: Marketing Loan Gain pp. 346-347
CCC loan $100,000Paid off loan - 92,500
Market gain$ 7,500Sold corn $103,000
Basis - 92,500Gain on corn $ 10,500
Questions?