In Iowa, the government is preparing to fix some problems with matching federal depreciation rules, with taxing of grants that the federal government did not tax as part of Covid relief, and some new rules on PPP loan and Beginning Farmer Tax Credit. Additionally, inheritance tax (tax Iowa imposes on people that inherit property from people that they are not direct descendants) is on its way out the door through a phase out between now and 2025. That is a tax on circumstance, as many times nephews and nieces are the next generation of farm owners and this will remove a financial obstacle for nontraditional farm generational transfers. If you are in line to get Great Aunt Gertie’s 160, feed her vitamins for a couple of more years, it’s worth the investment.
On the fed side, the president is laying out his tax and spending priorities. He has already pushed through a Covid 19 Plan called the American Rescue plan and is now moving towards a significant tax hike to fund physical infrastructure spending (the American Jobs Plan and “human infrastructure” (American Families plan). It might be called the make American Taxed Again plan. A great write up of this is found at the Iowa State Center for Ag Law and Taxation. I will hit the highlights. Note this is separate from the Senator Bernie Sanders introduced 99.5 Percent Act. This proposal would lower the basic exclusion to $3.5 million ($1 million for lifetime gifts) and increase the highest estate tax rate from 40 percent to 65 percent.
The Jobs plan looks to increase corporate tax to 28% (from 21%), imposing tax on corporation book income and funding the IRS to beat the countryside for unpaid taxes or reinterpreted tax returns to generate revenue.
The Families plan calls for 2 years of free community college, free universal preschool (which is reported at 4 years of free education occasionally), universal basic income for parents of children, paid FMLA and additional targeted funds to historically black colleges universities, minority serving institutions and tribal colleges (that is higher education sites that where historically operated to serve minorities), increase Pell Grants, money for teachers. The Plan will pay for these largess distributions by “closing loopholes”, increasing IRS audits and crackdowns and changing how long-term assets are taxed. It would increase capital gains rates (which are currently lower than regular income rates) on those who earn over $1,000,000 (to include the sale of the property in that earning), increase taxes on all income over $400,000, increase the individual rates to the 2017 rates, and tax assets at death as if they were sold, regardless of if the asset is actually sold or not.
Some of the things being considered include the elimination or reduction of the 1031 exchange provision that defer capital gains when selling real estate if you buy another piece of real estate, limiting the use of Net operating loss and making some sort of deferral exemption for “family farms” from the pay at death provisions, and increasing funding for everyone’s favorite government agency, the IRS.
Right now, you pay a tax upon the sale of assets that gain in value if you sell them. This is capital gains. If you hold them for more than 1 year it is a lower rate than if you hold them for less than 1 year. Also, you pay a net investment income tax (NIIT) sales of investment assets at 3.8% if your income is above a certain threshold. The difference between current law and the proposal on the sale of 1000 acre Iowa farm that with $6,525 of gain per acre would be an percent increase of the sales price from 17.6% to 36% of the total sales price. If the owners were not active farmers and had rented the farm out for 10 years, then they would be looking at 43.8% of the sales price going to taxes between state and federal tax.
What about the farm equipment Under current law, the value of the equipment that has been depreciated out on tax schedules is taxed at ordinary income rates when it is sold. That makes sense, you took a deduction when you bought it to make income and then if it has any value left when you sell it, that amount is “recaptured”. Under the new laws, because of the increase in the NIIT, too much equipment sales and or equipment sales the same year as the land sale and it will be taxed at 39.6%. Ouch. Don’t forget to hold the grain until another year or that will also be hit at that high rate.
Property transferred at death receives a step up (or step down if things are bad) basis adjustment equal to the date of death value. It’s been that way since 6 years after we started federal taxing folks. The alternatives are carry over basis (meaning that you inherit the cost that grandpa paid as your basis if you ever sell) or now proposed, tax it like it was sold even if it wasn’t. Same thing for donations, if the donation was worth more when donated, pay tax on it like you sold it.
Currently, a beneficiary receives step up to the date of death. Consider this inheritance, Land – 1,000 acres at $7,200 / acre basis, Machinery – $675,000 basis Corn - $500,000 basis which can be sold without paying capital gains at all by the beneficiary. Under the Families plan, if the beneficiary is not farming, this will trigger 30% tax on the land. If they were able to meet the definition of active family this tax is DEFERRRED, not waived and is payable when the family farm is no longer operating the ground. The plan is silent on the corn and machinery in this example. If this was a gift during the farmers lifetime under the Families plan it is not real clear what happens.
As government’s continue to spend away, the lucrative pull of changing acres to residential or commercial taxation over ag will continue to draw the eye of the assessors. Having the old grey mare out back is not going to save you on property taxes like it might once have.
Iowa Administrative Code 701.711.1 classifies property into difference categories and leaves it to the county assessor to apply according to its present use. If you don’t like what the property assessor does on classification (or valuation) you need to appeal in between 2 April and 30 April. This appeal is heard by a county board of review. If you don’t like what that board says, you appeal to the property appeals board. You need to make that decision relatively quickly (20 days after the local board adjourns or 20 June, whichever is later.
In a case out of Dallas County, a 25-acre parcel with two machine sheds, a hay field and two draft horses was not enough to get ag real estate taxation. The board looked at the amount of ag activity occurring on the property and the determined it wasn’t for profit. This was despite the testimony that the draft horses might be bred in the future (one was over 20 years old and the other was less than 5). The baseball field on the property also probably didn’t help sell it as ag.
However, a machine shed used in conjunction with a farm operation in a Humboldt county case, was enough to protect the ag definition, even as the surrounding uses around the farm operation became residential. The farm operator’s intent was important. The court found that determining was it a hobby or was it with profit intent to be critical to the classification.
Having an old swaybacked mare out back is probably not enough to enjoy ag classification, the closer you live to an urban area the more likely it will not be enough. To be fair, I have never been a fan of horses. A college roommate of mine once said the horses went out of style when they perfected the internal combustion engine. That might influence me. Now, as they say on social media, don’t “at me”. Other people are more than welcome to admire, care for and espouse the virtues of horses. That is, unless you can show profit motive with detailed records, business plans, and a clear path that you are engaging in ag, not rural living with out of style animals.
Terms that might be helpful
The trust: A trust is an artificial entity, something like a corporation, created by a document or instrument.
A trust requires four basic elements - trustee, trust property, trust document, and known or discernible beneficiaries. The trust document specifies the rules of operation for the trust, the powers of the trustee, the beneficiaries to share in the income and principal from the trust, and instructions for distribution of the trust property.
Trustee: The person “entrusted” with carrying out the trust plan. The trustee can be the grantor, a third party or a corporate entity (like a bank). All have a duty to be responsible and work for the good of the trust’s plan. Duties include receipt and management of the trust assets, collection of income, accounting, tax reporting and payments, investment and income distributions according to the trust agreement.
Grantor/settlor/Trustor: The person who creates the trust (not the lawyer, the person with the assets”
Beneficiary: The person or entity. who benefits (gets the goods or money) from the trust’s plan. A beneficiary can be the grantor (individual who established the trust), spouse, relatives, friends, churches, and/or charities.
I am a proud former Army member. I understand that it has a vital mission to protect the US, protect our interests abroad and partner with allies to accomplish the same. What I never really considered until I donned the uniform is that US Army engineers have responsibility for some internal issues such as wetland management and certain bodies of water. Specifically, the US Army Corps of Engineers has jurisdiction over some, but not all waters and some, but not all land improvement techniques. Confused yet, you should be.
What makes it even more confusing is that each engineering office has different standards in application. Tellingly, in Iowa, the Rock Island Arsenal Corps of Engineers has a much different view of certain activities that the western Corps of Engineers’ offices have for the same practice.
This is not good for those who are subject to regulation, which can include developers, farmers and sometimes landowners with ambitious pond projects.
Take for example, what kind of mess can happen when the Corps gets involved from this California case. I have referenced it in prior articles but here is a deeper dive.
A California farmer two federal agencies within the U.S. Department of Agriculture (USDA) (i.e. the NRCS and the FSA). That makes sense to most farm operators, they are frequently even co located in the same building. He checked with those agencies and their records to make sure that his future use of the land, wheat farming was suitable. It turns out that the prior landowner had also raised wheat. No problems. It didn’t occur to him to check in with a branch of the military before farming.
Army representative apparently according to the government randomly saw the wheat farm and complained to other members of the government that this field needed and didn’t have a Dredge and fill permit. For using a moldboard plow. Because, for one or two months in a year, the land small ponds that lasted about 60 days. These are called Vernal pools. The Corps claimed they have jurisdiction over them, but they do not. Congress specifically said normal farming operations are exempt from enforcing clean water act rules, which is where the Corps thought they had the power to control farming operations. It during out that a fourth government agency, the EPA, would have been the enforcer but they had not gotten involved.
That was 8 years ago. After 8 years of valiant defense with highly skilled counsel, the financial drain was telling, and the farmer had to settle. He paid $350,000 in fines and gave restrictive easements on the ground he kept. The conservative estimate of what he gave up in value is $1.2 million dollars.
His name is Jack LaPlant. If you seek other articles about him, the fifth government agency (the Department of Justice) is releasing statements painting Jack as an ag developer who wants to destroy the environment. Notice, the articles do not talk about houses, golf courses, helicopter pads, exotic species (not one tiger even), moldboard plowing however was. The DOJ called moldboard plows Earth moving equipment. Those sound a lot like bulldozers and not much like John Deere’s break through device.
As if that wasn’ t enough, the foundation that provided the legal defense noted it its recent article:
“Numerous Army staff testified under oath that they have no clear rule that tells you when they think you need a permit or not, and they won’t even talk to you until you do an expensive and time-consuming hydrologic study of the property and disclose everything that has been done on the property going back years.”
That didn’t stop the enforcement.
When I write demand letters or what to be a confrontational, I sign letters Govern yourself accordingly or fail not at your peril… both seem appropriate to close this article with if I was working for the government.
Most operations need access to capital to make their operations work and banks generally provide that access. In order to get access to those funds, the banks generally require the operator to give a security interest in the results of the operation (the products), land, and /or equipment, or commodities. This is called giving a security interest or a secured transaction. Simply saying you can take my stuff if I don’t pay isn’t enough. Steps and procedures have to be followed. The first step is connecting the pledged property to the promise to pay via a pledge or attachment. After that, the lender perfects its interest in the attached property by filing with the recorder’s office or Secretary of State or wherever the rules say they should file for the type of property they are attaching to. Usually, this is done with a financing statement, but with title vehicles it means placing a lien on the title and with real estate it means putting a mortgage on the property.
The reason lenders follow these steps is to make sure they are the right place or priority as to who gets paid when the pledged item is sold. The Talladega Nights motto of “if you are not first you are last” isn’t quite right as sometimes, the difference between being second or third priority is the difference between being paid and being left holding an empty promise. Generally, the first to file wins the priority race, with some exceptions.
The two that impact ag the most are purchase money security Interest (PMSI) and Ag Liens.
PMSI changes the first to file wins concept. A PMSI lets the lender jump the line to “super-priority” over other parties claiming an interest in the same collateral covered by the PMSI. Super-priority means the creditor with a PMSI will have first priority over third parties, even when these third parties perfected their interests before the creditor gained the PMSI. In order to be a PMSI, the lender has to give the money to purchase the item and follow the steps to perfect that interest in that item. Example, the local banker lends the operation money to put in the crop and receives a pledge of all farm products and equipment. The operation buys a new tractor mid-year and finances it through the dealership. The dealership’s lending will be first over the local bank as to the tractor it lent money for if it follows the rules to secure the PMSI financing. The PMSI rules require filing within 20 days of the operation taking possession (when it is physically received)
PMSI in livestock is another critter altogether. It requires additional steps, to include actual notice to the local lender who might otherwise be in front of the PMSI lender. The PMSI has to be filed BEFORE the delivery of the livestock. If an operation has a choice on equipment or livestock PMSI financing, the lender is probably doing less to secure its position with equipment PMSI lending.
Ag liens are state rules that trump the normal pecking order of payment. Vet liens, custom harvest and feeding liens and even repair shops that hold onto repaired equipment each have different rules on how to prefect their lien.
As a potential buyer of equipment at a private sale, the operation should do a lien search on the name of the seller (which needs to be searched exactly how the driver’s license appears) and a release should be obtained from any lender that has filed a financing statement. If the operation sees a financing statement that is valid and still wants to purchase the equipment, it should talk to the lender about what it will take to release the specific item being purchased. Oral statement that “my banker doesn’t care” and “I am good for it” are sure ways to line the pockets of your lawyer when the bank comes to take the property that you already paid the seller for once.
Sumner, Iowa Attorney practicing in Iowa primarily in Ag Law, Bankruptcy, Estate Planning, Real Estate Law. Lawyers at the Dillon Law P.C. are dedicated to serving Iowa, including but not limited to the cities of Allison, Charles City, Cresco, Decorah, Des Moines, Dubuque, Elkader, Grundy Center, Independence, Manchester, New Hampton, Waterloo, Waverly, Waukon, West Union & Vinton, and the communities that make up Allamakee, Benton, Black Hawk, Bremer, Buchanan, Butler, Chickasaw, Clayton, Delaware, Dubuque, Fayette, Floyd, Grundy, Howard, Polk, Winneshiek, counties. © 2022 Dillon Law P.C. Sumner Location | 209 E. 1st Street, Sumner, IA 50674 Volga City Location | 502 Washington St, Volga City, IA, 52077. West Union Location | 103 N. Vine Street, West Union, Iowa 52175 West Union, Iowa 52175 We are there most Fridays 10-3 and by appointment. Telephone: (563) 578-1850 Email: firstname.lastname@example.org Home | Attorneys | Blog | Ag Law | Bankruptcy | Estate Planning | Real Estate Law | Contact | Iowa Ag Law Attorney Sumner Taxation Commercial Transactions Production Contracts Labor Hobby Farm Liability Bremer Fayette County Lawyer