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Despite the alarming number reported in the media, Chapter 12 bankruptcy is not on the increase, yet. The reported 75% increase in Chapter 12 Bankruptcy filings was 2 more filings than this time last year. While farm bankruptcy numbers aren’t up, those operating in the shadow of bankruptcy continue grow. The shadows are where things aren’t to litigation yet, but it is clear absent joint action, litigation is likely.

When it is clear that an operation cannot make scheduled payments? It is time to talk to the lender, not on the due date when it is clear that the payment can’t be made. The topics that need to be addressed and considered are

  1. What is the financial condition now and what are its prospects going forward?
  2. What is the physical inventory and value of the assets of the operation with realistic numbers at a liquidation value (understanding that a creditor may apply a 50% or greater discount from what Fair Market Value might be on TractorHouse or BigIron to account for the costs of liquidation)?
  3. What is the tax implication of accelerating sales or the sale of capital assets like equipment and land?
  4. What is broke in the operation or the conditions that lead us here?
  5. What can be fixed in the operation?

Those are the broad-based principles that need to be considered. In the application of these questions, the operation should consider the cash flow for each enterprise (grain, livestock. custom work) and identify what operation is stealing revenue and which ones are generating revenue. Interfamily operations should also be examined. Is the operation subsidizing a brother, a child, a parent’s operation intentionally or unintentionally? Consideration to the impact of missing your payment on their ability to continue is critical.

What is a reasonable ask to the creditor? While it is fact intensive and based on the prior performance of the relationship, creditors can make some concessions where it is appropriate. Things like, removal of delinquency fees and interest, re-amortization of debt over a longer period to reduce payments, foregoing collection activity for a set time period or agreeing to allow another creditor to step in “in front of” the creditor to provide operating capital to generate funds to pay the original creditor are all possibilities.

From the creditor’s prospective, they are concerned about ensuring they have their “ducks” in a row regarding financing documents and once they are secured in that regard, they generally seek the best opportunity to achieve the most recovery in the shortest time possible with the least amount of effort and capital spent to recover the asset. Almost always, the creditor will require a release indicating that the borrower isn’t going to receive concessions from the creditor and then turn around and sue them for violations banking law. This is not an indication that the creditor did something wrong, it’s just a wise business practice. Remembering that it is business and not personal is essential to a successful discussion with the creditor.

You have 100% chance of dying, we all do. Having a discussion while you are able to communicate your wants, needs, and desires with those who might be asked to make those decisions is as important as establishing a succession plan or making sure Aunt Millie’s china never falls into the hands of a Cardinals fan.

Communication about your own desires and what type of medical and emergency treatment you want, can relieve the confusion and anxiety that comes with a medical emergency for both yourself and all involved. Your age when you have this conversation is immaterial. People 18years old-88 years old should be able to discuss their thoughts on life changing events and how they desire them to be handled and who makes those decisions.

According to an AARP Survey, “More than 90 percent of people think that it is important to have conversations about end-of-life care with their loved ones, yet less than 30 percent have done so. Similarly, 70 percent of people say they want to die at home, but in reality, 70 percent die in hospitals or institutions."

Conversations between family members can help individuals understand and participate in the process. It will not be an easy conversation. It should not be started after the plates are cleared and before desert is served at the next family event. Here are some relevant things to kick around and discuss.

  • When you think about the dying because of a terminal illness or slowly progressing issue, what's most important to you? How would you like this phase to be?
  • Do you have any particular concerns about your health?
  • What events do you need to get in order, or talk to your loved ones about? (personal finances, property, relationships)? Who is on the team, CPA, Lawyer, Investment advisor, land manager, real estate agent, etc.?
  • When was the last time the will was reviewed.?
  • Where are your documents to be found? Does somebody know how to get access to them keys, combinations, etc.?
  • Who do you want (or not want) to be involved in your care? Do the health care and general powers of attorney reflect who you want making decisions for you if you cannot?
  • How much deference to doctors do you want given when their recommendation contradicts your earlier directives?
  • Where are the hang fires? I.e. disagreements or family tensions that you're concerned about? If something is brewing, action while you have say in it might be a better course of conduct.
  • Where do you want (or not want) to receive care (Home, nursing facility, hospital)? A nursing home administrator once shared with me that the worst directive is to tell your children you never want to go to a nursing home. The guilt complex it can create on an already stressful time of transition is immense. Everybody would prefer die at home, sometimes that is simply not feasible, practical, or considerate to the members of the family.
  • Are there kinds of treatment you would want (or not want)? (resuscitation if your heart stops, breathing machine, feeding tube). When would it be OK to shift from a focus on curative care to a focus on comfort care alone?

This type of discussion is a gift to give your loved ones and the ones you are asking to make decisions for you when you cannot. It will bring peace of mind and comfort for family to know that the decisions they may have to make are what you would want them to do for you.

Section 179 Tax Deduction

Why does a farm truck have to be so big? So that we can deduct it, that’s why.

The new law changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017

 The following trucks and business vehicles qualify for 100% deduction

  • Vehicles that can seat nine-plus passengers behind the driver’s seat (Hotel / Airport shuttle vans, short buses).
  • Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a cargo van ala the A-Team, not the custom captain’s chairs style aka grandma’s conversion van.
  • Heavy construction equipment will qualify for the Section 179 deduction,
  • Typical “over-the-road” semi Tractors will qualify.

And new rules means that as long as its new to you and not purchased from a relative you can expense it right away.

Notice 4 door pickups and SUVS aren’t on that list. They need be heavy vehicles in order to maximize deduction opportunities Over 6,000 lbs.

. Absent invoking bonus depreciation, the maximum depreciation deduction is:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period 

 

Other vehicle thoughts.

Your business vehicles should be titled in the business or in a separate entity that then leases to your business. Makes sense, right? How can an asset be listed on the balance sheet if the entity doesn’t have title to it, or at least the right to the title, and risk of loss? However, some insurance companies will now want to charge an additional premium for a business vehicle. This is a money grab silly as risk is based on use, not the name on the title in the glove compartment.

Take a look at how your vehicles are titled, who is an authorized user under the policy and where the vehicle is carried for tax purposes.

I cannot stress the magnitude of the poor of decision it is to lease a vehicle, particularly on business vehicles over $80,000. Vehicle leases are generally not capitalized leases and not eligible for 179 expensing.

The residual value offered on a 36-month lease will be about 60%.

The leasing company takes the degradation in value ($80,000 minus $48,000) and apply a capitalization rate of 8% to 12%. This is essentially your interest rate while leasing.

You must watch mileage limitations such as 10,000 miles per year with penalties for going over the limit. The Little old lady who just drives to church in rural Iowa probably gets 10K in mileage.

The Wimpy Principle

The Wimpy Principle, I will gladly write off this equipment today and pay for it in the future.

Wimpy from Popeye was always promising to pay later. IRS rules on depreciation may have a Wimpy fan writing them. In many cases IRS rules allow you to purchase a capital asset today and write it off as if it was fully used up in less than its projected life time, even if you haven’t paid for it yet.

In the good years, many businesses, including farmers think, “I’m in money this year, so let’s go buy to avoid taxes.” The real question is “Does the operation need it?” and “Were you going to acquire it in the next tax period anyway?” Spending down is about a 3:1 ratio. For every $3 spent on the operation, the tax bill moves down about $1. And while you are not paying Uncle Sam or your state government that dollar, you are not having access to all three dollars.

While spending on inputs and the like is easy to expense off (as long as you don’t go over 50% of the total spend on the item for the upcoming year), spending on capital purchases like equipment takes a bit more maneuvering. That maneuvering is understanding depreciation, regular, accelerated, and bonus.

Depreciation recognizes the decline in the value of assets over their estimated useful lives. Under the new tax bill, farm equipment has a five-year useful life. Other things like buildings, fence and tile have different useful life spans. 

Once you have the lifespan established, it is then choosing what type of depreciation method is assigned to the property. Property can be written off equally over a period of years, accelerated with more write off in the early years and less in later years or it can be expensed all at once using IRS Code Section 179. 179 lets you expense capital purchases up to a set limit that varies by year but cannot be in excess of your operation’s net income. State law does not match up with the 179 limits and can create federal depreciation schedules that are different from state ones.

Additionally, if your operation purchases a BRAND NEW, not new to you, item up to 50% can be expensed off immediately. This also doesn’t match up with state rules.

When your income profile varies, accelerating expenses is dangerous dance. You still have to make money to pay the purchases if you are purchasing over time and that expense has already been consumed in a prior year. That means paying income tax on money that just gets turned over to the seller.

Finally, praying at the altar of no tax may come to bite you in later years. If you are only running a business/farm and have no tax payments in and do not have off farm income with social security withheld, you may be sorely disappointed when it comes to social security benefit statements. While that comment presupposes that Social Security benefits will remain available to you unchanged in your retirement years, those who pay very little or nothing into the system will find out that very little does the system return. And a wimpy return helps no one.

Saturday, October 31, 2020
  • Patrick B. Dillon
  • Jill Dillon
Dillon Law PC
Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
Dillon Law PC
Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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