Yes, really. You should be contemplating tax consequences right now for the year. You have six weeks left to get your income and expenses, capital purchases and sales tallied and contemplated.
Here are some factors to consider.
ARC/PLC, MFP, CFAP, EIDL Grants, Syngenta payments, Iowa Livestock Producer Relief Fund and the Beginning Farmer Debt Relief Fund payments are all income. Include these payments in gross income (subject to self-employment tax) when compiling income and expenses.
Crop insurance proceeds and federal disaster programs in gross income for the tax year during which they receive the payments. Unless a one-year deferral is triggered for provision for insurance proceeds and disaster payments received for “destruction or damage to crops.” This is to acknowledge those operations that sell the year following harvest. If farm operators are planning to play games by avoiding income this year it may be tricky to “right the ship” in the following years if they lose sight of the plan.
What to do:
Farmers have a number of tools available to help manage their tax liability. Sometimes to many tools and to vigorous use of tax avoidance means pain on the backside when the farmer tries to exit the field for good and finds out the social security benefit is a low number and they owe tax on depreciated items when later sold is a harder thing to plan around than they would like.
Avoiding income spikes and dips prevents overall income from being taxed at unnecessarily high tax rates. Some common techniques are income averaging, prepaying expenses, making contributions to retirement accounts, gifting grain to a charity, carefully timing the purchase or sale of assets, entering into or electing out of deferred payment contracts, and properly managing depreciation and expensing decisions. Farm operators can defer income from the sale of crops or livestock in the year of the sale by deferring receipt of payment until the following year through a deferred payment contract. If when filing tax returns for the 2020 year it would benefit the farmer to recognize income from the deferred price contract in 2020, the farmer can elect to report constructive receipt of the income in 2020, the year of the sale. The danger is that the check won’t be good in 2021 when the operator goes to collect.
Insurance is a form of legalized gambling. You pay a company in case something bad happens (the covered loss) and the company, based on their analysis of you and the environment you operate in sets the rate to cover the potential loss based on the likelihood of the loss, what you are actually covered for in terms of loss, and their expected ability to use your funds to make money while waiting for the loss to happen. Life Insurance or property insurance it doesn’t matter the same basic concept applies.
Motorcycle insurance is high, in part, because at least one study showed that the likelihood of a claim or accident on an insured motorcycle in 7 years is 100%. If you are objecting saying you have gone longer, congrats, but that likely means somebody else has had two in the same time period. Dealing with insurance in the farm operation is important.
The next time on Netflix you see “The Umbrella Academy” or on Disney “Mary Poppins”, or “Singing in the Rain” on a DVD, think of your insurance coverage and if you have or need to have an umbrella policy.
Umbrella policy protection for farm business remain one of the few bright spots in the necessary evil that is business insurance. They generally provide greater protection for all assets under the umbrella for reasonable price.
Since you are thinking about your insurance, also think about these issues that relate to how effective your insurance is.
When was the last time you and your insurance agent actually went over your policy? What does it actually cover? If you have a fire and lose stored grain is it covered? If your employee diverts a load of corn to another grain elevator and sells it in her name, is that inventory theft covered? What would it look like if the next tornado, derecho, fire, flood or hail event focused on your operation.
There are certainly advantages to deeding property prior to one's death, rather than waiting for that property to pass by will. However, it comes with some negative side effects.
When it is done the landowner no longer has it on the balance sheet or the responsibly for it. It can also allow the landowner the enjoyment of watching the next generation take over and begin operating the land that the next generation now owns. Conversely once the property is deeded, the landowner has no more control and the deed is irrevocable. This means if the landowner gets angry at the heir, he or she cannot take back the transfer. Similarly, if the heir decides that he or she wants to do something with the property that the landowner disapproves of--like selling the land, growing Aronia Berries, or making it an ATV park, the landowner has no say over that decision because the land is owned by somebody else. Also, if the new owner gets sued and has judgments against them, the land stands to pay for that judgement in most cases.
The transfer allows the land to pass without going through the probate process. it is a process that can take time, effort, and money to complete.
Transferring the property starts the five-year window prior to qualifying for Medicaid and avoiding Medicaid Estate Recovery Program. When a person seeks to apply for Medicaid benefits, one question that they will have to answer is whether they have transferred property within the last 5-years. If they have, then they may be ineligible to qualify for Medicaid for a certain period of time if it is less than market value. Additionally, the value of the property transferred within that 5-year period would be counted towards the value of the person's assets for purposes of determining whether they qualify for Medicaid.
Tax implications of making this type of lifetime transfer are fact dependent. If property is deeded during a person's lifetime, that may have gift tax consequences and may also affect the landowner's lifetime exemption with regard to estate taxes. It is critical that a landowner consult with a tax professional before making a decision to gift during his or her lifetime. It also impacts the basis on the property. Generally, if property is passed by will at a person's death, the heir receives a step up in basis for capital gains tax purposes, thus likely decreasing the capital gains taxes that would be owed if the property is sold by the new owner. If property is transferred prior to death, the heir will not receive this step up in basis.
July 1 is when new laws generally take effect. Here are some of the recent changes to Iowa Law that impact rural Iowa and ag.
Children under the age of 16 can hunt without a license as long as they are accompanied by an adult who has a hunting license. This includes out of state residents who may be back visiting family for example. Deer and Turkey still require licenses.
Here is what you can hunt deer with during the pistol or revolver seasons:
Any pistol or revolver firing a magnum three hundred fifty-seven thousandths of one-inch caliber or larger, centerfire, straight wall ammunition propelling an expanding-type bullet with a barrel length of at least four inches and firing straight wall or other centerfire ammunition propelling an expanding-type bullet with a maximum diameter of no less than three hundred fifty thousandths of one inch and no larger than five hundred thousandths of one inch and with a published or calculated muzzle energy of five hundred foot pounds or higher.
A person 20 or younger can use a pistol or revolver to hunt if they are accompanied by a person 21 or over who has a hunting license.
The special senior statewide antlerless deer only crossbow deer hunting license is now available to 65-year-olds instead of making them wait until they are 70.
Hunters may use a trained, leashed dog to retrieve a wounded deer. The leash must be no more than 50 feet in length.
It is illegal to hunt coyotes in Iowa using an infrared light source, except during muzzleloader, bow, or shotgun deer hunting season.
Animal Abuse update
The categories of what is allowed to be charged and the punishments as to animal abuse under various code sections has been redefined, which will increase protections to some non-livestock and certain wild animals.
The law states that animal abuse occurs when a person intentionally, knowingly, or recklessly acts to inflict injury, serious injury, or death on an animal by force, violence, or poisoning. Prior law restricted animal abuse to intentionally injuring, maiming, disfiguring, poisoning or destroying an animal owned by another person. Animal neglect is defined as failing to reasonably provide sufficient food, water, sanitary conditions, ventilated shelter, grooming, or veterinary care to an animal in a person’s custody. That is a much lower standard to prove for the prosecution. Recklessly means you should have known. The old standard of intentionally is a much more difficult bar to achieve. A defense of “I didn’t know horses weren’t’ supposed to be skin and bone bags” is not a defense under the new law.
Animal torture is intentionally, knowingly, or recklessly inflicting upon an animal severe and prolonged or repeated pain that results in the animal’s suffering and serious injury or death.
The crimes range from a serious misdemeanor for injuries that are not serious and do not result in death to a Class D felony for repeat offenses. Again, this is a marked increase from the old law, which was a simple misdemeanor (30 days in jail and a fine of $750). The law allows a court to order a person who commits animal mistreatment to undergo a psychological or psychiatric evaluation in some cases.
Hay Hauling Getting easier.
No wide load permit required for hauling hay, straw, stover, or bagged livestock bedding, as long as the width does not exceed 12 feet, five inches. The prior limit was eight feet, six inches.
Chauffer License Exemption for Farmers and their Workers
Farmer or the farmer’s hired help (eighteen years of age or older) is not a chauffeur when operating a special truck owned by the farmer and used exclusively to transport the farmer’s own products or property to a destination no more than one hundred miles from farmland owned or rented by the farmer. This allows smaller operations that are spread out to avoid having extra licensing requirements.
No Permit Requirements for Agricultural Experiences
This law prohibits counties from requiring a permit for agricultural producers offering “agricultural experiences.” An agricultural experience is defined as “any agriculture-related activity, as a secondary use in conjunction with agricultural production, on a farm which activity is open to the public with the intended purpose of promoting or educating the public about agriculture, agricultural practices, agricultural activities, or agricultural products.”
This law would prevent a county from requiring a farmer from obtaining a permit to host a harvest dinner or a group of students on his or her farm. The law specifically prevents the imposition of special exceptions, variances, conditional use permits, or special use permits, but it is unclear whether a county could impose other requirements upon these producers.
Agricultural-Exempt Property not subject to County Zoning Regulation even to get a permit to say you are exempt.
Iowa law has long exempted from county zoning regulations all land, farmhouses, farm barns, farm outbuildings or other buildings or structures which are primarily adapted and used for ag. This means that a farmer can build an ag building or a grain bin on his or her property without getting a permit from the county.
The new law adds that a county shall not require an application, an approval, or the payment of a fee to show they are exempt from regulation. It is not clear under the new law whether voluntary hearings or applications for determining exempt status would be allowed or whether all enforcement would occur after the building is built.
The law also specifies that the board of adjustment will consist of five members who are eligible electors and who reside within the area regulated by the county zoning ordinance. Prior law required a majority of them to reside within the county but outside the corporate limits of any city. Finally, the law requires county boards of supervisors to follow the same procedures to adopt an amendment to a comprehensive plan as it would to adopt the comprehensive plan. These procedures include submitting a final report and holding a public hearing.
New Tax law
Signed into law by the Governor on June 29, 2020, the primary intent of the bill was to streamline the administration of Iowa’s tax laws and coordinate their interaction with federal law. The provisions generally went into effect immediately, and many changes were retroactive. It’s a whole separate topic.
The law also modifies the newly enacted food operations trespass law (SF 2413 summarized below) to specifically exclude food establishments and farmers’ markets from the definition of a “food operation.”
The law now establishes acceptable billing methods and standards that electric utility companies can employ when working with “private generation customers.” These are customers who generate their own electricity and use that generation facility to offset a portion or all of the customer’s electricity bill. Excess electricity is purchased from the customer by the electric utility company.
A debtor may borrow additional funds secured by the original mortgage without the burden of fees and additional paperwork. A lender may file a 10-year extension on behalf of the borrower without additional acknowledgment. Current law requires a formal mortgage execution for such an extension. That means that a 10-year mortgage can be stretched to 20 with a simple filing, which may come in handy as financial fortunes change in the coming years.
Iowa Trust Code has been updated to provide authority for trust decanting, expanded directed trust provisions, and delegation of notices to beneficiaries under 25. This law will allow in some cases, amend irrevocable trust provisions outside of a formal court supervised proceeding. This would allow, for example, trustees to correct errors, modify trust provisions to better fit newly passed laws, or adapt trusts to changing conditions, such as a beneficiary who becomes disabled or one who would benefit from extra protection from creditors.
Transfer of Property
Fiduciaries of estates, trusts, guardianships, or conservatorships must provide a disclosure statement to a potential homebuyer if that fiduciary has lived in the home at any time within the 12-month period prior to the date of transfer. But otherwise is not required to, which makes sense when an executor from out of state comes back to deal with Uncle George’s house.
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. © 2023 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 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