Snake Oil and Deductions

Lets take a look at some attempts and failures to out game the country’s largest tax preparation firm, the IRS.

1.      Theory: Base Acre at the FSA. Your base acres in a FSA farm program is an asset, so you should be able to deduct that when you buy it or inherit it. The Snake Oil: You can use section 167. The Tonic:  Since the government regularly messes with the base acres, making it have a defined life and eligible under 167 is suspect as a quantifiable asst. Further   IRS Code 197E2 says any interest in land is excluded from an intangible that can be deducted. Now a regulation is out  saying it clearly  crop acreage base is  an interest in land.  And  a tax court case took a glancing blow at the argument that it some how was an expense item. This trifecta means you can assign it value but just like the land itself, it will not be an expense item that offsets income.

2.  Theory: Fert Deduct. Section 180 does allow for allocation of trace minerals and residual fertilizer on an asset (substantiated via a study, not a feeling).   The Snake oil:  We have private letter rulings saying its okay when you have nresidual fertilizer that you can take an expense on your taxes, even though  you bought the farm during the first Bush administration    The Tonic: Private letter rulings do not transfer to others, the name gives it a way, its private!  New purchases can take advantage of this concept, with the proper backing, but retroactive application invites a challenge. It also doesn’t pass the common sense test, do you  honestly think that sulfur from when you bought the farm is still lingering and is now suddenly subject to uptake by the current growing crop… Pisshahh.

3. Theory: Research  Credit. Farms are doing research and development and need to get an R&D Credit. Snake oil. Everything you wonder about, tinker with or compare products for is a research activity and is subject to the credit claim. Tonic. While available in  technical sense, compliance is the key.  The “researching farmer” needs to beat a  four part test to address uncertainty, have a rigorous process of experimentation and be very technical. The elements  are 1) must have a permitted purpose, 2) address uncertainty, 3) involve a process of experimentation and 4) be technical in nature. You need written details and trial processes. The kicker is that is must be new trials or research. Comparing seed corn company’s already proven work horses or marketed products doesn’t appear to meet the burden. Blind feeding two different new and previously untested fed rations from competitive or the same company might be closer to the mark. Same for equipment experimentation, using auto steer on  your farm is not innovation and research at this point, letting an AI program decide how to manage your chemical and fertilizer application might be closer. Not only does it need to meet scientific standards, but also, beware that the  deduction is for wages of employees DIRECTLY involved in the process, supplies and third party charges. (Produce pay roll logs, trial data, research plan and materials used) . Then that credit you worked so hard to develop, may implicate your AGI and toss some of your FSA program eligibility into the wind.  This is not a pencil whip, dash board accounting activity which a lot of producers feel tax preparation reporting is.

Theory 4:   Conservation Easements: You give up the right to develop something in exchange for a large charitable contribution. Snake oil: Give up the right to do something you don’ want to do anyway, like turn your farm into a quarry.  Tonic:  The IRS appears to despise these as does the  tax court, recently taking a million plus deduction and reducing it to thousands and then saying the assumptions used to make the deduction weren’t reasonable and hit the tax payer with a 40% penalty. Oh yeah, it was a quarry restriction.

Theory 5: Reporting what to whom.    Report low on Probate and   inventory and then report high value basis if you ever sell. Snake Oil: You avoid court costs at the state level and still get the capital gain step up. Tonic: Regulations under 1014 and 6035 have been rolled out to require consistent treatment on estate tax returns and basis claimed later.

Its almost like the government has lawyers and accountants working for them ……