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Farmers and Ranchers Archives - Ketel Thorstenson, LLP

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October 1, 20180

The Tax Cuts and Jobs Act has several changes for farmers and ranchers.

  • Like-kind exchanges, deferral of gain on sale, can only be used for Real Property. Equipment like-kind exchanges are reported as a sale and purchase (2 separate transactions).
    • Equipment trade-in value is the sale price of the equipment. Replacement equipment is valued at the selling price before the trade-in is considered.
  • Depreciation rules have changed.
    • New and used equipment purchased in the tax year qualifies for 100% first year bonus depreciation (old rule was new purchases only)
    • If the bonus is not used, Sec 179 is still available for new and used equipment. The limit is $1 million with the phase-out threshold at $2.5 million.
    • Double declining balance depreciation is available for 3, 5, 7 and 10 year property with the repeal of the 150% declining balance depreciation method.
    • The depreciable life for new equipment is 5 years (old rule was 7 years).
    • The depreciable life for used equipment remains at 7 years.
  • Real Estate taxes allocable to the business are not subject to the $10,000 limitation, the limitation applies to personal property tax only, deducted on the Schedule A as an itemized deduction.
  • Business interest is fully deductible as long as gross receipts are less than $25 million.
  • Net operating losses (NOL) have a couple of changes starting after December 31, 2017 and before 2026:
    • NOL generated can carryback up to $500,000 (MFJ) or $250,000 (single).
    • NOL carryback is for 2 years only (was 5 years) for farm and ranch only.
    • NOL carryforward is indefinite (was limited to 20 years).
    • NOL carryforward can only offset 80% of income (prior rules allowed 100%).
  • Qualified Business Income Deduction (QBID):
    • The flow-through deduction from cooperatives (formally DPAD), will still be deductible by the individual.
    • The QBID is a deduction against taxable income but does not affect self-employment taxes.
    • The Qualified Business income does not include capital gains (an example would be sale of breeding stock).
    • The simplest explanation for the QBID is 20% of Qualified Business Income (QBI).
      • This method is used when taxable income for a single taxpayer is below $157,500 and married taxpayer is below $315,000.
    • If taxable income is above the thresholds, the initial QBID for each of the taxpayer’s trades or businesses is the lesser of 20% of QBI, or the greater of 50% of W-2 wages, not including commodity wages, or 25% of W-2 wages plus 2.5% of qualified property.
    • Rental income will qualify for the QBI deduction if the property is rented to a commonly controlled trade or business.

The Tax Cuts and Jobs Act has many tax saving features.  We will continue to inform you as the proposed regulations get defined and made permanent.  We would encourage you to visit the KTLLP Tax Team for your tax planning needs before the end of the year.


January 17, 20180

If you work in or have clients that work in the agriculture industry, you understand that the cash flows generated from even a well- managed farm or ranch are very low in relation to the value of the underlying ground itself.  Rising crop yields due to new and improved technology paired with historically higher commodity prices and low interest rates have resulted in higher land prices.  However, cash flows from agricultural operations tend to be volatile with relatively high cash flows one year followed by less than break-even cash flows the following year.  Even if a farm/ranch operator could realize cash flows that are consistently high, albeit unheard of in the ag industry, the cash flows would still be low in relation to the value of the underlying ground itself.

Therefore, when appraising a minority interest in a farm/ranch operating entity, it makes sense for the appraiser to weight the value derived by the interest’s cash flows with the highest and best use value of the underlying ground.  This weighted approach has been upheld by the US Tax Court in Estate of Andrews v. Commissioner (79 T.C. 945) and Estate of Helen J. Smith v. Commissioner (99 T.C. 368). The valuation adjustments can be dramatic, but they are real.

For example, a hypothetical buyer of a 10% minority interest in an entity operating a farm or ranch, would not likely pay 10% of the value of the underlying ground because he/she knows the return on investment on a cash basis would be very low.  Moreover, a minority owner cannot force liquidation of the underlying ground and does not have the right to step foot on the property to enjoy its aesthetic qualities or to hunt, for instance.  However, the hypothetical buyer might purchase a 10% interest if he/she buys in at a price that is determined by weighting a value based on the interest’s cash flows with the highest and best use value of the underlying ground.  The buyer could then hope the underlying ground would be sold in his/her lifetime to increase the return on investment.

If your clients need to know the value of their minority interest, please call us for valuation services.


September 20, 20170

If you have been following the weather so far this year, you may have noticed it’s much drier than usual. This past winter, the snowfall was less than normal, and the rain storms this summer have been few and far between. You may have guessed it. Yes, we are in a drought. This affects all of us but hits the farm and ranch community hard. Many ranchers are forced to sell off their current year crop of livestock sooner than normal or even some of their breeding stock because their pastures and hay fields didn’t produce enough to feed them. Also, farmers who lose their crops and receive insurance proceeds can end up with a large increase in taxable income because they are not able to defer the income to the following year when their crops are usually sold. Luckily there is tax relief that can help out.

Producers may be forced to sell livestock earlier or sell more of their herd than usual which can cause a big increase in taxable income compared to a normal year. The tax law allows two different deferral options that can help smooth out income so they don’t have a huge tax burden in one year.

The first deferral option is an election to replace breeding, draft, or dairy livestock sold because of poor weather conditions, loss of pasture, bad water, etc. This allows the producer to defer any gain as long as the livestock are replaced within two years after the year of the sale. If the producer’s county or adjoining county receives a federal disaster designation, the replacement period extends to four years. Only livestock sold exceeding the amount sold on a normal year qualify for the deferral. For example, if the producer normally sells five cows and during the drought year the producer sold ten, only the additional five would qualify for the gain deferral. By making this election, any gain that was realized on the sale of the livestock is not taxable but would reduce the basis of the replacement livestock. The producer must replace the livestock with “like-kind” livestock (cows for cows, bulls for bulls). If, however, after the two or four year period weather conditions make replacing the livestock not feasible, the producer can replace the livestock with any property used in the farming/ranching business except for land.

The second deferral option is an election to defer income from the sale of any livestock (including a calf crop) exceeding the number of animals the producer normally sells in a year to the following year. In order for this election to be available, the producer must be in an area that was designated as a federal weather related disaster area, and the weather related conditions are what caused the sale of the livestock. To be eligible, farming must be the principal business of the taxpayer and normal business practice includes the sale of the livestock the following year.

Both of these elections have a maximum number of livestock that can be deferred but not a minimum, so each deferral can be tailored to fit a particular tax situation. Elections can be made up until the extended due date of the tax return (October 15), but tax owed is still due at the time of extension (April 16) to avoid interest and penalties.

Farmers also have some options when it comes to crop insurance proceeds. They can elect to defer the income from crop insurance received for crop damages or destruction to the following year if it is normal practice of the producer to sell or consume that crop the next year. All crop insurance proceeds for the current production year must be deferred even if it is normal practice to sell one particular crop the current year and the other the next year. This election does not provide much flexibility; it is either all or none.

Give the KTLLP Ag Team a call today to further discuss these rules and your particular situation.