Ask the Taxman by Andy Biebl

DTN Tax Columnist Andy Biebl is a CPA and tax partner with the accounting firm of CliftonLarsonAllen LLP in New Ulm and Minneapolis, Minn., and a national authority on agricultural taxation. He writes for both DTN and our sister publication, The Progressive Farmer. To pose questions for upcoming columns, email AskAndy@dtn.com.

Question:

We anticipate retiring from farming in a couple of years. We will be keeping our farmland and passing that on to the kids, but we are concerned about the tax implications from selling our machinery. What is a Charitable Remainder Trust and can this be used to minimize our taxes? What other options would you recommend?

Answer:

Machinery auctions can be a very efficient way to dispose of a valuable machinery line, but most producers don't like the tax consequences. The so-called "depreciation recapture" rules effectively result in all of the income being treated as ordinary rather than capital gain. Your tax adviser can help you measure the precise cost.

A Charitable Remainder Trust (CRT) is a technique that can utilize an auction but spread the tax consequences out over a number of years. A Charitable Trust is created, the machinery is conveyed to the CRT trustee, and the trustee conducts the auction. The advantage is that the CRT does not pay any tax on the sale due to the charitable nature of the trust. The terms of the trust typically require that the grantor be paid an annual amount over a term of years. This term can run up to 20 years. Thus, if there is an auction with $500,000 of proceeds, and the trust requires annual payments over 10 years to the grantor who transferred the machinery, that amount might be about $50,000 per year.

The price tag of this arrangement is that the design of the trust must result in donation of a projected 10% residual to charity.

The obvious benefit of the CRT is avoiding the big spike in income from the machinery auction. The CRT makes income payments to you that spread amounts over a sufficient number of years to avoid the higher tax brackets. That can be a good answer if it drops the tax rate significantly. However, it can be difficult to save enough on the rates to fully offset the 10% carve out for charities.

We like this technique even more for grain or livestock that are subject to both income tax and self-employed Social Security tax. In those situations, the CRT technique eliminates any self-employed Social Security tax on those assets.

The only other technique to spread out your economic benefit from the machinery sale is to find the right young producer who is willing to lease your machinery line. That can be done in a series of shorter term leases over a number of year, and eventually sell various pieces of machinery to that individual as he needs them for trade and replacement. But there is more economic risk in tying an exit plan to one purchaser.

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Question:

Two years ago we changed tax preparers and went with a large regional firm. We have realized that they are not up to par on agricultural tax. How do we find a good ag accountant? We need someone who can help make decisions throughout the year and not just at tax time.

Answer:

If it is a large regional firm, you just may not have the right individual. Have a discussion with the managing partner about your concerns, and you may find that you can be moved to a more qualified individual.

If that doesn't work, the best source is referrals. Check with attorneys, bankers and other professionals in the area. You should start to hear the same names mentioned more than once.

You make an interesting point about seeking a tax preparer who focuses on advice. Tax preparers too often view their role as limited to the compliance aspects of tax return preparation. The compliance functions are important, but I have always observed that clients place greater value on the advice and planning ideas.

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Question:

Are the fees to purchase real estate deductible or do they need to be added to the basis? I did a Section 1031 exchange and had attorney fees, exchange fees, and realtor costs. I would prefer to deduct them now.

Answer:

Acquisition costs related to capital assets are capitalized as part of the basis of the property. All of the fees you mentioned are in that acquisition cost category, so unfortunately they are not currently deductible. In fact, when added to the basis of the land, there may not be any tax benefit until a sale occurs many years down the road.

(MZT/AG)

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